Where should you invest in buy-to-let in 2018? We reveal the UK's top 10 rental hotspots for landlords

In spite of a barrage of tax changes making it harder to make money on buy-to-let, there are still pockets of the market where investing makes sense. 

Buy-to-let specialist Private Finance analysed buy-to-let yields available across major towns and cities in the UK and found that Liverpool and Nottingham are now the UK’s best performing property investment locations.

According to the research, both cities enjoy average rental yields of 6.2 per cent once mortgage costs are taken into account. In some areas of London the figure is below 2 per cent. 

 Liverpool has retained its top position since May 2017, although the city has seen rental yields compress due to falling rental prices. Nottingham has moved up from second position thanks to an average £121 increase in average monthly rents. 

In third position is Cardiff, with average yields of 6 per cent after the average rent paid in the city rose from £946 to £1,301 over the past month. Southampton and Greater Manchester also made the top five buy-to-let hotspots in January 2018, with both destinations offering rental yields of 5.9 per cent.

Shaun Church, director of Private Finance, said: 'Finding the right buy-to-let location is a careful balancing act. Too large an initial investment makes it difficult to achieve a healthy yield, but landlords must also be confident that property values will appreciate at a higher rate than mortgage borrowing to achieve a long-term profit. 'Strong rental demand is also key to prevent lengthy void periods that can damage affordability. 'While there has been some movement in the top 10 buy-to-let hotspots, larger cities and university towns tend to offer the greatest opportunity for investors as they offer the highest rental demand.'

Significantly, London and the South East are absent from the top 10, as high purchase costs have put a severe dampener on yields. Rents in the capital have also been coming down, as renters appear to have maxed out what they can afford to pay each month.The study claimed that some London boroughs offer new investors yields below 2 per cent, due to high house prices that negate any higher rent commanded.The London borough of Haringey offers yields of just 1.4 per cent it claimed, with the average property costing £546,185, while the average rent was £1,493.In Harrow and Hounslow, yields were 1.6 per cent and 1.7 per cent, respectively, while in Lewisham, Watford and Croydon, yields were 1.9 per cent.

Investors would need either rents to rise substantially to earn a good return on their money, or house prices to go up.

 

 

TOP TEN BUY-TO-LET HOTSPOTS BY RENTAL YIELD 
Ranking in Jan 2018

Location



Average house price*

Average mortgage costs* (annual) Average rent 2018 (month)

Average rent 2018 (annual)

Net rental yield 2018 (excl. tax)

Net rental yield 2017 (excl. tax)

Ranking in May 2017

= 1 Liverpool £131,707 £2,440 £886 £10,632 6.20% 8.00%  1
= 1 Nottingham £138,937 £2,574 £929 £11,148 6.20% 5.60%  2
 3 Cardiff £198,649 £3,680 £1,301 £15,612 6.00% 3.90%  7
= 4 Southampton £210,291 £3,896 £1,356 £16,272 5.90% 3.70%  11
= 4 Greater Manchester £163,800 £3,034 £1,052 £12,624 5.90% 4.30%  5
 6 Coventry £178,768 £3,312 £1,082 £12,984 5.40% 5.40%  3
 7 Edinburgh £246,508 £4,567 £1,454 £17,448 5.20% 4.40%  4
 8  Leicester £162,937 £3,018 £900 £10,800 4.80% 3.70%  14
 9 Brighton and Hove £360,673 £6,681 £1,969 £23,628 4.70% 3.30%  17
 10 Bournemouth £237,113 £4,393 £1,282 £15,384 4.60% 3.80%  10
Source: Private Finance. Average house price is based on December 2017 data (released 16.01.18). Average mortgage costs are based on a two year fixed, 75% LTV, BTL interest-only loan at an average rate of 2.47% (source: Bank of England Quoted Rates)

 

 

Over the past two years, landlords have been hit by a 3 per cent surcharge in capital gains tax on new buy-to-let purchases, the start of a reduction in the tax relief they can claim against their mortgage costs, and tighter lending standards making mortgages harder to secure. 

These increasing tax liabilities have depressed yields with the tapered reduction of tax relief on buy-to-let mortgage interest already eating into profit margins.

 

Church said: 'There are particular challenges for portfolio landlords, classed by the Prudential Regulation Authority as those with four or more buy-to-let properties. 

'These landlords now face much more stringent affordability tests and must demonstrate the profitability of their entire portfolio to be accepted for a loan. An independent mortgage broker can help investors navigate these tricky waters and find the most affordable and suitable option for them.' 

Despite the rising cost of being a landlord, across the top 10 hotspots, Private Finance claims rental yields have risen by an average of 0.9 percentage points since May 2017. Southampton saw the biggest rise in yield, of 2.2 percentage points, due to a 20 per cent uplift in rents while house prices in the area rose 6 per cent over the period. 

 

According to Private Finance, landlords have benefited from falling mortgage rates, helping to ease pressure on yields.There was a slight increase in average mortgage rates towards the end of 2017 as November brought the first interest rate rise in 10 years but Bank of England data shows that, at 2.47 per cent, the average two-year fixed rate at 75 per cent loan-to-value is at its lowest point since records began in January 2012.