Faced with rising costs and increasing legislation, landlords are having to think more strategically about how to maximise their existing properties while looking for new opportunities to diversify their portfolios and increase yields.
Gone are the days when a three-bedroom terrace was a surefire investment. Rising mortgage rates have squeezed profits and left some landlords struggling to meet lenders’ stress tests.
Growing legislative demands are also piling on the pressure. By 2030, all rental properties must have a minimum energy performance certificate rating of C, which could entail additional costs for landlords to get their property up to standard.
Semi-commercial and commercial properties introduce additional complexities
The Renters’ Reform Bill, anticipated to come into force this year, will also bring significant change, including the end of no-fault evictions (Section 21) and fixed-term assured short-hold tenancies.
Rental demand remains strong, however. In some areas, this has driven rents to record highs and created opportunities for landlords willing to adapt to the changing market conditions.
So, how can specialist buy-to-let (BTL) lenders support both experienced landlords and those just starting out?
New direction
As investors search for higher yields, there’s been a shift towards more specialist sectors of the BTL market.
“The BTL market is evolving, with landlords looking for property types that offer stronger yields and long-term stability,” explains Envelop managing director Donna Francis.
“One of the most popular choices is houses in multiple occupation [HMOs]. In a similar vein, student accommodation remains a reliable investment.”
Lenders are becoming more open to the idea of first-time landlords
As well as an increase in the popularity of build-to-rent (BTR), Francis is seeing a shift towards semi-commercial and commercial properties.
“Landlords are exploring mixed-use spaces that combine residential, retail or office units,” she says. “This diversification reflects a strategic approach to mitigating risks and maximising rental income in an ever-changing market.”
SPF Private Clients director Howard Levy is seeing landlords hunt for properties with lower purchase points, in order to secure better yields.
“If a property is bought at a lower price, the rental return works out better based on the deposit funds and costs tied up in that property,” he explains.
He’s also noticing an increase in clients purchasing limited company shares instead of the property itself.
“This should become increasingly popular given the ownership structures being used to purchase properties,” says Levy.
HMOs and student accommodation often involve higher management fees
“Lenders haven’t fully caught up with this demand yet but are moving in the right direction as more landlords purchase in company names and will eventually look to sell.”
As landlords seek to maximise their rental income, they are not just diversifying the types of property but also focusing on specification. Dynamo sales and operations director Tony Field says HMOs and multi-unit freehold blocks are being fitted to a very high standard, whether intended for students or for professionals.
“It’s not just younger people applying to rent; the age demographic is expanding as more people look at alternative accommodation,” he says.
“We’ve also seen a rise in semi-commercial and commercial purchases as a way for landlords to diversify their portfolios. Almost all new purchases are bought via an SPV [special-purpose vehicle] or via a trading limited company by professional landlords.”
Due diligence
While it’s easy to talk about diversification, the reality can be quite different, and not every new opportunity will suit every landlord.
“HMOs and student accommodation often involve higher management fees due to increased tenant turnover and more complex property maintenance,” says Alexander Hall director of partnerships Stephanie Daley.
First-time landlords are still investigating BTL but tend to use limited companies to make their purchases
“Additionally, these properties are subject to specific regulatory requirements, such as mandatory licensing and adherence to safety standards, which can add to the operational costs.”
Daley advises landlords to conduct thorough due diligence to ensure compliance and profitability.
Although HMOs and commercial properties can generate higher yields, says Field, there can be greater risks attached.
“Commercial properties come with a very different kind of client as you are working with businesses. It could be a warehouse, care home or shop, for example, so there are lots of things to consider,” he says. “I always recommend doing plenty of research before clients diversify their portfolio, and always speak to a specialist adviser to understand the products available and costs involved.”
Francis agrees that commercial properties can come with extra considerations.
Most lenders now have products with variable fee options
“Semi-commercial and commercial properties introduce additional complexities, including the potential for longer void periods between tenants and an increased risk of arrears, particularly during periods of economic uncertainty,” she says. “Student accommodation can present seasonal void periods, and higher maintenance costs due to wear and tear.”
Francis points out that BTR projects can require significant upfront investment and longer planning phases before rental income is generated.
“Landlords must carefully assess these factors when deciding which property type aligns best with their investment strategy,” she says.
Flexible finance
When a landlord is seeking to diversify a portfolio, how can specialist lenders help?
“With rising borrowing costs and tighter affordability criteria, specialist BTL lenders are stepping in to provide more flexible financing solutions,” says Francis.
“Many lenders now offer affordability assessments that focus on a property’s rental income potential rather than solely on the borrower’s personal income.”
To support portfolio expansion, some lenders have increased maximum loan sizes and loan-to-value ratios, enabling investors to access higher-value properties.
“Innovative financial products, such as rolled or deferred interest options, enable landlords to manage cashflow more effectively, particularly in cases where properties require development or renovation before becoming income generating,” adds Francis.
One of the most popular choices is houses in multiple occupation
She also welcomes the fact that lenders continue to cater to landlords with more complex financial backgrounds, including those with credit impairments or irregular income streams.
Field agrees that there are more options in the market to help investors diversify and increase rental yields.
“Lenders are offering things like investment valuations on six-bed HMOs with en-suites, and more specialist BTL lenders are providing semi-commercial products too,” he says.
“We’re also seeing lenders offer higher fees to help reduce the interest rate and improve cashflow. Most lenders now have products with variable fee options, ranging from 5%–10% fees all the way down to zero-fee products, giving clients flexibility to choose what works best for their portfolio.”
New landlords
Despite the challenges in the market, the consistent demand for rental properties continues to attract new landlords, with lenders eager to support them.
Landlords are exploring mixed-use spaces that combine residential, retail or office units
“If we go back 10 years, the choices for first-time landlords were limited,” says Field. “Now, most BTL lenders are open to helping first-time landlords enter the market, provided they meet the lending criteria and rental stress tests. This isn’t just for standard BTLs either. More lenders are offering first-time landlords opportunities to purchase HMOs and commercial properties.”
Daley agrees that criteria for first-time landlords have loosened.
“In the past, a number of lenders required at least two years of landlord experience before lending on an HMO property. We’re now seeing more lenders offer first-time landlords HMO options, which were previously seen as very specialist.”
Some lenders are also providing educational resources and advice services to help new landlords navigate the complexities of property investment, she adds.
Levy highlights that first-time landlords are starting with larger investments than those of their predecessors.
The BTL market is evolving, with landlords looking for property types that offer stronger yields and long-term stability
“First-time landlords are still investigating BTL but tend to use limited companies to make their purchases. Lenders are becoming more open to the idea of first-time landlords, and many more are offering HMO and multi-unit block finance for these clients. Previously, the number of lenders prepared to lend on such investments was much lower.”
Levy adds: “This is a sign that demand for HMO lending from first-time landlords is on the increase as these clients look at supplemental income from other sources.”
Positive outlook?
Much has been written about the BTL market over the past year, often focusing on the negatives. However, demand for rental properties remains robust and lenders continue to show a strong appetite for lending, increasingly offering flexible and innovative solutions.
Although the sector still faces legislative changes, it’s hoped that the worst of the challenges — particularly rising mortgage rates — are behind it. There’s optimism that 2025 will bring a more positive outlook, with lenders continuing to support brokers and their clients.
