When buy-to-let investors acquire a property, they typically aim for two primary benefits: a strong rental income and the potential for house price appreciation.
Investors often weigh these factors differently based on their goals. Those who prioritise high rental yields tend to seek properties that offer substantial immediate cash flow. However, this focus on rental income can sometimes come at the expense of long-term house price growth. Such properties might offer excellent returns on rent but may not see significant increases in value over time.
On the other hand, some investors focus on properties in locations where house prices are expected to rise. Their goal is to benefit from significant capital gains, even if this means accepting lower rental yields initially. They believe that, by choosing the right area, the increase in property value will ultimately provide greater returns compared to the steady cash flow from rental income.
Selecting an up-and-coming area with rising property values can be challenging. For instance, data from the Land Registry shows that investors who purchased properties in London eight years ago have not seen any capital growth. In contrast, those who invested in Manchester have seen their property values increase by an average of 65 per cent.
Predicting future house price growth is difficult, but calculating rental income is more straightforward. Investors can gauge potential rental income by reviewing online rental listings and consulting with local letting agents.
Most buy-to-let investors focus on the rental yield of a property before making a purchase decision. The gross rental yield is a common metric used, representing the percentage return an investor can expect from the purchase price each year, before accounting for taxes and other costs. For example, a property bought for £200,000 with a 5 per cent gross yield would generate £10,000 in rental income annually.
Agents at Lomond have analysed various regions and postcodes across Britain to identify those offering the highest rental yields. They also provide insights into areas that may offer strong potential for capital growth.
Which regions have the best rental yields?
According to analysis by estate agent Lomond, the average gross rental yield across Britain has risen to 4.5 per cent. This marks an increase from 4 per cent reported last year, a change attributed to the combination of rising rents and stable house prices.
At the regional level, Scotland stands out with the highest average rental yield. Properties in Scotland currently offer a gross annual return of 5.4 per cent. This is followed by the North East, where the average rental yield is 4.8 per cent, and the North West, with an average yield of 4.6 per cent. These regions are benefiting from strong rental returns, reflecting the high demand for rental properties compared to the relatively stable property prices.
In contrast, the South East reports the lowest average rental yield among the regions, currently at 3.8 per cent. This lower yield is indicative of the higher property prices in the South East, which have not risen as quickly as rental incomes.
Top 10 postcodes for rental yields
The LS3 postcode in Leeds currently leads the British rental market with the highest average yield, standing at an impressive 12.8 per cent. This postcode covers the Harehills area, including parts of Gipton and Harehills wards, as well as neighborhoods like Gipton Wood, Moortown, Harehills, Potternewton, Seacroft, and East End Park.
The LS3 area benefits from good transport links, including bus services and several rail stations, providing easy access to Leeds city centre. It is also close to popular local attractions such as Roundhay Park, East Leeds Golf Course, Temple Newsam, and Harewood House.
Following closely is the BD1 postcode in Bradford, which offers an average yield of 11.8 per cent. BD1 includes much of the city centre and the Little Germany conservation area, as well as extending into the nearby suburbs of Heaton and Manningham.
Manchester’s M14 postcode ranks third in the UK for rental yield, offering an average of 11.6 per cent. Nottingham’s NG1 postcode follows closely with a yield of 10.8 per cent, while the NG7 postcode in Nottingham also makes the list at number six with a yield of 9.7 per cent.
Leeds’ LS4 postcode is also among the top 10, providing an average yield of 9.7 per cent. This area covers Little London, Hyde Park, Woodhouse, Burley, Bramley, Armley, Gipton, and St. James.
Other notable high-yield areas include Sunderland’s SR1 with a yield of 10.5 per cent, Glasgow’s G67 at 9.5 per cent, and Aberdeen’s AB24 at 9.3 per cent. Coventry’s CV1 postcode rounds out the top 10 with a yield of 9 per cent.
James Needham, director at Alesco Property Investments, notes that these high-yield locations are often on the edge of city centres. “Investors are increasingly looking at properties on the outskirts of cities like Greater Manchester. These areas can offer better value as central city prices rise, which can lower yields.”
Rob Dix, co-founder of Property Hub, cautions that these figures might be skewed. “The high yields in these postcodes are often influenced by a large number of student properties. Postcode-level data can be misleading due to the small sample size and specific market factors,” Dix explains. “Investors should be cautious when expecting high returns, as these figures may not accurately represent typical buy-to-let returns in these areas.”
How to spot areas with potential for house price rises
Experienced investors often target urban areas that are undergoing regeneration and have strong transport links, universities, and major employers.
James Needham from Alesco Property Investments advises focusing on areas with ongoing regeneration, particularly those with transport improvements. “Tenants prefer locations that offer easy commutes,” he says. “We believe Greater Manchester and Greater Liverpool are poised for significant house price growth soon. We aim for properties that can get tenants to the city centre within 20 minutes.”
Needham also highlights the importance of good transport connections, including trains, roads, and buses. “For working professionals, these connections are crucial when choosing a property. Ensure your investment meets this need.”
Rob Dix from Property Hub recommends investing in areas with strong current performance and potential for future growth. “Nottingham is a key hotspot due to its universities, local employment, and transport links, along with its ongoing regeneration plans,” Dix explains. “We also look at commuter areas that might benefit from nearby city developments, such as Wolverhampton and Dudley, which could gain from Birmingham’s city centre transformation.”
Marc Von Grundherr of Benham and Reeves adds that new estate agents appearing on the high street can be a sign of an up-and-coming area.
Economic growth, a rising population, and planned infrastructure improvements are important factors when aiming for capital growth. Age demographics also play a role; areas with a younger population are likely to see increased housing demand in the future, which can drive capital growth.
Marc Von Grundherr suggests monitoring estate agents as a strategy. “When estate agents open new branches, it indicates confidence in the area’s future. These branches are costly and require a high volume of property transactions to be financially viable.”
Additionally, data on how quickly homes sell can be useful. A shorter selling timeframe suggests a strong and active buyer market.
Should investors focus on yield or capital growth?
Landlords often find high rental yields appealing, but these can come at the expense of capital growth. A high yield might make a property seem like a good deal, but it may be cheap for a reason.
James Needham advises balancing rental returns with potential house price growth. “Ideally, you want a property that offers both strong rental returns and capital growth. Capital growth helps expand your portfolio over time, while high yields provide short-term profits. For long-term success, growth is more important.”
Rob Dix supports this view, noting that while high yields can be attractive and easy to calculate, they often come with lower capital growth. “Cities like Bradford and Sunderland have historically shown lower price growth, leading to higher yields. However, without factors driving higher growth, you might end up with less total return compared to a property with a lower yield but better growth prospects.”
Marc von Grundherr highlights that the choice between high yields and capital growth depends on your investment horizon. “If you need immediate income, focus on higher yields. But if you’re investing for the long term, prioritise capital growth. Most landlords use interest-only mortgages, seeing capital growth as their main gain from buy-to-let investments.”
Download NOW
4 Simple Steps To Becoming Wealthy Through Property