The returns that a buy to let property investor makes depend mainly on three key factors. The first is the price you pay to buy a property. This is the one you have the most control over as you can always choose not to buy if the market is looking frothy. The second factor is interest rates on the mortgage you are paying. You have some control over this as you can pay a premium to get a fixed-rate buy to let mortgage. That means you won’t benefit if rates drop, but you won’t be caught out if they rise either.
The third factor is one that you have almost no control over and that is the prevailing market level of rents. In this regard you have to take what you can get. In 2009 quite a number of landlords were caught out by a glut of rental properties on the market the sent rents diving. I was one of them. A rental estimate from a good agent in mid-2008 told me I could expect £2,200-£2,400 per month for a particular property. By February 2009 when it went onto the market that estimate had dropped to £1,800, the rent that it did in fact obtain.
The biggest cause of this was a phenomenon known as the “unwilling landlord”. These were people who wanted to sell but their homes had dropped in value so instead they were renting them out. Many were, for instance, couples moving in together who would normally have sold one or both of their homes to buy a bigger one. Instead they created a flood of properties on the rental market.
There is some good news in recent months, however, in that the rental market seems to have turned up in the UK. The latest research from the Royal Institute of Chartered Surveyors, a reputable trade association of the people who do valuations, found that there had been a shortage of rental properties in the third quarter of 2009.
This seemed to have mainly been the result of a decrease in the number of rental properties being made available as well as a small upturn in demand by tenants. The changes seem likely to have put the breaks on further falls in the rents that landlords were managing to attract. There is little fresher data than that from the third quarter, although a new survey should come out within the next few weeks giving a better idea of the performance of the rental market over the last quarter. This is traditionally a quieter period for the property and rental markets, so should be taken with a pinch of salt. Still, RICS felt confident enough of the market to predict that rents might start rising again this year. If so, that will help lead to a real recovery in rental yields and vastly improve the returns that landlords can expect to make over the next few years.
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