What Types of Property Can You Choose From?
If you’re investing in buy-to-let property, an immediate consideration is the property type that you opt for. The typical choice for investors is to decide between a house or an apartment – a decision that will ultimately be based around your financial goals and investment strategy.
It’s no secret that compared to houses, apartments typically offer much higher rental yields – especially in city centre locations such as Birmingham in the UK. According to Joseph Mews research, houses in Birmingham average a rental yield of 4.42%, while apartments are reaching almost 7% rental yields.
For investors looking to build a substantial pot of funds quickly through rental returns, a buy-to-let apartment in a high traffic area – such as the Jewellery Quarter in Birmingham – will be able to deliver quality, consistent rental returns due to demand.
That said, when it comes to capital growth, houses have had the edge over apartments over the last 20 years. The difference between long-term capital appreciation is just 9%. Generally, apartments have increased by around 256% in price over a 20-year period, whereas house prices typically grew by 245% in the same time, although apartments only started to take the lead more recently.
You should also be considering the demographic of renters you’re targeting. If you’re looking to target students, a common option is to opt for larger houses that can be used as a HMO investment, while city-centre apartments are better suited to young professional couples.
Does the Size of the Property Matter?
Understanding the best type of property that suits your objectives is arguably more important than whatever is performing best at the time. Usually, this relates to the size of the property and more specifically, how many bedrooms they include.
Practically, properties with numerous bedrooms (more than two) tend to attract families, whereas one- and two-bedroom apartments are becoming increasingly popular amongst young professionals and couples. In the English Private Landlord Survey, it was revealed that couples aged 25 – 49 are the biggest demographic of renters in the market and typically rent for at least three years.
With this demographic making up such a large segment of the rental market, this could influence your decision to invest in a two-bedroom apartment in the city-centre, providing the ideal property to directly target couples. In our research, we’ve found that overall studio apartments tend to deliver the best rental yields but make up only 4% of the stock distribution.
One-bedroom apartments, on the other hand, make up 31% of the stock distribution and deliver the second best average yield at 5.41%. This is closely followed by two-bedroom apartments that deliver yields of 5.26% and make up 42% of the wider market.
What Features Do the Best Property Types for Buy-to-Let Investment Share?
When you’re looking to identify the best type of property for buy-to-let investment, there’s some common threads that you should be looking for.
Employment Opportunities: Investment locations that have more jobs (or higher-paying roles) nearby have much more potential for rental demand from the working population. A healthy jobs market attracts tenants and can help mitigate void periods. This is why you might see the housing market rise with the announcement of a major company moving to the area.
Amenities: Having a good mix of amenities near the property means tenants will be attracted because they’ll have everything to hand. In this case, amenities could be anything from local bars and restaurants to green spaces or leisure facilities. It can always be a good idea to take a tour of the local area, whether that’s in person or via an internet search.
Tenant Demand: What is the tenant demand in the location? If you’re buying near an educational institution such as a university or college, chances are that you’ll have plenty of rental enquiries from students. Similarly, if you’re investing in a city-centre near large offices, you’ll likely see interest from working professionals. This can allow you to tailor your search to meet your investment strategy.
Rental Performance: How are the rental yields in the location around your buy-to-let investment? Rental income is your most important resource so you need to make sure that it can cover your mortgage payments. At the same time, think long-term. Where are rental prices heading in the future?
Future Development: Otherwise known as regeneration, what are the future plans for new spaces around your investment location? If there’s plenty of new redevelopment, it’s likely you’re investing in a growth area. Consider this – if a train station is due to be built in the next year, you know that your property will likely be in higher demand from commuters.