Matt Stevens is Director at mortgage consultancy company, The Mortgage Genie. Here, he advises property investors wanting to maximise their rental returns by suggesting the best property hotspots at the moment.
In a time where demand for rental property is on the increase and rent prices are following suit, now is the opportune time to yield impressive profit from your property investments. According to ARLA PropertyMark, the number of prospective tenants registered by lettings agencies increased by 8% in March, with rent rising by 23%.
It’s unsurprising that investors are wanting to move away from London and its surrounding areas, with inflated house prices causing more worry than they’re worth for many prospective and current landlords. Investors are now turning their backs on Southern regions and heading up to areas in the North — Yorkshire and the North East being particularly attractive — to grab a bargain on house prices and take advantage of higher rental returns.
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What areas should I look out for?
Whether you’re looking to buy in a hub of creativity like Manchester or want to take it to new heights in Britain’s second biggest city, Birmingham, there are high-yielding areas dotted all around the UK that’ll ensure capital growth. Here are the top 5 UK cities you’ll want to consider this year for buy-to-let properties:
1. Manchester It’s the largest-growing UK city outside London, so it’s a given that the housing market here has endless opportunities for property developers and investors to gain control over their returns. With high ROI in areas like Fallowfield and Salford, there’s never been a better time to invest in Mancunian property, particularly if you take into account the extreme demand for student accommodation. However, be aware that the house prices in Manchester are rising rapidly.
2. Liverpool With the fastest-growing UK economy thanks to an impressive increase in job opportunities, and a choice of 4 universities for students to enrol in, there’s plenty of scope for finding the perfect buy-to-rent sites in this city. Liverpudlians are keen on long-term rentals, with the strong job market tying them to the city for extended periods of time.
3. Leeds Having put itself up for 2023 European Capital of Culture, Leeds knows its own worth, particularly with regards to how well people receive the city. With transport links from Leeds Bradford Airport to the planned HS2 high-speed rail connecting North and South, there’s plenty of scope for hiking up rent in Leeds — especially following predictions that Leeds house prices will increase by 21.6% over 2017-2021. With the universities spreading from the city centre to outer areas in Horsforth, student accommodation is a key area to address for any prospective buy-to-let investors.
4. Birmingham Benefiting from the aforementioned Leeds-based HS2, Birmingham may be one to watch with the opportunity for people travelling from as far as London to arrive in approximately 50 minutes — shaving almost an hour off the current travel time. The city’s existing tram links mean that outer areas may be a popular choice to target, especially given the demand for houses along the A456 and its surrounding suburbs.
5. Sheffield The S1 and S2 postcodes are some of the UK’s highest-yielding areas, with S2 housing the infamous Park Hill estate — soon to reveal its development of 200 flats, giving investors a substantial pick of properties. Exploring the city-centre of Sheffield will reveal some of the most highly demanded homes — with a particularly high demand for the private rented market among students and young people, according to Sheffield City Council — meaning prospective renters don’t have much chance to low-ball investors on their prices.
Top tips for mortgaging buy-to-let properties
Investing in buy-to-let properties is an appealing idea for many, with mortgage rates at record lows. Even though interest is expected to rise and Stamp Duty eats into a good chunk of your rental returns, many investors are sticking with it for its positives, including the increasing demand for these property types.
1. Know the risks
Although buy-to-let can be an attractive concept due to the greater demand and lower costs for investors, your money might be better off elsewhere. Having your money tied up in a property which may decrease in value is a risky move. Additionally, there will most likely be periods of time where there are no tenants in, so you need to have enough money set aside to pay for any maintenance or repairs during this time. You’ll also need a bigger deposit amount — expect 25–40% — than you would for a residential mortgage.
2. Price it up
Before booking viewings in various cities, make sure you look into each of your desired properties with your eyes open — the maximum amount you can borrow is linked directly to the amount of rent you expect to receive. Typically, you’ll need to get enough rent to cover at least 125–150% of the mortgage for the property. This usually means charging a rent that’s 25–30% higher than your mortgage payment. You also need to consider both internal and external factors like whether you can afford to maintain the property, even in the absence of tenants or if rates rise? Once you’ve done this, keep on top of it to afford you some power in changing economic circumstances.
3. Speak to an independent mortgage broker or consultant
These professionals — who aren’t associated with your bank — will help you to gauge a sense of whether buy-to-let is going to be viable for you personally. As experts in the field, they’ll be able to advise you on what deals are the best — just be prepared to know what you want to get out of it so you can communicate this during the meeting. The Financial Conduct Authority (FCA) can help you ensure that you aren’t a victim of financial mis-selling so be sure to check their guidelines to protect yourself.
4. Know the types of mortgage and their pros and cons
Interest-only: This is the most common type of buy-to-let mortgage. You only pay the interest on the loan, and do not make payments towards the capital borrowed. This is a popular choice for investors who are planning on selling the property at the end of the mortgage term — paying out any tax on capital gains and retaining any equity. This allows you to keep more of the monthly returns, making it suitable for people solely wanting to bring in income.
Repayment: These will cost you more each month as you pay the interest on the loan as well as a portion of the amount borrowed. As you pay more and more off, the negative equity will shrink, reducing your interest costs over time and meaning you will eventually own the property outright. This makes them preferable for long-term investors.
5. Familiarise yourself with the type of tax you’ll pay
Currently you can sell your buy-to-let property for profit, meaning you might be subject to paying Capital Gains Tax (tax on the profit when you sell or give away something that has increased in value) if the gain you receive exceeds the annual Capital Gains Tax threshold. Additionally, if your rental income is exceeding your mortgage interest-only payments, you’ll be liable to Income Tax.
With this in mind, do be aware that tax reform is already underway. The major changes will mean that for personally owned buy-to-let properties, the gross rental income will eventually be charged at your income tax level and you won’t be able to offset some costs as you do currently. There are different rules and structures which can be put in place for buy-to-let properties owned by a Limited Company. So, make sure you ask your mortgage advisor to introduce you to a trusted tax advisor who can help position your portfolio accordingly.
You can find out more on the government website.
Knowing the highest-yielding areas and keeping this advice in mind will have you one step ahead of the game to securing that all-important property investment. Head North, save money and raise returns!