Some recent evidence suggests buy-to-let properties could soon be providing record rental yields. But should you be tempted into becoming a landlord?
Judging by some of the chat on our discussion boards, I reckon a decent number of Fools have made small fortunes from buy-to-let property investment in recent years.
But is too late to join the buy-to-let party? Well, perhaps surprisingly, a couple of surveys have come out this week which suggest that the outlook for buy-to-let may not be as bad as some people think.
So let's take a closer look...
We'll start with the latest quarterly lettings survey from the Royal Institute of Chartered Surveyors (RICS). It suggests that demand from tenants is rising fast thanks to the dual effects of a slowdown in the housing market and uncertainty over where interest rates will head next.
According to RICS, in the second quarter of the year, 29% more surveyors reported a rise in tenant lettings than a fall, up from 15% in the previous quarter. And new landlord instructions -- which are an indicator of buy-to-let activity -- rose sharply with 20% more surveyors reporting a rise compared with 8% in the previous quarter.
What's more, surveyors anticipate rental growth from flats in particular will surge into the autumn as first time buyers delay taking the plunge while they keep an eye on what's happening to house prices and interest rates.
And surveyors aren't the only ones who are bullish on buy-to-let. The Association of Residential Lettings Agents' (ARLA) published results this week which reveal tenant demand now outstrips supply in all areas of the rental market. Again ARLA cites softening house prices as the key driver.
But does this mean buy-to-let investing is more attractive than ever?
Well, as we all know, if something sounds too good to be true then it usually is and I fear it's equally true here. Interestingly RICS' previous survey, released three months ago, was published under the banner 'Rental Demand Slows As Home Sales Bounce Back'. Hang on a minute....isn't that the reverse of what they're saying now? Rental yields may well have strengthened over the last three months, but it's important not to draw too many conclusions from short term results.
According to ARLA's members, rental returns of between 4% and 5% are typical for rented houses. Looking at the figures, the overall average weighted rental return on houses is...wait for it...5.0%! Although this is up from 4.8% on the previous quarter. Over the same period the average rental return on flats is unchanged at 5.0% which is all rather undramatic. The table below outlines the geographical variations:
Average Rental Returns (%)
Region | Average Rental Return Houses % | Average Rental Return Flats % |
|---|---|---|
Prime Central London | 4.8% | 5.1% |
South East | 5.0% | 5.1% |
Rest of UK | 5.0% | 5.0% |
All regions (weighted) | 5.0% | 5.0% |
Source: ARLA
Admittedly, the average rental returns for the latest quarter are an improvement on the previous three months, but according to ARLA, the long term trend still appears to be downward. Remember the actual yield you could earn can be influenced by a whole host of factors which can be masked by average returns.
So, overall, I'm still not convinced that now is a great time to climb aboard the buy-to-let bandwagon.
If, however, you're more optimistic than me, take a look at buy-to-let mortgages through The Fool's award-winning service.