New research shows investors who spend £272,000 on an average two-bedroom flat in the IG11 postcode can expect to earn just over £15,000 a year in rent — equalling a yield of 5.6 per cent.
Other top options for would-be landlords include Thamesmead and East Woolwich (SE28), and North Dagenham and Little Heath (RM6 and RM8), all areas where the average price of a two-bedroom flat is less than £300,000.
THE LONDON AREAS LANDLORDS LOVE:
|Postcode district||Area||Capital value (£)||
Rental value per annum (£)
|RM6/RM8||North Dagenham & Little Heath||274,000||14,800||5.4%|
|SE28||Thamesmead and East Woolwich||263,000||14,500||5.5%|
YIELD DOESN'T EQUAL TOTAL PROFIT
Lucian Cook, director of residential research at Savills, warns that yield on a property is not profit. About 25 per cent of rental income will be spent on costs, ranging from management fees to taxes.
And to make a real profit the property has to be occupied 365 days of the year. So buy-to-let investors in London must work out their budgets with forensic attention to detail before taking the plunge into a sector which has seen a dramatic reversal of fortunes in the last year.
The Government hiked stamp duty on buy-to-let homes by three per cent last April, so a property priced £300,000 carries a £14,000 payment.
From April this year, tax changes affecting buy to let will start to be phased in. By April 2020, landlords will no longer be able to deduct mortgage interest payments and other finance-related costs from their rental income when calculating how much tax they need to pay. The National Landlords Association says this could double or even triple their tax burden.
Savills’ Lucian Cook agrees landlords should seek out inexpensive properties in areas with strong rental markets in order to make buy to let work. “Low-value properties have a higher yield and will also give you more borrowing ability,” he says.
Darren Edwards, sales manager of Hetheringtons estate agents in Whetstone, N20, has seen a significant fall in buy-to-let sales because of the tax changes, but adds: “Individuals who already have large portfolios invest here.”
Buying to let works best when you can put down a bigger deposit, says Edwards. A buyer with a 20 per cent deposit — which on an average £455,000 two-bedroom flat in Whetstone is £91,000 — will find things “very tight”, as their borrowing and interest repayments will be higher.
With only 20 per cent to put down they will find it hard even 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 40 per cent deposit they’ll do vastly better than if they left that money in the bank,” says Edwards.
The wild card in all this is capital growth — the potential increase in the value of the property itself. Edwards believes prices in Whetstone will increase by two to four per cent this year, meaning a paper profit of £9,100 to £18,200. A buy-to-let landlord who invests in a good growth area benefits most the longer they hang on to the property.