As many property experts will tell you, the key to making money from property investments boils down to one essential factor: location. One of the best ways you can ensure you make a profit, through both rental yields and capital growth, is by choosing a property in the right area. In a previous article we discussed the best places in the UK to invest in a Buy to Let property. This article will highlight the Buy to Let locations to avoid.
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. Several property websites have carried out Buy to Let surveys to determine which locations currently offer the best rental yields for landlords. According to Neil Faulkner writing at confused.com, it is particularly important for investors to avoid areas with annual rental yields of less than six percent. This is because, in his opinion, average annual yields below this figure may signal that property prices in the area are inflated and may experience a sharp fall when the market readjusts.
London: Not as attractive as it looks
In HSBC’s survey of Buy to Let locations (April 2013), six of the ten worst performing areas for Buy to Let are in London. Despite house prices in London’s most sought-after areas rising by up to 19% last year, these areas don’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%, but the worst performing area of London, Kensington and Chelsea, offered landlords an average annual rental yield of 3.34%. According to the HSBC survey, the ten worst performing Buy to Let locations in the UK are:
|Location||Yield||Av. Rent||Av. Property Price|
|Kensington and Chelsea||3.34%||£3033||£1,091,000|
|Hammersmith & Fulham||3.42%||£1690||£594,000|
|Hastings, East Sussex||3.72%||£550||£177,000|
|Richmond Upon Thames||4.07%||£1647||£485,000|
Keen-eyed investors will notice that the high demand for property and high market rents in London (in areas such as Kensington, Camden or Richmond Upon Thames) do not translate to high rental yields. This is because investors have to pay a premium to buy property in these locations and high property prices reduce the annual rental yield.
You can see the reason for this when you calculate the annual yield of a property. To calculate yield, 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%
While Inner London boroughs may not be a good investment prospect, there is an exception: three of the top five London locations for Buy to Let include locations (E15, E13 and E6) that are clustered around the site of the 2012 Olympic stadium, each offering reasonable yields of over 5%.
Buying to Let in the Countryside
For many landlords in search of a profitable investment, it may seem that buying a property in a beautiful countryside location may be an ideal opportunity to generate a steady income. However, recent research shows that some of the most beautiful areas of England and Wales such as the Brecon Beacons, rural Devon, the Peak District, the Yorkshire Dales or Exmoor and Dartmoor offer rental yields of around 2%. These areas tend to be attractive to property owners, for whom living in the rural location is its main attraction.
Those landlords who are interested in the Holiday Lets market should bear in mind that rental demand in the countryside is much lower than in towns and cities. Successful lets depend on the size of the property you have bought. For example, in the current market 2- and 3-bedroom properties are not doing as well as larger holiday lets. While holiday lets do demand significantly higher weekly rents than residential lets, investors should remember than there can be significant void periods. In addition, high street lenders typically avoid providing Buy to Let mortgages for holiday homes.
Consider the Effect of a Falling Market
The property website home.co.uk has cautioned landlords who wish to purchase Buy to Let property in locations with an unstable market. The website asks investors to take into account the effect of a negative capital growth on their property investment. Based on this premise, they have highlighted the ten worst Buy to Let areas in the UK based on the average rental yields of two-bedroom properties:
|Location||‘Real’ Rental Yields|
Although on paper a two-bedroom property in each of these locations offers investors an average rental yield of 6%, the figures do not take into account falling property values, which if significant would more than wipe out gains made through rental yields. With the average predicted rise in the UK property market between 2 and 7% in 2015, there should be fewer locations that offer negative rental yields, but it is important to do your homework before committing to a property in a particular area.