A growing number of landlords are looking to alternative types of buy-to-let options to deliver a better yield. So, what are the options and the considerations?
With landlords starting to feel the impact of tax changes in their pocket for the first time, many are looking at alternative options to deliver a better yield. Whereas a standard buy-to-let investment might typically deliver a yield of between 5% and 6%, taking a slightly different approach, with an HMO, multi-unit freehold block or light refurbishment project could deliver yields of 7% to 8% or even more.
An HMO is a building that is not entirely comprised of self-contained flats and where the occupants share one or more of the basic amenities (defined as a toilet, personal washing facilities and cooking facilities). A typical HMO might be a student house that is let to a number of different students.
If your clients are thinking about investing in an HMO it is worth remembering that, from 1 October last year, the government extended mandatory licensing for HMOs to include all HMOs that are occupied by five or more people from two or more households. And, as part of this mandatory licencing, it also introduced minimum room size for bedrooms in licenced HMOs.
Multi-unit freehold block
Another way for landlords to achieve higher yields is by purchasing multiple self-contained units on a single title. This will typically involve buying a block of flats or converting a building into apartments, or occasionally, two or more adjacent houses that are all held on the same title.
Unlike an HMO, a multi-unit freehold block contains separate, independent residential units, each with their own AST agreement. Each household will have its own entrance and private areas into which no one else has right of access, and there are also likely to be common parts, such as a hallway or garden, that all households have the right to use.
Multi-unit freehold blocks can be lucrative for investors because they provide economies of scale and the opportunity to realise greater capital gains as they can increase the value of each unit by separating the title and selling them off individually.
Light refurbishment is the term used for a property renovation that requires no planning permission or building regulations and where there is no change of use to the property. Light refurbishment renovations commonly include new bathroom, new kitchen, redecoration, rewiring or new windows and, more recently, they have become very popular for properties that do not meet minimum EPC requirements.
On 1 April last year, minimum energy efficiency standards were introduced for privately rented property. These standards require landlords to achieve at least an E on the Energy Performance Certificate (EPC) ahead of agreeing any new tenancy agreement. So, if a property is rated as F or G it cannot be let to new tenants or even have existing tenancies extended until the rating is improved.
One product that has proven popular amongst landlords who want to buy a property rated as F or G and make changes to improve its energy efficiency so that it can be let out is the Precise Mortgages Refurbishment Buy-to-Let mortgage, which combines a short-term refurbishment facility with a longer term buy-to-let exit. This gives investors the combined benefits of a flexible short-term refurbishment mortgage, that can be used to increase a property’s capital value and achievable rental income through, along with the peace of mind in knowing they already have a long-term exit solution in place once the works are completed.
If you have clients who would like to investigate their options for investing in alternative type of buy-to-let, give a Brightstar a call to discuss what’s possible.
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