The best buy-to-let locations for starting a business

If you’re looking to take the buy-to-let property market by storm, choosing the right location is crucial. Perhaps you’re looking to expand your property portfolio, or you’re a newcomer to the real estate market. Whatever your circumstances, we’re here to help you make the right decision when choosing buy-to-let locations, to improve your chances of business success. 

In December 2023, average house prices were estimated to have fallen by 2.1% due to high mortgage rates and the cost of living crisis. But the market will likely pick up again, with 47% of landlords believing the Bank of England’s base rate will fall in 2024 - great news for those starting in the real estate industry.

We’ve explored 50 of the biggest cities to uncover the best buy-to-let locations in the UK, looking at average property prices, rental costs and letting agent fees in each city to determine the net yield and potential returns on property investment. We’ve also reached out to current buy-to-let business owners who have shared insight into the property market and current considerations. So, what are you waiting for?

Benefits of a buy-to-let limited company

If the buy-to-let industry is calling your name, you’ll need to decide if you’d prefer to keep the properties in your name, as a sole trader, or if you’d benefit from forming a limited company. There are several benefits to starting a buy-to-let limited company, especially when it comes to business tax and legal protection.

Let’s delve into the benefits of operating as a limited company: 

• Limited liability: Should you face financial difficulties as a limited company, you’ll receive protection in the form of limited liability. This means your business is legally classified as an ‘individual’ and a separate legal entity. So, should you run into financial trouble as a business, the business itself is responsible, not you personally. You wouldn’t be obligated to pay any debts or personally cover any financial losses.

• Tax efficiency: Operating as a limited company can be more tax-efficient than working as a sole trader. As a limited company, you’ll pay 19-25% Corporation Tax on profits compared to the 20-45% Income Tax you’d pay as a sole trader.

• Professionalism: Choosing to operate as a limited company may give your professionalism and credibility a boost. Your potential customers are likely to perceive you as more trustworthy and established.

  
  

The UK’s most profitable buy-to-let hotspots

So, where is the best place for buy-to-let? We’ve uncovered the top UK cities for buy-to-let, based on their property prices, monthly rent prices, management fees and best net rental yield. Net yield is the return, or potential return, of a rental property after costs have been deducted such as letting and management fees.

The top buy-to-let hotspots in the UK, coming out in joint first place, are Manchester, Glasgow and Aberdeen, all with a net yield of 6.9%. The average buy-to-let property price in Manchester is £251,557, with an average monthly rent of £1,713. Compared to the average UK house price of £290,000 in July 2023, Manchester’s property prices are significantly cheaper than the national average, making them a worthwhile investment for buy-to-let investors. Glasgow and Aberdeen’s average buy-to-let prices also fell significantly below the national average, at £230,619 and £189,633 respectively, making them attractive buy-to-let locations for those looking to invest in property. It seems that opting for cities in the North of England and Scotland are generally better for yields than cities in the South of England and London. This is true for Stoke-on-Trent and Birmingham which came out in second place for the most profitable, with net yields of 6.8%.

Benefits of these locations

These best areas for buy-to-let offer more than just profitability, they’re also prime locations known for their culture scene and business opportunities. 

As mentioned, Manchester ranked in first place for most profitable buy-to-let hotspots, alongside Glasgow and Aberdeen, and is a bustling city to consider. With an economy worth £62.8 billion, it has firmly cemented itself as a major business hub in the UK. If you’re a music buff, you’ll know what Joy Division, The Smiths and Oasis all have in common - Manchester! It’s renowned for its vibrant music scene and unmissable music venues such as the Warehouse Project. It’s safe to say Manchester is a worthy contender when searching for the best buy-to-let locations in the UK, with its high rental yields and job opportunities, and strong economy. The same can certainly be said for Glasgow, whose average house price in its West End area has risen by 27% since 2019 - great news for property investors. Glasgow is Scotland’s economic powerhouse, generating £19.3 billion GVA per annum. 

According to Rightmove, Aberdeen is the third cheapest city for first-time buyers, so if you’re new to the buy-to-let world, you could benefit financially from your investment. Local estate agents in Aberdeen have predicted that house prices will rise by 1-2% in 2024, so you could make a significant profit on your investment should you choose to invest in Aberdeen’s housing market. The city is home to an array of green spaces, beaches and beautiful views, offering an excellent quality of life. Named one of the most affordable cities to own a home, Aberdeen is certainly worth considering, with the average cost of a mortgage, utilities and council tax being only 37% of the median monthly salary.

What is rental yield?

When starting a property business, there are two ways you can make money - either through an increase in the value of your property, or through the rent you receive as a landlord. When looking for buy-to-let hotspots in the UK, a key deciding factor for investing in property is the rental yield you can expect to receive. Rental yield is a metric used to assess the profitability and potential return of a property investment. It’s usually presented as a percentage.

The difference between gross and net rental yield

While gross rental yield and net rental yield are both used to assess the potential returns on property investment, they differ in the expenses they use to calculate profit. Gross rental yield takes the annual rental income generated by your property and divides it by its total cost or market value. Net rental yield also takes into account the various expenses that come with owning and maintaining a property, such as property management fees, insurance and maintenance costs. This means net rental yield offers you a comprehensive measure of your property’s profitability, by factoring in all the costs that come with a property, not just the cost of the property itself. 

Why rental yield matters for investments

Rental yield is crucial for you to assess the potential return on your investment, which can help you make informed decisions about the property you choose to invest in. You can use rental yield to calculate the income a property will generate, and the level of risk a property may have. For example, lower rental yields may indicate a higher level of risk, while higher yields may suggest a better return on investment. 

What is considered a good rental yield?

