A buy-to-let property offers an attractive way to grow your wealth. But where is the best place to buy one?
If you want to make money as a landlord, think outside London.
Cities such as Manchester, Newcastle, Liverpool, and Birmingham all offer great potential returns for buy-to-let properties. The regeneration projects in these areas, plus the transport links and great schools, all play a part in attracting more people. More people means a higher demand for rental accommodation – and that means there’s potential for a great rental yield on your investment.
If you want to know HOW to invest in buy-to-let properties, check out our in-depth guide on buying property for profit.
But if you already know you want to invest, check out these hot tips on where to look for your next buy-to-let property.
- Is buy-to-let a good investment?
- Is buy-to-let good for a regular income?
- What’s the best way to do buy-to-let?
- Where should I get a buy-to-let?
- Working out rental yield
- Can you afford to do a buy-to-let?
- What are the downsides to buy-to-let?
Yes it can be, but it’s certainly not for everyone.
- House prices generally rise over time. That means your initial investment will grow without you having to do anything (especially if you keep the property for mid- to long-term)
- You only need to raise enough capital for the deposit and purchase fees
- The rental income you get from your tenants will cover your monthly mortgage payments, maintenance costs, and even a little profit
- When the mortgage is paid off, you’ll have a solid asset that earns almost pure profit (minus maintenance)
Property is still a risky investment if you don’t buy well: your property could be empty for a while or require expensive renovations
Buy-to-let mortgages are more expensive and require a large deposit around 25%
Your cash is tied up in the property and won’t be easily accessible
Bad tenants may not pay or leave thousands of pounds of damage behind.
House prices can also drop, so you could lose money if you choose to sell up.
It takes a lot of time and energy to be a landlord, especially with tighter regulations recently introduced.
Willing to take on these risks to reap the rewards? Keep reading!
Like any investment, your returns aren’t guaranteed. A rental property could provide you with a better income than gilts, bonds, savings accounts, and stocks and shares – but only if:
- The property is never empty of tenants
- Your tenants treat the property well and pay rent on time
- The property doesn’t require extensive maintenance or renovations
- You’ve got the time and energy to manage the property and tenants
- You won’t need to access your cash tied up in the house quickly.
Buying a property as a rental income is only really ideal if you’re willing to take a long-term investment view of it.
If you want to buy property for a quick profit, look into ‘flipping’ homes instead. That’s when you either buy a run-down property and renovate it, or get a cheap property that’s in a regeneration area to resell for a considerable profit when the area becomes desirable for homeowners.
Of course, there are downsides to flipping properties, too: you might not get your investment back, could take ages finding a buyer, and you need a lot more capital to get started.
There are two reasons to get a buy-to-let:
1. You want to grow your money – it’s a long-term investment
2. You want a regular, good income on the cash you already have
If you want to grow your money – primarily you should be interested in how much the property you buy is likely to go up in the next 5, 10 or 15 years.
The problem with London Lettings
London used to be a prime place for buy-to-let landlords. However, the prices of property in the capital are incredibly prohibitive even for first-time buyers – let alone buy-to-let landlords who need to raise more for deposits and costs.
In addition, this property bubble around the city could collapse at any time. While there’s always going to be demand for property in the capital city, political turbulence such as uncertainties around Brexit can have an impact. For example, prices were pushed up when overseas investors bought property in the capital because of the attractive rental returns. These investors may now consider selling those properties due to Brexit – meaning there is more supply to meet demand, reducing prices or at least stagnating growth.
Look outside the capital for great returns
That’s why buying a property outside of London could deliver better returns. The housing market in other regions of the UK may also stagnate for a short time due to economic and political turbulence – but overall, prices will rise. Developments such as HS2 – controversial as it is – means areas on the route will become an attractive option for commuters wanting to live outside of major cities.
Manchester, Liverpool, Blackpool, and Newcastle also have major regeneration schemes at present. This will encourage more people to move to these cities – and set up businesses – and that means house prices will likely rise in the near future.
If you want a regular income then buying property in an area that has plenty of transport links, amenities, and good schools will deliver a healthy supply of tenants to minimise the risk of your property being empty for long.
