Landlords have enjoyed a prolonged period of high profits and rental yields in recent years thanks to a strong demand and, of course, record low interest rates.

But despite previous reports that the Bank of England is keen to see a return to ‘normal’ levels from the record low of just 0.5% since March 2009, a significant interest rate rise is now not expected for years according to the Office for Budget Responsibility.

This gives landlords the chance to re-evaluate their buy-to-let investments to ensure that they remain profitable and sustainable for the future.

Measures such as fixing your mortgage rates now, looking to reduce costs where possible, such as managing properties yourself and saving on agent fees, are good steps to take.

But, if I could give landlords one piece of advice, it would be to look at maximising rental income.

This is not a case of just increasing your rent once a year or whenever a new tenant moves in – that wouldn’t go down well and is arguably unethical – but looking at other buy-to-let models such as Houses in Multiple Occupation (HMOs).

By effectively maximising the number of rooms in a single property and renting them to multiple tenants, you could earn up to three times as much rental income, providing a sufficient buffer against fluctuating costs and in this example, interest rate rises.

Take the following portfolio for example.

Paul Watson was already a landlord of three single-tenancy maisonettes before joining Platinum Property Partners in December 2013. He has since added two fully-tenanted high quality HMOs to his property portfolio.

Table 1 below shows the current key financial information for his portfolio.

Standard Buy-to-Let 1

Standard Buy-to-Let 2

Standard Buy-to-Let 3

HMO 1

HMO 2

Property Value

£270,000

£250,000

£260,000

£475,000

£430,000

Mortgage LTV

75%

75%

75%

75%

75%

Current Mortgage

£202,500

£187,500

£195,000

£356,250

£322,500

Own Equity in property*

£72,500

£67,500

£70,000

£148,750

£157,500

Mortgage Rate

3.25%

3.25%

3.25%

4.79%

4.79%

Monthly Gross Rental Income

£980

£1,020

£1,075

£4,000

£4,150

Monthly Mortgage Interest Payments

£(548)

£(508)

£(528)

£(1,422)

£(1,287)

Monthly Gross Profit

£432

£512

£547

£2,578

£2,863

Monthly Costs

£(37)

£(37)

£(37)

£(1,040)

£(1,063)

Net Profit per Month

£395

£475

£510

£1,538

£1,799

Return on Equity**

6.53%

8.45%

8.75%

12.41%

13.71%

Gross Annual Yield ***

4.35%

4.89%

4.96%

10.10%

11.58%

* Own Equity in property includes the light refurbishment costs for the standard Buy-to-Lets and more extensive refurbishment costs for the HMOs.

** Return on Equity = Annual Net Profit / Own Equity in Property

*** Gross Annual Yield = Annual Gross Rental Income less Annual Costs / Property Value

These figures highlight that, despite higher mortgage interest rates, refurbishment and running costs – Paul pays all the bills at his HMO properties offering a fully inclusive rental package for his tenants – the HMOs provide a significantly higher Return on Equity (ROE) compared to his standard buy-to-lets.

As well as this, Paul’s HMOs are providing him with a comparable Gross Annual Yield over twice that of his standard buy-to-lets.

Table 2, below, shows the impact on Paul’s portfolio should the mortgage interest rates rise by 3%. (Note – all other costs have remained constant, as has the rental income.)

Standard Buy-to-Let 1

Standard Buy-to-Let 2

Standard Buy-to-Let 3

HMO 2

HMO 2

Property Value

£270,000

£250,000

£260,000

£475,000

£430,000

Mortgage LTV

75%

75%

75%

75%

75%

Current Mortgage

£202,500

£187,000

£195,000

£356,250

£322,500

Own Equity in property*

£72,500

£68,000

£70,000

£148,750

£157,500

Mortgage Rate

6.25%

6.25%

6.25%

7.79%

7.79%

Monthly Gross Rental Income

£980

£1,020

£1,075

£4,000

£4,150

Monthly Mortgage Interest Payments

£(1,055)

£(977)

£(1,016)

£(2,313)

£(2,094)

Monthly Gross Profit

£(75)

£43

£59

£1,687

£2,056

Monthly Costs

£(37)

£(37)

£(37)

£(1,040)

£(1,063)

Net Profit / (Loss) per Month

£(111)

£7

£23

£647

£993

Return on Equity**

(1.84)%

0.12%

0.39%

5.22%

7.57%

Gross Annual Yield ***

4.35%

4.89%

4.96%

10.10%

11.58%

Whilst Gross Annual Yield is unaffected, as you would expect, you can see that with a 3% interest rate rise Paul would experience a net loss per annum of £972 across his three standard buy-to-let properties. However, the HMOs are still producing a healthy profit of £19,680 per annum.

In fact Paul’s HMO portfolio could withstand a massive 5% mortgage interest rate rise and still turn a profit of £6,108 a year. This would equate to a Return on Equity of 2% – still higher than many cash NISAs that are currently available!

Have you considered how an interest rate rise would affect the performance of your property portfolio? Is this a buy-to-let strategy that appeals to you? Start doing your research now so that you can build a sustainable portfolio for the future.

View more articles by Steve Bolton