Buy-to-let hotspots where you CAN still earn above-inflation income

New data shows landlords can achieve near double-digit returns as buy-to-let yields rise in some parts of the country.

In the areas around Glasgow in Scotland, including West Dunbartonshire, Renfrewshire, East Ayrshire and North Lanarkshire, yields are eight percent or more.

Yields have risen 13 per cent in Renfrewshire in the past year alone and seven per cent in West Dunbartonshire.

Even in parts of the country where yields are lowest, it’s still possible to earn a positive return, data from real estate portal Zoopla shows.

Yields in the affluent London boroughs of Kensington and Chelsea, Richmond upon Thames and Westminster are among the lowest in the country – all below 4.5 percent.

However, over the past year, returns in these areas have increased by 9%, 11% and 13%, respectively.

Across the country, tens of thousands of landlords whose properties are to be bought for rent are selling because it is becoming increasingly difficult to get a good return on the property.

Rising mortgage rates are increasing the pressure on landlords, who are already grappling with increasingly strict regulations and a less generous tax system.

About 40,000 of these have been sold in the past five years since valuable tax breaks were scrapped in 2018.

However, our numbers show that there are bright spots in the overwhelming darkness. Additionally, landlord sales are creating a shortage of rental properties, which helps boost returns on remaining properties.

Demand is high in those areas that are seeing a sharp increase

Thanks to a combination of factors, the areas around Glasgow have some of the most resilient yields. Stephen McGlone, Lettings Manager at Westgate Estate Agents, says: “Demand for rental properties is increasing as Glasgow University is expanding rapidly and attracting many new people looking for accommodation.”

“Morgan Stanley and Barclays are expanding their workforce in the city, so many employees are looking for a place to stay.”

McGlone adds that there is also demand for Airbnb rentals as Glasgow is a popular travel destination.

Ross McMillan of Glasgow-based mortgage adviser Blue Fish Mortgage Solutions adds that while landlords are doing well, there are challenges in the region, such as buy-to-let purchases across the country.

“The landlords here are usually resilient and keep an eye on their holdings over the long term,” he says.

Toby Parsloe, an analyst at real estate agency Savills, explains that areas with the highest returns tend to be those where house prices are lower but there is a strong labor market where some workers can afford comparatively high rents.

Parts of Scotland and areas like Middlesbrough and Sunderland fit the picture, the latter showing returns of 8.2 and 8.4 per cent respectively.

He adds that Glasgow in particular has seen “significant rental growth of 33.5 per cent since March 2020, while the number of new rental offers has fallen by 15 per cent, increasing competition”.

…but high yields aren’t everything

There are two main ways to make a profit from renting a property: the income you earn from renting a property; and the capital gain you can make if its value increases.

Ideally, landlords look for investment properties that can do both. Vanessa Warwick, co-founder of the landlord network PropertyTribes and herself a landlord, says there are currently no areas that offer both, but individual properties do.

However, investors will have to do their homework to find them.

“Finding an area with high income and high capital growth is the holy grail, but I’m not sure there is such a place,” she says. “Every location, every street, every property has different metrics that need to be researched and understood.”

Ashley Thomas, a principal at mortgage broker Magni Finance, says investors shouldn’t necessarily be put off by low-yield areas.

“Prime London will always have low yields, but properties in these areas have seen some of the strongest capital appreciation,” he says. “London is still seen as a resilient and profitable market, particularly for foreign investors.”

However, Warwick believes landlords should focus more on what they can achieve with rents. “Return is money in your pocket that you can spend, while capital growth is speculative and takes many years to accumulate,” she says.

“This shouldn’t be a primary focus for most landlords unless they have significant other income.”

Hotspot: Rental yields are high in Glasgow where business is growing

Why it can still be difficult to make a profit

A near-double-digit yield may look good at first glance, as it beats the best savings rates (currently around 6 percent) and average returns on stocks and bonds.

However, even for landlords that have the best returns, it’s still a very difficult environment to generate a good return.

In addition to the usual ongoing costs that eat into returns, landlords will need to invest to ensure their properties meet new minimum energy efficiency standards by 2028 – otherwise face fines.

But perhaps the biggest drag is rising mortgage rates for both buy-to-buy and rent-to-buy mortgages. The average two-year fix was 4.04 percent last August but is now at 6.64 percent, according to data auditor Moneyfacts. Landlords who reschedule experience a decimated profit.

Peter Gettins, Product Manager at L&C Mortgages, says: “In August 2022 you could get a two-year fix without a fee at 3.89 percent.”

“Today the corresponding product is 7.22 percent. So for a loan of £150,000 that means payments go from £486 a month last year to £903 a month.”

Lewis Shaw, a mortgage broker at Mansfield-based Shaw Financial Services, believes that rising interest rates are making it impossible to make a profit on buy-to-let rentals in most areas unless you fully own your investment property or have a lot of equity.

“Until you have a 50 percent down payment, buy-to-rent is dead in most parts of the country,” he says.

Chill Zone: Kensington in London is at the bottom of the yield league

Some lenders are also tightening their landlord affordability rules, adding to the pressure. According to these rules, landlords must prove that they can pay a higher mortgage rate and also earn a higher income.

For example, last Wednesday Santander increased its affordability rate by nearly a percentage point, from 7.59 percent to 8.52 percent.

That means a landlord with a £100,000 purchase mortgage will need to show they have a monthly rental income of £994 – down from £885 as a result of the changes.

Imogen Sporle, chief executive of London-based Finanz Property, said: “Contrary to popular belief, landlords don’t rub their hands in delight when they raise their tenants’ rent.”

“They know this is a difficult time for many and that a rent increase could lose them as tenants altogether.”

“But if the rent doesn’t increase, the property could become unviable, meaning the only option is to evict the tenant and sell it.”

So is buying to rent still worth it?

While there are decent returns, more and more landlords are wondering if it’s worth the effort compared to other options available.

When interest rates on savings were low, it was worth making an extra effort to get a significantly better return through buy-to-let.

But now that the savings rate has hit six percent, spending time finding tenants, fixing broken boilers, and dealing with complex taxes doesn’t make as much sense for a percentage point or two more of income to earn.

Shaun Robson, Head of Wealth Planning at Killik & Co, says: “Many of our clients look at the numbers and decide that even if they are making a decent return, it’s just not worth it.”

“Some landlords whose mortgage contracts are expiring are deciding now is a good time to sell.”