Landlords enjoyed record-breaking rental growth last year, boosting yields and putting the property market on the radar of investors looking to diversify their portfolio. But investing in the buy-to-let sector has become increasingly fraught with regulatory pitfalls and higher borrowing costs thanks to inflated interest rates.
The sector has been losing more investors than it has attracted since 2016, when a three percentage point stamp duty surcharge was introduced for additional properties. The tapering of mortgage interest tax relief on buy-to-lets followed soon afterwards.
For those willing to navigate the complex rules, buy-to-let is a familiar option which if done properly gives investors two sets of returns; rental income and capital growth of their underlying asset.
Where to start? Here, we take a look at the best places to invest with a cash budget of £25,000, enough to cover a 25pc deposit and stamp duty, using data from Hamptons estate agency.
In the three locations below, an initial £25,000 investment would produce an average gross yield of more than 9pc – significantly more than the target 4pc rate of income from a typical pension pot in drawdown.
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Where £25k will earn you the highest returns
Hartlepool and County Durham
The highest yielding location for landlords with £25,000 to spend in England and Wales is Hartlepool in north east England. Yields are generally highest where house prices are lowest. Cheaper property prices and high tenant demand in the North have boosted rental returns, making it a popular region with investors.
The port of Hartlepool is a rental hotspot for modest budgets, with an average gross yield of 9.7pc. A typical flat in the area costs £68,130, meaning landlords will need £17,030 for a 25pc deposit and a further £2,044 to pay stamp duty. They can expect an average yield of 11pc on their investment, one of the highest on this property type in the country.
Recent house price growth means an average terraced house in Hartlepool no longer falls within a £25,000 investment, but is still within reach for those who can afford to stretch their budget a little further. A typical terraced house in the area costs £95,100, requiring a £23,780 deposit and £2,853 for the stamp duty bill. It equals an upfront investment of £26,630 and would yield an average gross yield of 9.2pc.
Paul Gough of We Love Renters, a property management company in Hartlepool, said there were three main tenant demographics that landlords had targeted in the town in recent years.
Two or three-bedroom houses for families were very popular among investors, said Mr Gough, who owns a portfolio of properties in the area.
He added: “Old Victorian houses which can be developed into one-bed apartments have also become increasingly popular, as they are perfect for single male tenants. Short-term lets for contractors have also taken off in a big way.
“There has been a lot of government money directed towards the wider Teesside region over the past year and there are thousands of contractors in the area.
“These workers often live elsewhere in the country but are staying in Hartlepool for weeks at a time. They don’t want to be paying hotel prices, so short-term bedsits for anywhere from a few nights to six months are in high demand.”
Investors can expect rental income before expenses of £7,494 a year from an average flat in the town and £8,794 from a terraced house, according to Hamptons.
Next door in County Durham investors can find the second highest yields for a budget of £25,000 in the country. Landlords with a modest investment can achieve an average gross yield of 9.2pc, or higher if they invest in a cheaper property type.
The average flat here costs £76,020 according to Hamptons, more expensive than nearby Hartlepool. Landlords would need a combined £21,290 to cover a deposit and stamp duty and could expect a typical double-digit yield of 10.3pc.
A terraced house in County Durham is also out of reach to a landlord with £25,000, although possible if they have a few thousands pounds more to invest.
A property of this size costs an average of £100,880 in the area, requiring a £25,220 deposit and £3,026 stamp duty bill – £28,250 in total. Landlords renting out a typical house here can expect an average yield of 8.7pc.
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The borough of Blaenau Gwent has the highest rental yield in Wales for investors with a £25,000 budget, at an average gross rate of 9.1pc.
A £25,000 budget would be enough to cover the £17,660 deposit on an average flat in the area, plus £2,119 in stamp duty. Landlords can expect an average yield of 10.3pc on a flat and £7,239 in annual rental income, before any costs are deducted.
Investors would need more than 60pc more to invest in a terraced house in Blaenau Gwent, where property values have risen in recent years. At a typical price of £117,060, the upfront cost of investing in a terraced house is £32,780 to cover a 25pc deposit and stamp duty bill, according to Hamptons.
Landlords can expect higher rental income from a terraced house, an average of £10,088 a year – but yields will be lower because of the bigger initial investment, at an average of 8.6pc.
By Rachel Mortimer