Property firm Savills has revealed that there are still areas where strong rental yields are available in London for buy-to-let landlords.
The fashionable east London regeneration zone of Barking has been named the capital’s most profitable location for strong rental yields.
The study found that landlords who spend £272,000 on an average two-bedroom flat in the IG11 postcode can expect to earn just over £15,000 per year in rent, equating to a rental yield of 5.6%.
Other top options for strong rental yields include Thamesmead and East Woolwich (SE28), and North Dagenham and Little Heath (RM6 and RM8) – all areas where the average price of a two-bed flat is less than £300,000.
Strong rental yields don’t mean high profit
Lucian Cook, the Director of Residential Research at Savills, warns potential investors that rental yields aren’t necessarily profit. Around 25% of rental income will be spent on costs, ranging from management fees to taxes.
Therefore, to make a real profit, the property must be occupied 365 days of the year. Buy-to-let landlords in London must work out their budgets with forensic attention to detail before taking the plunge into a sector that has seen a dramatic reversal of fortunes in the past year, warns Cook.
In addition, from April this year, further tax changes for buy-to-let landlords will start to be phased in. By April 2020, landlords will no longer be able to deduct mortgage interest, and other finance costs, from their rental income when calculating how much tax they need to pay.
Cook agrees that landlords should seek out inexpensive properties in London in areas with strong rental yields in order to make buy-to-let work.
“Low value properties have a higher yield and will also give you more borrowing ability,” he explains.
Darren Edwards, the Sales Manager of Hetheringtons estate agent in Whetstone, N20, has witnessed a significant decline in buy-to-let sales due to the tax changes.
However, he adds: “Individuals who already have large portfolios invest here.”
He explains that buy-to-let works best when you can put down a bigger deposit. A buyer with a 20% deposit, which on an average £455,000 two-bed flat in Whetstone is £91,000, will find things “very tight”, as their borrowing and interest repayments will be higher.
With just 20% of the property’s value to put down, investors may even find it hard to secure a mortgage, as banks are squeezing buy-to-let lending criteria. A higher deposit means a more favourable mortgage and lower interest repayments.
“If a buyer has a 40% deposit, they’ll do vastly better than if they left that money in the bank,” says Edwards.
While strong rental yields are important when it comes to investing, Edwards explains that the wild card in buy-to-let is actually capital growth – the potential increase in the value of the property.
He believes that house prices in Whetstone will rise by 2-4% this year, meaning a paper profit of £9,100-£18,200 for landlords.
If you’re seeking higher profits overall, hanging onto a property with good growth potential is much better than seeking out strong rental yields for short-term gain, he insists.
With the buy-to-let sector experiencing dramatic changes in recent times, it couldn’t be more important for landlords to protect their investments with the widest cover available. Our specialist Landlord Insurance has been rated 5-star by Defaqto and includes 33 essential covers as standard – Get a quick online quote here: https://www.justlandlords.co.uk/quote/proposers