Liverpool is the UK’s number one buy-to-let hotspot, offering rental yields of 8.0% once mortgage costs are taken into account, according to new analysis from Private Finance.
The area benefits from a combination of low average house prices (£122,283) and strong rents (£1,021).
The Midlands is home to the second and third best performing investment locations, with average rental returns of 5.6% in Nottingham and 5.4% in Coventry. Greater Manchester (4.3%) and Portsmouth (4.2%) also fall into the top five buy-to-let hotspots.
Just three of the top 10 buy-to-let hotspots are located in the South of England, and are restricted exclusively to coastal towns (Portsmouth, Bournemouth and Southampton) with student and holiday rental markets.
Mortgage repayments are one of the biggest expenses for landlords who do not purchase their investment property outright, and the size of the loan needed is impacted by housing costs. Within the top 10 buy-to-let hotspots, average annual interest-only mortgage costs vary significantly from £5,940 (Blackpool) to £13,548 (Bournemouth). Areas with higher housing and mortgage costs require greater levels of rental income to remain a viable choice for investors.
Table 1: Top 10 buy-to-let hotspots by average net rental yield
| Location | Average house price (Jan 17) | Average mortgage costs* (Annual) | Average rent 2017 (Monthly) | Average rent 2017 (Annual) | Net rental yield 2017 (excluding tax) |
| Liverpool | £122,283 | £2,421 | £1,021 | £12,252 | 8.0% |
| Nottingham | £127,302 | £2,521 | £808 | £9,696 | 5.6% |
| Coventry | £166,324 | £3,293 | £1,025 | £12,300 | 5.4% |
| Greater Manchester | £154,037 | £3,050 | £809 | £9,708 | 4.3% |
| Portsmouth | £197,141 | £3,903 | £1,019 | £12,228 | 4.2% |
| Cardiff | £192,482 | £3,811 | £946 | £11,352 | 3.9% |
| Blackpool | £101,125 | £2,002 | £495 | £5,940 | 3.9% |
| Lincoln | £140,345 | £2,779 | £684 | £8,208 | 3.9%. |
| Bournemouth | £234,609 | £4,645 | £1,129 | £13,548 | 3.8% |
| Southampton | £201,983 | £3,999 | £958 | £11,496 | 3.7% |
*Based on a 75% interest-only loan at an average rate of 2.64% (source: Bank of England Quoted Rates)
Private Finance’s findings suggest house prices and mortgage costs can be more influential than rental income when assessing which locations provide the best rental yields.
According to the research – which calculated rental yields in the 50 UK towns and cities with the highest proportion of private rental housing stock – six out of 10 of the areas with the lowest house prices are also in the top 10 list for best rental yields.
None of the locations with the top ten highest average rents are buy-to-let hotspots. Situated almost exclusively in London, these locations bring up to £5,000 in monthly rents – but come associated with hefty purchase costs.
The area with the highest average monthly rent (Kensington and Chelsea) is home to average house prices of £1.4 million and mortgage costs of £27,855 per year, making it better suited to landlords who have large cash sums to contribute to an initial property investment alongside a mortgage.
Table 2: Top 10 buy-to-let hotspots, lowest house prices and highest rents
| Top 10 lowest house prices | Top 10 lowest mortgage costs (annual) | Top 10 locations with highest rents (monthly) | |||
| Blackpool | £101,125 | Blackpool | £2,002 | Kensington & Chelsea | £5,025 |
| Kingston upon Hull | £103,254 | Kingston upon Hull | £2,044 | Westminster | £3,581 |
| Liverpool | £122,283 | Liverpool | £2,421 | Camden | £3,289 |
| Nottingham | £127,302 | Nottingham | £2,521 | Hammersmith & Fulham | £2,362 |
| Lincoln | £140,345 | Lincoln | £2,779 | Southwark | £2,343 |
| Leicester | £151,474 | Leicester | £2,999 | Richmond upon Thames | £2,217 |
| Greater Manchester | £154,037 | Greater Manchester | £3,050 | Wandsworth | £1,990 |
| Coventry | £166,324 | Coventry | £3,293 | Tower Hamlets | £1,980 |
| Ipswich | £187,183 | Ipswich | £3,706 | Oxford | £1,954 |
| Torbay | £188,280 | Torbay | £3,728 | Newham | £1,923 |
Locations shaded in grey are also included in the top 10 buy-to-let Hotspots.
Shaun Church, director of Private Finance, said: “It’s not only the residential property market that’s all about location, location, location. Many landlords will treat property as a long-term investment, looking for reward in the form of capital gain. Succeeding in making a long-term profit depends on buying an affordable property and being confident its value will appreciate at a higher rate than mortgage borrowing. However, for more immediate returns, landlords can optimise rental yields by choosing their buy-to-let location carefully.
“Investors should look for areas with strong rental demand. Larger cities and university towns generally have better performing rental markets: this will help to avoid lengthy void periods that can damage landlords’ profitability. Investors may also want to stay away from areas with very high house prices. Although these locations can provide high rental income, a large initial investment can prevent investors from achieving good returns.
“When purchasing with a mortgage, landlords should keep in mind that the larger the loan, the higher their mortgage costs will be. Now that tax relief on mortgage interest is being restricted, keeping mortgage costs down is particularly important. The good news is all landlords are benefitting from ultra-low mortgage rates. An independent mortgage broker has access to products that might not be available if going it alone, and can help track down the most affordable and suitable option.”