A guide to the best type of property for buy-to-let investments

When you start looking into buying an investment property, there are a lot of things to consider, from the location to the mortgage provider - but what about the property type?

We’ve dived into the data on which properties bring in the highest rental yields, as well as capital gains, to help you feel better informed when scoping out your next buy-to-let property.

Best type of buy-to-let property for rental yield

Rental yield is an important factor when considering what type of property to invest in. It determines how much you’ll earn from a rental property compared to the property’s cost. If you’re looking to make money from your investment in the short to mid-term, rental yield may well be your focus.

Rental yield for HMOs and multi-unit properties

Recent research from Mortgages for Business found that Houses in Multiple Occupation (HMOs) - which is defined as any rental property shared by three or more tenants who are not members of the same family - brought in the highest rental yield in 2017 at 8.9 per cent.

Next to HMOs were multi-units - such as blocks of flats - which produced yields of 8.1 per cent.

What number of bedrooms has the best rental yield?

However, getting an HMO licence can be a long and arduous process, and for many, it’s not feasible to purchase a multi-unit property, even with a mortgage.

So if you’re looking for a property that falls outside of those parameters, what can you use to find your best possible rental yield? Well, research from Upad has found that the number of bedrooms, and whether the property is a flat or a house, can impact rental yield:

Number of bedrooms Rental yield for a house Rental yield for a flat
1 4.08% 4.95%
2 5.30% 5.16%
3 5.07% 4.32%
4 4.77% 3.14%
5 4.12% 3.56%

Of all properties, two bedroom houses currently offer the best rental yield, and if you’re in the market for a flat, two bedrooms is also the way to go.

However, for one-bed properties, flats outperform houses, though houses again offer better rental yield when you get to three or more bedrooms. ### Where to invest for best rental yields

Of course, the location you buy your property in can impact rental yield, both in terms of where in the country you invest, and what local services are available in the specific area your property is in.

If you want more information on which location in the UK to invest in for your next buy-to-let property, check out our guide to 2018’s buy-to-let hotspots

Best type of buy-to-let property for capital gains

For long-term investors, capital gains will be an important factor when deciding what type of property to purchase for buy-to-let.

Data from Zoopla shows which type of property - detached, semi-detached and terraced houses, or flats/apartments - have increased most in value over the past five and the past 20 years.

Property type 5 year increase 20 year increase
Detached house 31.84% 245.49%
Semi-detached house 33.60% 269.59%
Terraced house 32.16% 281.87%
Flat/apartment 28.76% 256.42%

It’s important to look at capital gains over both the shorter and longer term, as fluctuations in the market can distort the data.

Either way, terraced houses appear to bring in the highest capital gains, whether you plan to sell up in half a decade or in two. Detached houses, on the other hand, could give you reasonable capital gains in the short to mid-term, but may fall behind other property types over longer periods of time.

While this data can’t tell us exactly what the market will do in the future, it’s a good indicator of how things could progress.

What type of property will you invest in next? Let us know in the comments.

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