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Smaller properties with bigger yields

Recent research from the UK’s largest estate agency group, Countrywide, showed that smaller properties are achieving higher yields.

One- and two-bedroom properties are achieving average yields of 6.8% and 6.4%, whilst three bedroom homes are fetching 6.2% and properties with four or more bedrooms just 5.6%. Additionally, whilst the rent for three- and four-or-more-bedroom properties has increased year-on-year by just 2.3% and 0.3% respectively, their smaller siblings have seen rents climb by 3.3%.

It would seem, then, that size does matter – but not in the manner we might think. However, is small always the way to go?

When bigger might still be better

Countrywide’s research wasn’t just into yields – they also examined rental arrears, and found that whilst all property sizes have seen a fall, one-bedroomers saw the smallest fall (0.4%) and three-bedroomers the largest (1.5%). This makes a case for the argument that tenants in larger properties might be better at staying on top of their rental payments.

To me, this holds some water. There are a couple of reasons why larger properties might see smaller arrears: one is if they’re rented by families or older professionals who might be more experienced at managing their finances; the other is if they’re rented by sharers, who share liability for rental payments.

Another factor to consider is how a property holds its value. A quick nip over to the Land Registry website shows how house prices for different property types have fared between November 2007 – when house prices were at their beefiest – and March 2013. Detached and semi-detached houses (which tend to have the most bedrooms) have lost, on average, 9% of their value, whereas flats and terraces have lost closer to 13%.

For those investing not just for yields, but for capital appreciation, this is a big deal. The rent on smaller properties might be rising more quickly, but this can be put down to demand rather than value – and if a sudden big development of one- and two-bedroom flats springs up in an area, the local demand for similar properties will shrivel up.

The moral of this story, I think, is aiming the right property at the right tenants. Yield statistics will go up and down – the real aim is to get a good tenant, ‘avoid the voids’ and make sure your investment pays off at the end of it all. Whether a property is big, small or even a giant, purpose-built teapot, if you do your research and plan your investment right, it should be able to turn a profit.

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Amelia Vargo is an online marketing executive for CT Capital. Amelia writes for Turnkey Mortgages, Turnkey Landlords, TurnKey Bridging, TurnKey Life and Commercial Trust.