We all know the old property adage: “location, location, location”, but in the light of the current situation in the buy-to-let market, it’s worth reiterating it and emphasizing its importance. Location can not only determine the long-term profitability of an investment, but whether the risk involved is appropriate for any given investor.
The UK’s top ten buy-to-let hotspots according to Private Finance
Research by Private Finance has determined that the UK’s top ten locations in terms of BTL rental yield are as follows:
Greater Manchester 4.3%
Cardiff, Blackpool, Lincoln 3.9%
The key point about this particular study is that it looks at net rental yields, i.e. yields after the cost of an interest-only mortgage. This fact played a key role in ranking the results, for example the average annual cost of an interest-only mortgage in Blackpool is slightly below £6K, whereas in Bournemouth it is around 13.5K. This is a reflection of the difference in house prices in the respective areas and, in turn, reflects the degree of risk involved for investors using leverage (i.e. mortgages).
Location and leverage
Higher house prices generally mean larger deposits are required, purchasing fees (such as stamp duty) are higher (particularly with the 3% BTL surcharge) and a mortgages need to be for greater sums. Paying deposits and fees reduces an investor’s disposable cash, while a mortgage is a commitment which must be fulfilled regardless of the investor’s situation at the time, e.g. whether or not the property is actually tenanted at that point.
In other words, using leverage is a risk and the more leverage you use, the greater the element of risk. Hence, when two locations offer similar yields (as in the case of Blackpool and Bournemouth), but widely different house prices, an investor would need to have a very compelling reason to pick the location with the higher house prices. For this reason, investors may wish to tread carefully when dealing with locations such as London, even though rents here are amongst the highest in the country. The harsh reality is that these high rents reflect the high cost of purchasing property in the capital rather than indicating the potential for outstanding yields.
For all the changes in BTL, success still depends largely on location.
Over recent times, BTL landlords have had to (try to) absorb a whole slew of changes, including significant tax changes, which have had a substantial impact on the cost of being a BTL landlord. At the same time, however, supply-side issues mean that there is always a demand for property in the UK, including rental property, and for as long as that continues to be the case, BTL will remain a viable investment, as long as investors are careful about picking the right properties in the right locations and making absolutely sure that their sums add up. With questions about Brexit continuing to dog London and the south east, the north and in particular the north west of England, looks increasingly attractive, all the more so because of its large and growing student population, which provides a reliable flow of tenants for properties within commuting distance of the area’s many educational institutes.