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Updated: 10 Jul 2019

Landlords: is now the time to invest in a buy-to-let property in London?

London rents soar as number of available rental properties dwindles
hand holding key

With house prices dropping and rental demand outstripping supply, now could be a good time to invest in a London buy-to-let. But the market is complex, with some parts of the capital far more popular with tenants than others.

Here, we take a look at the state of play for landlords considering investing in the capital, and reveal the most in-demand areas - as well as the places where rents are rising fastest.

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House prices in London are falling

If you're looking to expand your property portfolio, the good news is that house prices in London are falling, although they're still high in many areas.

The most recent UK House Price Index from the Land Registry found that the average London property price dropped to £459,800 in February - a 3.8% year-on-year decrease.

And landlords looking to invest in a flat or maisonette in the capital can take advantage of a more substantial 5.9% price fall.

Cost of renting in London on the rise

As house prices drop, the average 'asking rent' (the amount that's advertised, before any negotiation) in the capital has soared by 8.2% year-on-year, according to Rightmove.

The property portal's latest tracker puts the current average rent in London at £2,093 a month, representing the biggest annual rise since Rightmove started reporting the data in 2012.

The main factor for this is fewer properties coming on to the market, as some landlords have quit the sector following a series of regulatory changes eating into their profits - a trend that could continue with the upcoming tenant fees ban.

David Cox of the letting agent trade body Arla Propertymark claims the banning of these fees, coupled with uncertainty around the abolition of section 21 evictions, 'could increase pressure on the sector and discourage new landlords from investing, meaning rents will only continue to rise for tenants'.

Where are London rents increasing?

If you're thinking of investing in London, you're likely to be wondering where rents are rising by the highest amount.

This is particularly significant in a market where house prices are stagnating, as landlords increasingly need to focus on their rental yield rather than capital growth to turn a profit.

In the table below, we've listed the top five areas in London that Rightmove claims have seen the biggest increase in rent costs year-on-year.

We've then set this against the average house price in each of these areas, based on data from the Land Registry.

Top five areas for rental growthAverage asking rent (two-bed)Annual changeLocal authorityAverage property price (February 2019)Annual change
1. Holloway£2,126+22%Islington£638,559-1.3%
2. Southwark£2,855+20.2%Southwark£479,503-6.9%
3. Camden£3,079+15.8%Camden£867,478-0.9%
4. Kennington£2,356+14.3%Lambeth£493,004-3.9%
5. MuswellHill£1,756+12.8%Haringey£553,422-0.8%

Source: Rightmove (asking rents and annual change). Land Registry UK House Price Index (property prices and annual change). 25 April 2019.

As you can see, house prices are falling in every area, but this is a double-edged sword for prospective investors.

That's because, while lower prices could mean you can grab a bargain, there's no guarantee the property's value won't continue to fall.

Renters flocking to the south east

Rightmove has provided Which? with data on the areas where the most tenants are searching for properties in London, which we've outlined in the table below.

Interestingly, nearly all of these areas are to the south-east of the city, and many are outside the central transport zones.

In all but one of the top 10 areas, asking rents are lower than the London average of £2,093. This shows the degree to which tenants are increasingly needing to look further afield to find value - and perhaps indicates the kinds of places where landlords can get a bargain.

Renters' most sought-after areasAverage asking rent (two-bed)Local authorityAverage property price (February 2019)Annual change
1. Kennington£2,356Lambeth£493,004-3.9%
2. Coulsdon£1,231Croydon£367,332-1%
3. Deptford£1,542Lewisham£405,4320%
4. Sydenham£1,267Lewisham£405,4320%
5. Camberwell£1,596Southwark£479,503-6.9%
6. Forest Hill£1,371Lewisham£405,4320%
7. West Norwood£1,401Lambeth£493,004-3.9%

Source: Rightmove (most sought-after areas and asking rents). Land Registry House Price Index (property prices and annual change). 25 April 2019.

How to choose a buy-to-let property: five tips

Finding the right buy-to-let property can be difficult; it's a process that requires expertise and in-depth market research. As a starting point, always keep these five tips in mind when looking for a home to invest in:

  1. Research the local property market - are prices going up or down?
  2. Consider rental yields and capital growth potential
  3. Find out what type of tenants your area attracts, and think about what they'll be looking for
  4. Don't stretch your budget
  5. Don't let your heart rule your head - make a decision based on the facts available to you

Find out more:learn more about the pros and cons of investing in our full guide on becoming a landlord.

Finding a buy-to-let mortgage

If you already own other rental properties, taking out another buy-to-let mortgage could be tricky, depending on your circumstances.

Bank of England regulations mean that landlords with four or more properties now face more stringent affordability checks, and need to prove that all of their rented homes are profitable before they can get another mortgage.

Landlords with smaller portfolios, however, might find it easier to obtain finance - and at an attractive rate.

When we looked at buy-to-let mortgage ratesearlier this month, we found that landlords borrowing at 60% loan-to-value could obtain a two-year fix at a rate below 1.5%, or 1.75% when borrowing at 75% LTV.

Get professional advice on your mortgage options

Whether you're considering expanding your portfolio or are buying your first rental property, a whole-of-market broker can assess every deal on the market to recommend the best one for your circumstances.