What is a good yield on buy-to-let property?

Buy-to-let is one of the more popular types of property investment, but what is a good yield for a buy-to-let property? And how you can tell whether you’re getting the best return possible?

Calculating your buy-to-let yield

To determine what a good yield is on a buy-to-let property, you must first understand how a buy-to-let yield is generated.

Two forms of return are possible from residential buy to let: rental income and capital growth.

Capital growth will come through a rise in the value of the property and is normally subject to the same growth acceleration and inhibition factors as any other residential property. With property prices generally rising above inflation over the last five decades, this is what makes buy-to-let a reliable long-term investment.

Rental income comes from the rental payments made by the tenants each month. Rents are normally fixed for the duration of a tenancy agreement and can normally only be increased if the agreement is renewed following the completion of the initial term.

Rental income is expressed either as gross or net yield. Gross yield is the amount earned without taking any costs into account. Indeed, with a buy-to-let property, there are multiple costs, from letting agent fees or other charges to insurance premiums and general maintenance or repairs. Net yield is your actual income, once outgoings have been deducted.

Combined, they form an overall Return On Investment (ROI). Whichever way you calculate them, yields will vary depending on the property, its location, other market conditions and the quality of your tenant.

How does buy-to-let compare to other property investments?

English-housing-stock
It is important to have a realistic expectation of the potential yield for a buy-to-let investment, especially when deciding whether to become a landlord or not.

Compared to other investments, buy-to-let is not the highest-earning property type: while a hotel room could generate a yield from 7% per annum up to 20%, average buy-to-let yields are closer to 4 or 5%. Low returns are therefore around 3 to 4%, with any double-digit return at the very high end of buy-to-let income.

A good yield would be around 7% or 8%, allowing you enough margin to cover costs.

Indeed, with management of a property taking up a lot of time in exchange for potentially low income, it is often best practice to employ a letting agent on your behalf to deal with maintenance, paperwork and other duties, making buy-to-let a hands-off, and therefore more attractive, investment.

The long-term capital growth is the biggest strength of buy-to-let, as you can earn a much higher sum than a hotel room over 10 to 20 years, due to the property’s appreciating value.

The current buy-to-let market

Buy-to-let yields are impacted by a lot of variables, from the quality of your tenant and the property’s original purchase price to its general condition. A lot of these risks can be mitigated, though, by doing due diligence, choosing the right location, the right property and investing at the right time.

Timing is crucial, as the market’s conditions will determine how much your property is worth – which, in turn, will determine how much your yield is. Buying when prices are low is the best way to ensure the biggest return on your investment in the long-term.

At the time of writing, the buy-to-let market in the UK is facing a major headwind in the form of reduced mortgage interest tax relief, which will begin to be phased in from April 2017. This will mean that you will not be able offset your mortgage interest before calculating your tax and will eventually be taxed on your whole rental income, rather than your final profit.

As of April 2016, buy-to-let investors must also pay a 3% stamp duty surcharge on their property purchase.

The conditions are still broadly favourable, though, because there are too many tenants and not enough homes – an imbalance between supply and demand that means the risk of vacancy or void periods is low and the potential for both rental hikes and capital growth is high.

With the other factors in play, though, it is more important than ever to choose your property’s location wisely and obtain the best yield available.

Where are the best rental yields for buy-to-let in the UK?

Manchester, UK
Manchester, UK

Yields can vary wildly, depending on where you invest: a good buy-to-let yield in one city is not necessarily a good buy-to-let yield 100 miles down the road.

Where are the best rental yields for buy-to-let in the UK? According to LendInvest, the top 10 locations for buy-to-let in 2016 are as follows:

LocationAverage Buy-to-Let Rental Yield
Manchester6.8%
Coventry5.8%
Luton5.8%
Outer London5.8%
Blackburn5.7%
Oldham5.6%
Northampton5.6%
Cardiff5.6%
Sunderland5.6%
Rochester5.5%

Looking at properties in a university city can also help to boost your yield, due to the larger population of tenants. With properties in the North East typically more affordable than those in the South East, better yields can normally be found there.

Sunderland is the number one student city for buy-to-let, according to property crowdfunding platform Property Partner, with 6.9% net yield. Middlesborough (5.9%), Birmingham (4.5%) and Newcastle (4.3%) are also worth considering.

Where is the best capital growth in the UK?

As with rental income, capital growth will vary, depending on the location of the property. According to Hometrack’s UK cities house price index, Bristol is leading the way, with growth of 14.7% year-on-year in June 2016. London (13.7%), Cambridge (11.5%), Southampton (9.7%) and Portsmouth (9.3%) complete the top five, followed by Manchester (9%), Oxford (8.7%), Birmingham (8.3%), Bournemouth (8%) and Nottingham (7.8%).

Where is best for overall ROI on buy-to-let in the UK?

Taking both rental income and capital growth together, the best return for buy-to-let can be found in Inner London, according to LendInvest, with an overall ROI of 14.81%. Ilford (11.16%) is second, followed by Outer London (10.36%), Cambridge (10.3%) and Watford (9.72%). Cities such as Luton, Milton Keynes, Oxford and Brighton are also highlighted as offering around 8% total ROI.

Where are the best rental yields for buy-to-let in the world?

The UK is a major buy-to-let market for investors, but you may be looking at investing further afield. Again, what is considered a good buy-to-let yield can vary, depending on the location.

When it comes to city centres, Belgium boasts impressive yields of 6.54%, due to the dominance of Brussels as an expat destination for those working at or within the European Parliament and Commission.

Sweden, on the other hand, has yields of below 3%, due to rental controls that favour tenants and an unfavourable currency exchange rate that effectively raises the price of property.

Research by World First highlights the average rental yield available from buy-to-let property in each country. The top 20 buy-to-let locations are:

CountryAverage Rental Yield
Netherlands65.7%
Belgium64.7%
Portugal62.9%
Hungary62.1%
Turkey61.3%
Slovakia60.7%
Bulgaria59.9%
Malta59%
Cyprus54.1%
Ireland53.4%
Denmark51.6%
Latvia50.7%
Romania50.6%
Poland49.8%
Spain49.6%
Czech Republic46.9%
Greece45.1%
Luxembourg44.8%
Lithuania44.3%
Finland43.1%

For a good buy-to-let yield, you should be looking for a property that generates at least this income, if not higher.

 

For more on buy-to-let property, or to browse listings of available property investments, click here.

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