Landlords Profits are Rising

How Do Landlords Make Profit?

Landlords’ returns are acquired mainly from 2 sources: rental income and capital growth.

Rental income is an immediate return and investors can make a profit from the monthly payments as long as the rent outweighs the outgoing payments the landlord is required to pay. When looking for a property, investors often take the average yields in the area as a benchmark against their forecasted rental growth. The yield is an overall percentage showing the profit a landlord can make.

Capital growth is a long-term goal investors will see in time rather than immediately. It is the amount a property’s value changes over time, so to see a significant increase investors will have to wait for property values to appreciate. Investors should see capital appreciation as a bonus rather than the sole reason for the purchase as investors will also need to receive immediate income if they want their property to be profitable from the start.

Rental Returns are Rising

A study by Paragon Bank revealed that 87% of landlords that they surveyed made a profit in Q3 2024. The percentage of landlords that saw a loss is down to 4%, showing a 2% decrease from Q2 where 6% of landlords reported a loss. Profits made by landlords were 7% higher than this time last year, showing a positive growth in buy-to-let returns.

This growth is not expected to slow down any time soon, as supply in the private rented sector remains low and demand continues to rise. This will lead to both property prices and rents increasing with the demand.

In the next year alone, experts forecast an annual increase in rental prices between 3-5%. This will provide investors with a growing rental income, heightening their profits. Furthermore, property prices are predicted to rise by 21.6% in the years leading up to 2028. Providing investors with significant capital growth potential on their properties.

Recent Changes Affecting Landlords

The Bank of England’s recent reduction in interest rates from 5% to 4.75% has had mixed effects on investors. While lower rates are typically intended to stimulate borrowing and investment, mortgage costs have risen. The average two-year fixed rate is now at 5.5%, meaning investors may end up paying more when securing a mortgage. However, rental income is also on the rise, so the overall rental income still tends to outweigh the increased mortgage costs.

Additionally, the Chancellor has announced a 2% increase in stamp duty for second-home buyers and buy-to-let investors, raising the stamp duty rate from 3% to 5%. Although this might seem like a significant hike, the rising rental income helps to mitigate the impact. By selecting the right property, investors can ensure that the returns from rental income cover the added costs.

How do Landlords' Maximise Profits?

Most investors’ ultimate goal is maximising rental income, but how can they ensure their buy-to-let property delivers the best possible profits? Here are some top factors to consider…

Tenant Demands – Knowing a target tenant’s demands is one of the most important factors when it comes to finding an investment. This will allow landlords to be one step above the rest of the market and receive high demand, leading to a higher rental income.

Location – When choosing the best property type, location is crucial. Investing in areas with high demand and future regeneration is one of the top strategies for maximising landlords’ profit. This is because this it lead to higher rental yields and faster capital appreciation.

Property Type – Recent research suggests that apartments are an ideal choice in the current market for boosting returns. Flats and smaller, energy-efficient properties have long been favoured by tenants looking to lower their living costs. Making them a smart option for investors.

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