London's best buy-to-let postcodes:Barking regeneration zone named as the capital's top investment spot with landlords earning up to £15k a year in rental yields

Private landlords are being squeezed for tax. But pick your area wisely and it's still worth doing.

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Barking's hot east London regeneration zone has been named as the capital's most profitable buy-to-let location.

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 (£)

Gross yield
SE6/SE12 Catford/Lee 340,000 15,200 4.5%
SE25 South Norwood 312,000 14,200 4.6%
E10 Leyton 358,000 16,400 4.6%
HA0 North Wembley 386,000 17,900 4.6%
SE7 Charlton 343,000 16,000 4.7%
N12/N20 Totteridge/Whetstone 455,000 21,400 4.7%
TW13/TW14 Feltham 304,000 14,500 4.8%
HA3 Wealdstone/Harrow Weald 325,000 15,900 4.9%
IG1/IG2 Ilford 293,000 15,400 5.3%
E13 West Ham 306,000 16,100 5.3%
UB4/UB5 Northolt/Hayes 290,000 15,300 5.3%
RM6/RM8 North Dagenham & Little Heath 274,000 14,800 5.4%
SE28 Thamesmead and East Woolwich 263,000 14,500 5.5%
IG11 Barking 272,000 15,100 5.6%

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.

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Prime location: This apartment is on sale in Feltham which saw a 4.8% yield in 2016

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.


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