Again, areas of regeneration or suburbs or major cities are worth considering if you’re interested in this type of investment. Families with children, for example, tend to stay put in a rental property for a while to prevent moving schools. Suburban housing near city centres offers the best of both worlds: long-term family tenants and rising house prices.
To understand how your investment in a buy-to-let works for you, look at the rental yield. This is how much you get back every year in the form of rental income against your original investment.
A simple sum would look like this:
- Property price £100,000
- Rent £500 a month / £6000 a year
- £6000 is 6% of £100,000, so your rental yield would be 6%.
An excellent yield is anything above 7% a year, as this will cover mortgage payments, maintenance, and provide a profit. However, a yield of more than 5% is good in today’s market.
Location, Location, Location
Working out where you should invest for your buy-to-let is a little more complex than buying a cheap house.
You could buy a cheap property – but if the area isn’t as desirable, your rental income may be lower, too. Ask yourself why the property is cheap: does it require a lot of renovation and repair? Or does the area have a bad reputation?
Check local planning permission files, too. A cheap house might soon become a desirable property if large-scale planning permission applications have been placed. For example, new development or town regeneration plans will make your property more desirable in a few years’ time.
Consider where you live, too. Managing a buy-to-let takes time and energy. If you live in London, a rental apartment in Liverpool might end up costing you more in travel costs and time than one in a village that’s a short train ride out of London.
So, what are the current hotspots for buy-to-let properties?
However, according to property website Zoopla, if you can buy property in northern England or Scotland, you’re more likely to see better returns.
Liverpool offers investors a whopping 10% return on their investment. Rochdale, on the outskirts of Manchester, offers an average yield of 9%. Blackpool comes in second with an average return of 8.6%, while Glasgow offers returns of 8%.
If you want to compare the yield, house prices, and other factors for the best buy-to-let areas in the UK, try this nifty landlord tool from GoCompare. It lists the major cities in the UK – so when you’ve found a city that delivers an ideal yield for your investment, look a little deeper.
Research local towns and villages to find out if they’re well-connected to the major city, and if they offer a better yield potential.
A buy-to-let mortgage provider often requires a minimum 25% deposit, and the arrangement fees are much higher than residential mortgages. You also need to factor in typical house purchase costs, such as conveyancing, searches, and survey fees. These can easily add up to a few thousand pounds.
Let’s say you want to buy a rental property in Newcastle. The average price for a flat there is £147,000. To put down a 25% deposit as a landlord, that means you’ll need to have a lump sum of almost £37,000 saved.
Remember, too, that the larger your deposit, the lower the overall fees of a mortgage. You’ll shorten the term and/or lower payments – meaning you could have more free capital each month if you put down closer to 40% or 50% as a deposit.
To me there are two main downsides:
- The general NUISANCE of looking after a property
- The moral issue – the more people invest in buy-to-lets the harder it is for young people to get on the housing ladder
Looking after your property
Jasmine, Moneymagpie’s founder, has this to say about having a buy-to-let property:
“I had a buy-to-let property for a couple of years and it annoyed the pants off me!
It was a nice flat, in the same building where I live and easy to rent out.
You would think it would be perfect.
But I’m the sort of person who can’t be bothered sorting out my own washing machine, let alone someone else’s!
To me it was a load of hassle that I could be bothered with. I sold the flat, paid off my own mortgage and invested the money in shares, pension and….well, Moneymagpie actually.
The property’s value has shot up (grrr) since, but I’m still quietly glad not to have it hanging round my neck.”
“I’m also secretly smug that…
…I’m not stopping other people afford their own place
Because, honestly, that is much of the problem with the UK housing crisis.
Yes we should be building more, but look at the situation in London and other big cities: residential properties are being built and are instantly sold to foreign buyers, many of whom never live in the properties.
The buy-to-let craze is definitely putting up prices and making it near impossible for young people or people in lower incomes to afford their own homes.
I REALLY don’t like this so although I often suggest buy-to-let as a way for people (particularly retirees) to make a regular income on their investment, it’s not one that I am generally happy about.”
Really think about that when you consider a buy-to-let.
What do you think? Have you got a buy-to-let property? Do you think people should be stopped from investing in buy-to-lets?
*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.