November 30, 2021
What is a good rental yield in London?
As a landlord, yield will be a very important consideration. Put simply, a rental yield is the value of rent you can anticipate to achieve annually from your rental property.
Normally, to cover all the associated costs that come with being a landlord while still making a decent return on your initial investment, a yield of between 5%-8% is deemed to be strong.
But this varies by location and circumstance. London, for example, has typically been known for lower rental yields – thanks to higher initial buy-in costs, more frequent turnover of tenancies and higher cost of upkeep.
However, this belies the reality, where London landlords can actually make very good returns in parts of the city. What’s more, capital gains are stronger than anywhere else in the UK.
What, though, constitutes a good yield in the capital? Below, we take a quick look.
How are yields calculated?
In essence, your yield is the amount of money you make on your rental property each year by calculating the gap between your overall costs and the income you receive from letting. By knowing what your yield could be, you can work out whether an investment is worthy or not.
It is calculated by taking the annual rental income of a property and dividing it by the total amount that has been invested in that property.
Rental yields can be calculated in two different ways: gross and net. While a gross rental yield refers to everything before expenses, a net rental yield takes everything else into account. You can work out the rental yield of your portfolio using our rental yield calculator. And find out more about yields in our buy-to-let investment guide here.
Calculating rental yields is not an exact science. And neither is it the only thing you should consider when making an investment. Far from it. But it is very important and will give you a solid idea of whether you can turn a decent profit on a home.
What is London’s average rental yield?
Average rental yields in the capital, where rents are at their highest but so too are property prices, typically hover at around the 3-4% mark. With the average for the whole of England somewhere around this mark too.
But this varies by location, with some East London locations in particular recording yields of more than 4%, and potentially higher than 6%.
Typically, areas a bit further outside of the centre of London generate better yields. Largely due to the lower house prices at play, which means properties have to work less hard to secure good yields.
Yields of between 5-6% are generally seen as being good for London and can help landlords and investors to turn a good profit.
Finding up-and-coming areas can help landlords to get in early before an area becomes popular among buyers. And prices rise.
Equally, there are long-established hotspots throughout London. There, demand is always high and can guarantee solid rental yields year in year out. Brixton, Clapham, Shoreditch, Tooting, Balham, Bow, Mile End and Vauxhall are examples of ever popular locations for tenants.
London’s rental market is huge. And demand is nearly always high. It undoubtedly took a knock during Covid, as young professionals and students returned home during lockdown. But this trend is starting to shift back as people return to living, working and socialising in the capital.
Guaranteed demand is part of the battle. But the next part to secure the best yields is to find those areas which are more affordable but still heavily sought-after.
It might be worth your while considering less well-known places, such as Myatts Fields, Furzedown, Homerton and Stepney. They could become the rental hotspots of tomorrow.
There may also be a perception that certain areas, such as Canary Wharf, are prohibitively expensive and out of reach. But, actually, this isn’t the case. Despite its global profile and status as a financial centre, Canary Wharf had an overall average price of £616,227 over the last year, according to Rightmove.
Which isn’t in the realms of Prime Central London, as some might have thought. Rental yields in the area are typically around the 3.8% mark, while prices have been rising strongly over the last few years. Sold prices in Canary Wharf over the last year were 3% up on the previous year. And 11% up on the 2017 peak of £557,366.
Nearby Surrey Quays, currently undergoing significant regeneration, is also perhaps more affordable than one might imagine.Properties here had an overall average price of £519,686 over the last year. Most sales in Surrey Quays during the last year were for flats. Selling for an average price of £462,342.
Both these places, with more affordable buy-in points than Central London, could represent a canny investment. With good scope for both solid rental yields and capital gains.
As a London landlord, if you can achieve rental yields of 5% upwards, you increase your chances of a good ROI on your buy-to-let. While areas on the outskirts of the city with more affordable buy-in costs and still high rents are likely to generate the highest yields, landlords shouldn’t become obsessed with one area or region as decent yields are on offer in a surprising number of places in the capital.
Work with your letting agent to pinpoint the areas or hotspots with the best yields. And try and keep your portfolio as varied and flexible as possible.
With demand continuing to outstrip supply, and London rents bouncing back across the board, now is as good time as any for landlords to invest in the capital. Which remains one of the most popular investment locations in the world.
Here at Atkinson McLeod, we can help you to get the most from your rental properties. If you have any questions about letting a home in the London area, we’re here to help.
To find out more about our services and current operations, please get in touch with our expert team today. You can find out how much your home could be worth on the current market by requesting a free and instant online valuation here.