Whether you are a first time landlord or the owner of an extensive property portfolio, you will be hoping to find a Buy to Let property that maximises your investment. One of the best ways you can do this, through both rental yields and capital growth, is by choosing a property in the right location. So, where are the best places in the UK to be a landlord? Despite house prices in London’s most sought-after areas rising by 10.2% in 2014, the London market doesn’t offer landlords the high rental yields or capital growth that you might expect. In 2013 UK landlords received an average annual yield of 8.8%, while the best performing area of London, Southwark, offered an average annual rental yield of 6.15%.
Remember that Rental Yield is Your Main Income
In the case of Buy to Let mortgages, rental yield (and not capital growth) is the main source of income for the investor. In the present climate, the best chances for a good return lie in long term investments. Several Buy to Let surveys have been carried out by property websites to determine which locations currently offer the best rental yields for landlords. In a report published by Home.co.uk in August 2013, the top Buy to Let locations were all to be found outside London:
|Location/ Postcode||Annual Rental Yield|
|New Romney (TN28)||10.5%|
|Waltham Cross (EN8)||8.7%|
Despite the fact that demand for rental properties is very high in London and the South East of England, it is worth noting that a high demand in a certain location does not automatically mean that these areas offer high rental yields. This is because they also attract high house prices, and high prices will reduce a landlord’s annual rental yields. You can see this when you calculate annual property yield. To do this, take the property’s yearly rental income and express it as a percentage of the investment in the property. So for example, if you charge £1500 per month in rent for a property that you bought for £200,000, your yield would be as follows:
£1500 x 12 = £18,000 per year rental income
£18,000/ £200,000 x 100 = 9%
However, if you paid £250,000 for the same property but charged the same market rent, the annual yield would be:
£1500 x 12 = £18,000 per year rental income
£18,000/ £250,000 x 100 = 7.2%
All of this underlines the important principle that in order to make the best property investment, landlords should buy their properties at the most competitive price. This should give them the best possible rental yields and the best possible chance for capital growth.
Should You Rely on the Statistics?
So, if you are looking for a new property investment, should you simply rely on the statistics? Experienced landlords often argue that there is more to managing a successful property portfolio than the yields promised on paper. To start with, consider the fact that different surveys suggest different locations. An HSBC Buy to Let property survey published in September 2013 by comparethemarket.com looked at the most profitable seaside locations for landlords:
|Location||Annual Rental Yields|
|Kingston Upon Hull||7.77%|
|Brighton and Hove||5.48%|
While average annual rental yields across the UK were 8.8% in 2013, it is worth noting that not all of the locations shown in either report offers an above-average yield. Indeed, all of the seaside resorts highlighted in the HSBC report offer below-average yields, as well as two of the locations in the Home.co.uk survey. Another financial website, lovemoney.com has also named Southampton as the top location for Buy to Let landlords, offering an annual rental yield of 7.82% (April 2013), followed by Blackpool (7.81%), Kingston-Upon-Hull (7.77%), Manchester (7.60%), Nottingham (7.55%), Coventry (7.13%), Slough (6.82%), Oxford (6.64%), Liverpool (6.57%) and Portsmouth (6.55%). Again, all of the locations on the list offer annual yields less than the average for 2013.
Do Your Homework Before Investing
These conflicting reports suggest that landlords should do their homework carefully, even in areas that seem to offer the opportunity of high rental yields. Before you buy, consider how you will manage your property, whether the area is likely to experience a growth in house prices, and what sort of tenants you can expect to live in your property. These factors are important because they reflect the reality of being a landlord. If you live a long distance from the property you have bought, it may be difficult to manage the property without employing a letting agent. You will have to pay property management fees (which will reduce your rental yield) and will not have an established network of contacts (such as building contractors) that can help you when problems occur.
Also, while buying a cheap property in a less desirable area may offer the prospect of a higher rental yield consider whether you will be able to sell the property easily if your circumstances change. An average property in an area with low demand could prove difficult to sell. If you aim at the lower end of the market, you are likely to attract tenants at the lower end of the wage spectrum, some of which may have unstable personal circumstances. While this does not mean that your tenants will prove unreliable, it is possible that this will be the case. Many landlords who let to tenants in this situation find that they experience higher than average rates of arrears, damage to property and void periods, all of which will reduce annual rental yields.
Use Your Own Knowledge of the Area
When looking for the best location for your Buy to Let property, it is worth bearing in mind the statistics, but also use your own knowledge of the area. Most of the locations on these published lists benefit from excellent transport infrastructure and easy access to local amenities. They also have high levels of demand for rental property, perhaps because of their proximity to universities or business locations, as well as a growing population. Look for locations with these features, or areas close to popular locations where there is planned large-scale public or private investment. These factors ensure that your property is likely to retain its appeal and that you can attract reliable tenants, avoid lengthy void periods and be able to achieve capital growth when you decide to sell your property in the future.
Buy Below Market Value
Another way to maximise your rental yield is to pick the right location and then look for properties available below market value. You may be able to achieve a discount of 15-25% from ‘motivated sellers,’ such as vendors who are looking for a quick sale because of a divorce or repossession. Property auctions can be an ideal place to find discounted properties to which you can add value through a small renovation and then rent to tenants at the market rate. While property surveys may help you to choose the right location for your Buy to Let property, remember to use your common sense and to do your homework before you make an investment.