One of the biggest challenges facing property investors is deciding where to invest. Finding the best rental yield is generally favoured by property commentators and the media, as it offers a way of measuring the return on your investment today, rather than trying to forecast how much your investment could grow over time. Capital growth tends to be favoured by those taking a longer term, more holistic view, of someone’s investment portfolio – especially if the investor is not needing the income.
But is it as simple as that? Does successful property investing come down to prioritising one of these two factors, or trying to find the ideal combination of the two?
Current rental yields
If you look at current rental yields, the north of the country fares better than London, with Manchester looking particularly attractive:
East London 4.69%
North London 3.67%
West London 2.94%
South East London 4.24%
The case for capital appreciation
Conversely, if we look at capital appreciation for the average property in the cities mentioned above, the returns they achieved over the last 10 years paint a very different picture:
Outer London 62%
Source: Land Registry
(I’ve deliberately chosen 10 years, as this includes the credit crunch, and the capital growth achieved in the 10 years since.)
Confusing, isn’t it? No wonder would-be property investors find it hard to know what to do, or who to believe. In my experience, deciding where to invest goes well beyond this binary measure. Even within supposedly good buy-to-let areas, there can lie bad investment decisions.
Here are a few other things to consider:
How quickly your property will rent is key to being a successful landlord. Rental yield is only useful if the property is rented in the first place. This tends to come down to supply and demand, which is one of the many attractions of London. Choose the right area (usually close to good transport links, amenities and easy access to large areas of employment), and you shouldn’t have any trouble in renting the place out.
It’s important to be sure that your rental income will keep pace with inflation at the very least. Again, this comes down to supply and demand, and economic conditions at any given time. Interestingly, if you look at the rental amounts across the country over the last 10 years, London has outpaced every other area. Rents in the capital increased by 45%, versus -4% in the North East and -7% in the North West (Source: www.hometrack.com/uk/insight/market-analysis/rental-growth-and-rental-affordability)
It goes without saying that choosing where to invest will ultimately come down to what you can afford. But don’t look at it in the same way as you would look at choosing your own residential property. Buy-to-let lenders are more interested in where you’re choosing to invest, how rentable it is, and the longer-term prospects for the property as a rental. The better the proposition, the more likely they are to lend, and the more you will be able to borrow. Most of my clients can invest comfortably in London with a capital sum of £150,000, which is usually financed by re-mortgaging their home and covers a deposit and all fees and expenses.
One key consideration is what happens when you want to sell. And, more importantly, what happens if you need to sell? Liquidity is one the biggest risks facing property investors, and it can be better to pay more for a sought-after area that’s less likely to suffer badly in a downturn.
If you would like to invest in property, and would like to discuss some these findings in more details, please email me at eh@myproperty_consultant.london