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28 Mar 2019

Revealed: the best areas for buy-to-let yields and rents

The North East offers the highest yield, but could the South West be better all-round for investors?

Rent prices are increasing faster in the South West than any other region in England and Wales, according to a new report - but it's the second-worst area for yield.

Rents in the South West increased by 4% in the year to February 2019, estate agent Your Move has reported, and the average yield stands at 3.3%.

The data indicates that savvy investors should look beyond London in order to capitalise on cheaper properties and higher yields.

Which? reveals the best regions if you want a bang for your buy-to-let buck, and reveals the different options for potential landlords looking to invest in a new home.

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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 £861 per calendar month (pcm), according to Your Move.

The South West and North West are both seeing an increasing demand for rental properties and higher potential returns on investment, according to the data.

The average rent in the South West rose to £703 per calendar month in February, while in the North West it was £644.

Average rent per calendar month

Bristol is particularly popular right now. Martyn Alderton, national lettings director at Your Move, said: 'Renters have been drawn to Bristol, not only because of its vibrant arts and cultural scene but also its strong job prospects.

'This has been accompanied by a boom in build to rent [purpose-built rental properties typically funded by investors] in the city, which has driven up demand and the average rent across the region.'

London, on the other hand, has suffered. Average rents may be high, at £1,260pcm, but 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% to an average of £636, and Yorkshire, which experienced a 2.1% rise to an average rent of £588pcm.

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 by the property value, expressed as a percentage - will be a crucial consideration.

The North East tops this table, with an appealing yield of 5.02%, followed by the North West (4.8%). Wales nipped into third place with 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 3.31% 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 in England (though they are mandatory for all houses of multiple occupation, or HMOs).

The cost of a new licence can range from £55 to £1,150 depending on where the property is, according to research by Direct Line for Business.

Buy-to-let mortgages for landlords

If you're considering buying a property with the intention of renting it out, you'll need to apply for a specialist buy-to-let mortgage.

You'll need a deposit of at least 20-25%,althoughthe best deals are normally available 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 payments - typically tested ata 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 your monthly mortgage payment, but most lenders want it to be closer to 145-150%.