With rising interest rates, sterner regulations, and a tax squeeze, many prospective landlords are questioning the viability of their investment dreams. Yet, research from digital mortgage lender Molo Finance suggests that by picking the right locations, investors can still reap yields nearing an impressive 8% in England and Wales.

Understanding Property Yields

Before diving deeper, it’s essential to understand what ‘yield’ means in this context. Simply put, the gross yield of a property is derived by dividing the annual rental income by the property’s price. It’s a percentage that gives you an idea of your returns before expenses. Generally, more expensive areas don’t necessarily guarantee higher yields.

For instance, in places like Camden and the City of London, the average property might set you back by around £672,104. But the monthly rental income is around £2,268. When you crunch the numbers, it equates to a yearly yield of just 3.58%, which happens to be among the country’s lowest. This yield has been calculated after factoring in the purchase costs, like stamp duty, conveyancing charges, and the purchase price itself.

Areas like West Sussex, Dorset, Bromley, and North Yorkshire aren’t faring much better either, offering gross rental yields of 3.70% or less.

Where the Grass is Greener

It’s not all bleak. If you turn your gaze to the Central Valleys of Wales, an average property there, costing about £100,706, can yield as much as 7.96% annually – that’s more than double what Camden offers. The North East of England, especially Hartlepool and Stockton-on-Tees, are not far behind with an average yield of 7.90%. Swansea and Coventry also make the list with yields of 7.30% and 7.06%, respectively.

According to Molo’s CEO, Francesca Carlesi, with buy-to-let profits at their lowest in 16 years, securing a high yield has never been more crucial. She points out that most top-yielding locations lie in the North, Midlands, or Wales.

Strategic Investment Suggestions

Carlesi suggests targeting northern regions with a blend of low property prices and high rents. Locations near major commuter routes and universities can be particularly lucrative. Landlords can further amplify their returns by enhancing their properties – think home improvements, energy efficiency upgrades, or even extensions.

Challenges and Opportunities

Landlords have faced their share of challenges. Recent data indicates landlords are shelling out 40% more on mortgage interest than they did in August 2022, which translates to a hefty £4.3 billion annually. And with many fixed-rate deals nearing their end, many landlords may soon be forced to remortgage at the prevailing higher rates. Today, a landlord typically spends over 37% of their rental income on mortgage payments, a significant rise from 28% a year ago.

Yet, the silver lining remains. Due to a shortage in rental properties, the average UK rent has surged by 11.7% over the past year. In Greater London, rents have skyrocketed by 15.7% in just a year, meaning landlords can pocket an additional £322 monthly.

However, this rapid rent escalation has also put immense pressure on tenants. A significant reason for this spike is the current shortage of buy-to-let properties. The situation is a double-edged sword. While landlords face challenges, their retreat from the market has inadvertently made life more challenging for renters.

A Glimpse of the Future

Aneisha Beveridge, Hamptons’ head of research, believes some landlords may find it challenging to sustain if they end up spending half their rental income on mortgages. This situation could continue exerting upward pressure on rents.

Historically, landlords who remortgaged often borrowed more to invest in additional properties. However, with rising interest rates and economic uncertainty, many now prefer to reduce their mortgage debt. On the upside, there are indications that buy-to-let mortgage rates could soon see a decrease. For instance, The Mortgage Works has recently slashed its two-year fixed-rate switcher mortgage to 4.94%.

In Conclusion

The buy-to-let market, like all investment avenues, has its peaks and valleys. By making informed decisions and staying updated on the latest trends, potential investors can still find rewarding opportunities in the UK property market.