Rent costs are increasing faster within the South West than any other region in Britain, according to a new report – but it’s the second-worst position for yield.
Rents within the South West increased by 4% in the year to February 2022, estate agent Your Move has reported, and the average yield stands at 3.3%.
The data suggests that savvy investors should look beyond London in order to capitalise on cheaper properties and better yields.
Which? reveals the very best regions if you want a bang for the buy-to-let buck, and reveals the different options for potential landlords contemplating investing in a new house.
South West buy-to-let booms as London remains subdued
Across England and Wales the annual rental growth rate was 1.4%, with the average rent standing at lb861 per calendar month (pcm), based on Your Move.
The South West and North West are both seeing a growing interest in rental properties and higher potential returns on investment, based on the data.
The average rent in the The west rose to lb703 per thirty day period in February, while in the North West it had been lb644.
Bristol is especially popular at this time. Martyn Alderton, national lettings director at Your Move, said: ‘Renters happen to be attracted to Bristol, not just because of its vibrant arts and cultural scene but also its strong job prospects.
‘This has been along with a boom in build to rent [purpose-built rental properties typically funded by investors] in the city, that has driven up demand and the average rent across the region.’
London, on the other hand, has suffered. Average rents might be high, at lb1,260pcm, however the capital’s decreasing property values has contributed to the worst yield in England and Wales, at 3.16% (more on yields below).
With many landlords choosing to invest outside London, other regions enjoying growth include the West Midlands, where rents rose by 3.1% for an average of lb636, and Yorkshire, which experienced a couple.1% rise to an average rent of lb588pcm.
Look north for the best buy-to-let yields
If you’re considering investing in a buy-to-let, your projected yield – the annual rent divided through the property value, expressed as a percentage – is a crucial consideration.
The North East tops this table, by having an appealing yield of 5.02%, followed by the North West (4.8%). Wales nipped into third place by having an average yield of 4.56%, before another northern region – Yorkshire and the Humber (4.40%).
The south fared far worse, with London, the South West and South East offering yields of 3.16%, 3.30%, and three.31% respectively.
Landlord licence could add to costs
Potential buy-to-let landlords should check whether their local authority operates a landlord licensing scheme.
You’ll definitely need a licence in Wales and Scotland but local authorities can choose whether or not to require one out of England (though they're mandatory for all houses of multiple occupation, or HMOs).
The cost of a brand new licence can range from lb55 to lb1,150 based on where the rentals are, according to research by Direct Line for Business.
Buy-to-let mortgages for landlords
If you’re considering buying a house with the intention of renting it, you’ll have to apply for a specialist buy-to-let mortgage.
You’ll need a deposit of at least 20-25%, even though the best deals are usually open to investors with deposits of 40-50% or above.
Lenders operate strict affordability tests for buy-to-let landlords, and require minimum interest cover ratios (ICRs) – the ratio of rental income to mortgage repayments – typically tested at a representative interest rate of 5.5%.
The minimum required ICR you’re likely to find is 125%, which means the projected rental income must be 125% of the monthly loan payment, but many lenders want it to be nearer to 145-150%.