The Ultimate Guide to Rental Yields in the UK in 2023
The UK property market - and the rental market in particular - has always been an enticing field for domestic and international investors. Interest rates are rising and, property prices are dropping, making property investment even more appealing. However, with the ever-changing dynamics, understanding the significance and implications of rental yields has become increasingly crucial in 2023.
There are several investment strategies to implement in the UK property market but opting for house in multiple occupation (HMO) properties has proved to be a successful, and popular, choice. In this article, we’ll provide a comprehensive guide to rental yields in the UK in 2023 and show you how Property Data can help your investment flourish.
What are Rental Yields?
Rental yield is a fundamental concept in the property investment landscape. At its core, it represents the annual return potential on a property investment, relative to its market value. In essence, the rental yield gives investors a percentage figure that shows the annual rental income the property can generate in relation to its purchase price.
There are a few different ways to calculate rental yields. This includes:
- Gross Rental Yield: This is the basic form of rental yield calculated by taking the annual rental income, dividing it by the property value, and then multiplying by 100 to get a percentage.
- Net Rental Yield: A more precise metric, net rental yield takes into account the costs associated with the property, such as maintenance, property management fees, insurance, and other associated expenses. This gives a clearer picture of the actual return an investor can expect after expenses. Net rental yield provides a more accurate representation of the property's profitability.
So investors often prefer to focus on the net yield, although both metrics have their respective merits and applications. Understanding rental yield is important because it offers insights into a property's income potential over the long term. It helps investors compare various properties in different locations, assess the viability of their investment, and devise strategies to optimise returns.
Future Predictions for Rental Yields
The current landscape for rental yield in the UK is being shaped by a spike in demand for properties and a low supply. The UK has seen a month-on-month increase in demand since May 2020, but there are more than a quarter fewer homes available now than pre-pandemic times.
As of 2023, the estimated rental yield is around 4.75%. So anything above this number would qualify as a good rental yield. You can often find slightly higher yields by moving north up the UK to areas like Manchester, Sheffield and Newcastle.
Moving forward, it’s being predicted that rent across the UK will rise by up to 9.5 % over the course of the next five years. London, understandably, will look to experience the most growth of around 12.5 %.
What is an HMO?
House in Multiple Occupation (HMO), is a term familiar to many in the UK property market. An HMO refers to a property where three or more unrelated individuals live, sharing facilities like the bathroom and kitchen. Essentially, it's a living arrangement where several tenants coexist in one property but have separate tenancy agreements.
Why are HMOs Popular among Investors?
HMOs are one of the more popular property investment strategies, and with good reason. There are several reasons why investing in an HMO is appealing, including:
Higher Rental Yields
HMOs often yield higher returns compared to single-let properties. This is because renting out individual rooms typically generates more total income and higher average renting yield than renting the entire property to a single tenant or family. Gross rental yields for HMOs typically falls between 8 to 12 %, whereas single-let properties only reach 5 to 7 %.
Risk Diversification
If one tenant in an HMO vacates, the landlord still receives rent from the other occupants. This reduces the risk of complete loss of rental income, which might occur in a vacant single-let property. So an HMO allows you to diversify your portfolio which lowers the risk of your investment.
Demand
With increasing UK house prices and housing costs, as well as the need for flexible accommodation in university towns and bustling cities, there's a consistent tenant demand for HMOs. This high demand can ensure a solid investment with high capital growth as this is where the greatest demand for HMOs lie.
The Challenges and Risks of HMO Investment
While HMOs can present lucrative opportunities for property investors, they also come with their own set of challenges and potential pitfalls. Understanding these is important for any investor considering delving into the HMO market.
Let’s go over a few of the biggest challenges and risks of HMO investment:
- Regulatory Compliance: HMOs are heavily regulated in the UK, with licensing requirements that vary by local council. The Management of Houses in Multiple Occupation (England) Regulations 2006, for instance, details obligations for landlords regarding fire safety, water supply, drainage, and waste disposal. Non-compliance can lead to hefty fines.
- Higher Management Demands: Managing an HMO is often more time-consuming and demanding than other rental properties. From ensuring shared spaces are maintained to managing potential conflicts between tenants, HMOs require a more hands-on approach.
- Turnover and Vacancies: While HMOs can diversify risk due to multiple tenants, they can also see a higher turnover rate. This can increase wear and tear on the property and result in more frequent periods of vacancies for individual rooms.
- Increased Maintenance Costs: Due to shared facilities and more occupants, wear and tear in HMOs is typically higher than in single-let properties. This can translate to more frequent repairs and replacements, leading to higher maintenance costs.
- Mortgage and Insurance Complexities: Not all mortgage lenders offer products for HMOs, and those that do might have stricter criteria. Similarly, insuring an HMO can be more complex and potentially more expensive than standard landlord insurance.
- Tenant Cohesion: A harmonious tenant mix is essential in HMOs. Disputes or disagreements between tenants can lead to a stressful environment, potentially resulting in early lease terminations or disputes for the landlord to mediate.
- Economic Factors: While HMOs can offer a buffer against economic downturns due to multiple rent sources, they can also be sensitive to changes in the local economy. For instance, if an HMO is based in a university town and there's a significant drop in student numbers, it can impact rental demand.
By understanding the risks, you’re in a much better position to make a prudent investment that will pay off. So keep these in mind and you should be able to reap the benefits of HMO investment.
How to Use PropertyData.co.uk to Maximise Rental Yields
Property Data offers a variety of useful tools for property investors in the UK. It provides invaluable data-driven insights that can significantly aid in identifying and analysing potential HMO properties. This ranges from learning about nearby transport links to focusing on specific UK cities and postcodes. Here's a step-by-step guide on how to harness its capabilities effectively:
Research tools
Property Data provides you with a wide range of research tools to help you find and assess potential investment areas. You can:
Occupancy Characteristic Statistics
- Demographics: Get insights into the population makeup of an area by looking Local Data. This data can help determine if the locality is conducive for HMOs. For instance, areas with a high student population may be ideal.
- Tenancy Types: Review the most common types of tenancies in an area. High numbers of shared tenancies might indicate a demand for HMOs.
On Market Sourcing
Find the right on or off-market properties using the sourcing tools. You can:
- View Listings: Browse through properties currently on the market that fit the HMO criteria. Look for larger properties that can be converted or existing HMOs.
- Direct Contact: Some listings might provide direct contact to agents or sellers, facilitating quicker transactions.
Evaluate Opportunities
There are several due diligence tools you can use to help you perform due diligence around your potential investment. This includes:
- Property Valuation: Use the platform's tools to get an estimated market value of your potential HMO property.
- Comparable: Compare the property with similar ones in the area. This helps in understanding if you're getting a fair deal and potential room for negotiation.
Find Your Next HMO Investment and Reap the Benefits
The current landscape of the UK property market is one that is hungry for more properties. This demand for properties has created an excellent window of opportunity for investors. However, it takes a good understanding of rental yields to know what a good deal looks like
Thankfully, there are plenty of tools and resources available at Property Data that are designed to make finding the right investment easier. From property valuation tools to finding new locations and assessing demographics, you can harness these tools to find the right location to invest in and find properties that will maximise your HMO yields.
