By Lucy Waters - Managing Director for Aria Finance
The UK buy-to-let market has faced significant challenges and negative press in recent years, with rising interest rates and regulatory changes creating uncertainty for landlords.
However, opportunities remain for those willing to navigate these challenges. In this blog we explore four strategies that we are seeing an increasing number of property investors use to ensure they not only survive but thrive in this market.
The Opportunity: HMOs (Houses in Multiple Occupation) and MUBs (Multi-Unit Blocks)
HMOs and MUBs are increasingly capturing the attention of property investors eager to optimise their returns. The most compelling reason? The potential for significantly higher rental yields.
By offering individual rooms to multiple tenants in a HMO, landlords can generate more rental income than by renting the whole property to a single family or tenant. Similarly, MUBs allow landlords to collect rent from several units, enhancing their overall rental income compared to standard tenancies.
A key advantage of these property types is the stability of their rental income. In a typical tenancy, the departure of a tenant can leave a property temporarily vacant while new occupants are found. In contrast, with HMOs or MUBs, it's rare for all tenants to vacate simultaneously, ensuring a steady income stream to buffer against vacancies.
According to the ONS, UK private rents surged by 8.4% in the year leading up to September 2024. This, coupled with rising living costs, has fuelled a strong demand for affordable shared housing, particularly in city locations among students and young professionals.
For landlords aiming to maximise their income and mitigate risks, HMOs and MUBs present compelling opportunities, provided they are managed with diligence and are compliant with local regulations.
The Opportunity – Below Market Value (BMV) Properties
In a market where interest rates have risen, BMV properties present a compelling opportunity for astute property investors to enhance their return on investment. Securing a BMV property can offer investors the prospect of achieving higher profitability in both the short and long-term.
Whether it’s navigating auctions for a hidden gem or directly approaching sellers whose properties have lingered on the market, there are exceptional deals to be discovered.
By acquiring a BMV property, investors not only start with built-in equity but can also look to swiftly elevate the property's value, boosting its rental potential or flipping it for profit. Properties purchased at this lower price point provide greater flexibility for renovations, allowing investors to customise and tailor the asset for high-demand rental markets or quick resales. In both scenarios, the initial cost savings combined with strategic improvements can significantly boost an investor’s return on investment.
The strategy of buying below market value can also provide a buffer against market fluctuations. In uncertain economic conditions, starting with a lower purchase price reduces exposure to potential price corrections, offering a reliable and robust investment approach.
The Opportunity – Student Accommodation
For property investors looking to diversify their portfolio, student accommodation offers an attractive mix of high demand, strong rental yields, affordability, and resilience.
Universities across the UK continue to welcome thousands of new students each year, ensuring a continuous stream of renters in need of housing. This ongoing demand provides a level of security for landlords, as properties in university towns and cities are rarely left unoccupied for long. Even during periods of economic uncertainty, student housing tends to remain a reliable investment, as education is typically prioritised, and students will still require housing.
Investors don't need to focus solely on purchasing large, purpose-built student accommodation (PBSA) blocks to thrive in this market. Many are turning to smaller-scale options, such as Houses in Multiple Occupation (HMOs), which enables landlords to achieve a higher monthly income than they would from a single tenancy.
Additionally, student tenancies are typically shorter, aligning with the academic year, meaning landlords can adjust rents annually to reflect market conditions at the end of each term or year.
Student accommodation can offer an affordable entry point for investors, with many student HMOs located in inner-city areas near universities, where property prices are generally lower compared to prime residential or commercial locations.
For those who understand the local markets and student needs, this sector presents a chance to generate consistent, profitable income while benefiting from a steady stream of new tenants each year.
The Opportunity - Holiday Lets
Investing in holiday lets offers a range of financial benefits for property developers. A big attraction is the premium daily and weekly rates of holiday lets, there is a strong potential for higher profit margins compared to traditional buy-to-let properties, enhancing their attractiveness for developers in search of lucrative investment opportunities.
Additionally, holiday lets come with a range of potential tax benefits. However, investors should consult an accountant and refer to current tax guidance, as tax rules may vary and conditions often apply:
- Initial furnishing expenses for Furnished Holiday Lettings can be offset against rental income, reducing taxable profits.
- Holiday Lets can qualify for Business Rates property tax, making them eligible for small business rate relief instead of the usual council tax, which helps in cutting down ongoing expenses.
- When it comes time to sell, holiday let investors can take advantage of significant Capital Gains Tax reliefs, including Entrepreneur’s Relief, Business Asset Rollover Relief, and Gift Hold-Over Relief, all of which can substantially lower tax obligations.
- Furthermore, income from holiday rentals is considered ‘relevant earnings,’ enabling developers to contribute to pensions and further decrease their income tax burden.
How can Aria Finance help?
Aria Finance is the UK’s leading buy-to-let mortgage broker in the specialist finance marketplace, backed by over 20 years of industry expertise. Our reputation is built on an exceptional track record, unmatched service, and unwavering dedication to our clients.
Thanks to our unique market position, we offer highly flexible criteria across a range of factors, including income, adverse credit, property types, landlord experience, and stress testing. Whether it’s portfolio landlords, limited companies, or even offshore entities, we have the solutions to meet diverse needs.
Get in touch with the team today to discuss a case.