Average rental yields have hit a six-year high with HMOs and properties in the North East offering landlords the best returns.

Paragon Bank research reveals that after increasing for the third successive quarter, average gross rental yields hit 6.1% in Q1. This is the first time average yields have surpassed the 6% mark since the end of 2021 and the highest since Q2 2018 when landlords achieved average yields of 6.2%.

A poll of almost 800 landlords highlights how HMOs have the potential to generate higher average rental yields compared with single self-contained properties - 7% versus 5.8%.

Richard Rowntree (main picture) managing director of mortgages, says landlords are naturally looking for ways to maximise returns, while trying to mitigate the impact of an increasing tax burden.

“Alongside their yield generation potential, HMOs appeal to investors because of strong demand for affordable homes, particularly in areas where tenants would perhaps not be able to afford to buy or rent a whole property,” he explains.

Inflation

“This is particularly evident at the moment, with high levels of rental inflation. Alongside a stabilisation of house prices, it is likely that this has contributed to improving yields.”

Rowntree adds that while strong yields are good news for landlords, rental inflation poses a very real challenge for tenants, and that reports of improving levels of housing stock in the sector are good news.

“This is because addressing the imbalance between supply and demand is central to keeping rents at an affordable level and also means that tenants have more choice when choosing a home.”

Regional differences show that Yorkshire & The Humber landlords enjoyed high yields of 6.6% while those in the capital recorded the lowest yields, with returns of between 5.2%-5.7% - likely influenced by significantly higher than national average property prices.