While it’s true that the City of London property market is booming relative to much of the UK and indeed much of the world, buy to let landlords should turn to the North if they are looking to maximise their returns according to the Paragon Mortgages report in April. The reason is simply that whilst capital gains are available in the capital the rental yields are simply not as high as in the North. Not only that but landlords can spread their risk more effectively in the North where the same deposit will allow them to purchase more properties.

Higher Rental Yields in the North

Higher Rental Yields in the North

Gross Rental Yield

The gross rental yield is the total rent paid during a year expressed as a percentage of the current market value of the property. Total annual return on the property includes capital gains and this may be higher in some parts of London where rental yields are still strong and property prices are booming sufficiently to offset the slightly lower monthly returns, however for much of the country LSL reports the total annual return is typically just 5% due to falling prices in much of the country. Also as landlords have to either remortgage or sell incurring significant fees in either case it’s often more profitable to receive income in the form of rent than capital gains although this is clearly not always the case.

The rental yield figure is important for landlords as it gives a good indication of how well a property, and in a wider sense, a portfolio is performing.
John Heron: Paragon Mortgages

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Not Too Far North

Landlords can’t seek even higher yields by moving North of the Border, however, as Scotland sees significantly lower returns than most of the UK. Compared to the North West where returns were reported by Paragon to be 6.6%, Scotland fares particularly badly yielding 1.1% less. To put that in context a £100,000 property in the North West would receive rent of £550 per month on average whereas the same property in Scotland would only receive £458. This has the knock-on effect of reducing the amount landlords would be able to borrow in Scotland as lenders often use tough rental calculations such as 125% of the mortgage needing to be covered by the rent when assessing the application.

Future Potential

Property prices have made a strong start to 2012 despite the strong economic uncertainty throughout the UK and this is expected to continue to push up the rental yields due to increased demand for private accommodation. Landlords will therefore benefit from ever increasing total annual returns and LSL went as far as to project that this could peak at 10.7% over the coming twelve months. This would mark a return to the bumper returns landlords experienced during some of the boom years of the past despite atrocious conditions across much of the rest of the economy. Those landlords that have targeted the most profitable areas and sought value, perhaps through buying property at auction with bridging finance, will have even more to gain.