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Best property types for London buy-to-let investment revealed

Find out which floor a London flat should be on for maximum rental returns

Potential buy-to-let investors in London should avoid buying ground-floor flats, according to a lettings agency report.

Three-bedroom properties have also seen the biggest rise in average weekly rent, the 2018 lettings report from Foxtons has claimed.

Which? takes an in-depth look at the report and explains what potential buy-to-let landlords should consider before investing in a London rental property.

 


‘Raised ground’-level flats command highest rental premiums

According to Foxtons, buy-to-let landlords renting out standard ground-floor flats are suffering losses, with the ‘rental premium’ – the buying price per square foot compared with the rent per square foot – commanded by such properties down at –9.4%.

In contrast, the premium for ‘raised ground floor’ flats (properties above street level, often accessed by a flight of steps) is 6.2%, and it’s 4.7% for ‘lower ground’ (i.e. basement) flats.

What difference does size make?

Three-bedroom flats experienced the biggest year-on-year increase in average weekly rent, growing by 3.9% to reach £658 per week in 2018, according to the report.

Type of flat Average weekly rent in 2018 % change 2017 to 2018
Studio £289 1.5%
1-bed flat £366 2.2%
2-bed flat £461 1.6%
3-bed flat £658 3.9%

Source: Foxtons/dataloft

Zone 2 most popular with renters

According to Foxtons, the strongest growth in weekly rent has been in Zone 1, where the average has grown by 3.9% year-on-year to hit £554 in 2018.

In Zone 2 rents average £459 per week – an increase of 1.7% – and in Zones 3-6 it’s £394 (2.2%).

Zone 2 properties attracted the most interest from renters, with 41% of the prospective tenants registering with Foxtons in 2018 requesting a Zone 2 location.

By comparison, 29% of tenant registrations were for Zone 1 properties and 30% were for Zones 3 to 6.

The overall number of tenant registrations rose by 8% in 2018, but the number of properties coming to the market dropped by 11%.

London’s buy-to-let hotspots

In a recent blogpost, Foxtons singled out Hornsey, Hayes and Leyton as upcoming buy-to-let hotspots.

According to the UK House Price Index, the average house prices in the local authorities these boroughs are based in are £536,718 in Haringey (Hornsey), £407,751 in Hillingdon (Hayes), and £440,455 in Waltham Forest (Leyton).

Last month in a separate blog Foxtons singled out Barking and Dagenham, Newham, Tower Hamlets and Greenwich as the top four London boroughs for rental yields this year.

Affordability rules for landlords

The biggest stumbling block for many landlords applying for a buy-to-let mortgage is the strict affordability testing imposed by lenders, resulting from tough restrictions imposed by the Bank of England (BoE).

Technically, your projected rent must cover at least 125% of the mortgage repayments to satisfy the interest cover ratios (ICRs) required by the BoE.

However, most lenders will test your affordability based on higher ICRs of 140-145%.

Our video explains the basics of how buy-to-let mortgages work.

What else should prospective landlords consider before making an investment?

You’ll need to put down a larger deposit on a buy-to-let property than a residential one – typically around 25% but up to 40% if you want to qualify for the best deals.

Ultimately, you should consider whether you can earn enough rent to make the investment worthwhile, while having enough cash for unexpected bills and the void periods in between an occupant moving out and a new tenant moving in.

Investors often talk about the rental yield, which is simply the annual rent on the property divided by its value as a percentage. According to Foxtons, gross yields for London flats increased from 4.5% in 2017 to 4.9% in 2018.

However, if you’re factoring capital growth in to your investment, you should also take house price activity into account. Combining yield with house price activity, Foxtons claims that the ‘total annual return’ of a London buy-to-let has fallen from 7.8% in 2017 to 3.6% in 2018.

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