What is considered a good rental yield will depend on factors such as the location of the property, market conditions and whether the property is residential or student accommodation, for example. Generally speaking, a gross rental yield of 5 - 6% is considered ‘good’, while anything over 7% is seen as ‘very good’.

How to calculate rental yield

Calculating the rental yield of a property should be fairly straightforward once you know how. Here’s the calculation to use:

(Annual rent / property value) x 100 = gross rental yield

For example, if you purchased a property for £200,000 and charged £1050 per month, your gross rental yield would look something like:

£1050 x 12 = £12,600

(£12,600 / £200,000) x 100 = 6.3%

How to maximise your rental yield

Typically speaking, the higher your rental yield, the stronger your property investment - so it’s often a key goal for landlords. 

Here are a handful of ways you could look to increase your rental yield:

• Choose the right buy-to-let location: Choosing a property in a high-demand location could increase your rental income. Consider transport links, business opportunities in the area, schools and local amenities when looking at potential areas.

• Upgrade the property: Could you add another bathroom or bedroom to the property? If you have a large living space that isn’t necessary, you could turn it into an extra bedroom to boost your cash flow. This may attract more tenants which could increase your profits.

• Pets: Many landlords say no to pets. After all, you’ve spent significant time and money on the property, you want to prevent damage. But rental properties that allow pets are hard to come by for tenants, so you may be able to increase your rental cost if you say yes to pets (and what harm will a furry friend do really?) 

  
  

What taxes are involved with buy-to-let?

Tax can feel like a minefield for a new business owner, but it’s a crucial thing to get right. The last thing you want is to face a hefty fine. Here are some of the taxes involved with buy-to-let for you to consider:

• Income tax: For the 2023/24 tax year, basic taxpayers pay 20% tax on buy-to-let income. If you’re a higher-rate taxpayer, you’ll pay 40%. 

• National Insurance: If your profits are more than £12,570 per year, you’ll need to pay Class 2 National Insurance contributions. You’ll pay this through Self Assessment.

It’s important to note that you can get buy-to-let tax relief on income tax. This means you’ll pay tax on the profit you make, once your ‘allowable expenses’ have been deducted. These expenses include the money you spend on the day-to-day running of the property such as letting agents’ fees, buildings and contents insurance, accountants’ fees and Council Tax. You can find out more about these allowable expenses on the government’s website. 

How much tax you pay on buy-to-let property income

The income you receive from charging rent on your property is taxable. This means you’ll need to declare any rent you receive to HMRC (once you’ve deducted the expenses or allowances explained above) when filling out your Self Assessment tax return. As mentioned, how much tax you’ll pay will depend on your income tax band (either 20% or 40%). 

If you make money from other sources, such as employment, your rental profits will be taxed at the same rates as your other income. 

Stamp duty

You’ll pay stamp duty on your buy-to-let property if the purchase means you’ll own more than one property and the property is worth more than £40,000. This type of stamp duty is known as the Additional Stamp Duty Rate and is charged as an extra on top of your standard stamp duty bill. So, if your property purchase means you own more than one property, you’ll pay a 3% stamp duty surcharge.

Capital Gains Tax

You may need to pay Capital Gains Tax if you make a profit when you sell a property that isn’t your home, such as a buy-to-let property. To work out if you’re required to pay Capital Gains Tax, you’ll need to calculate the ‘gain’ you’ve made from selling the property. The Capital Gains Tax rate is 18% for basic rate taxpayers earning up to £50,000 per year. This rate then rises to 28% for higher-rate taxpayers earning more than £50,000 per year. But like income tax, you’re entitled to a tax-free allowance which can reduce your tax bill. Until April 2025, the Capital Gains Tax tax-free allowance is £12,300. 

Inheritance tax

If you’re a landlord or property business owner, you may look to pass on your property to loved ones once you’ve passed away. To do this, you must understand how Inheritance Tax (IHT) works and how it may affect your property portfolio. 

Should you pass away owning property, your beneficiaries (those in line to receive inheritance from you following your death) may need to pay IHT on your estate. IHT is charged at 40%, but everyone is entitled to the nil-rate-band allowance of £325,000 which they won’t pay tax on. Anything above this threshold is subject to the 40% tax rate. 

Real life case study from a property business owner

We asked Michelle Niziol, estate agent, mortgage broker, property investor and director of IMS Property Group about her experiences with buy-to-let and any key takeaways she can share with new property investors. 

“The biggest challenge of starting a buy-to-let portfolio is usually the capital to put down as a deposit. You typically need at least 25% deposit of the value of the property.

“Then understanding the local property market is critical, you need to be able to identify areas with potential for rental income and property appreciation and this can be challenging, especially for beginners.

“You need to be careful with your property selection, ensure that the property you choose aligns with your investment goals, budget, and target tenant market, you need to consider factors such as location, property condition and potential rental yield.”

When it comes to long-term success as a buy-to-let business owner, Michelle shared the following tips: “Ensure that you secure a property in the right location, near public transport routes, good schools and ensure that when the tenant moves in, the property is refurbished to a high standard. Make sure you deal with maintenance issues promptly, and enlist a reputable letting agent to fully manage your property.”

Further costs associated with buy-to-let properties

When investing in property, it’s important to consider any ongoing costs that may affect the returns on your investment. Once you’ve purchased a property, there are several ongoing expenses you’ll need to cover, including:

• Property maintenance costs: The cost of regular upkeep for your property, including cleaning, gardening and ensuring the property is kept in good working order.

• Agency fees: If you choose to rent out your property through a letting agent, you’ll need to pay letting agents’ fees. How much this will cost depends on the tasks the letting agent provides. You may choose to pay a one-off fee for a let-only service, which is usually around four weeks’ rent. If you choose full property management, the agent will deal with any day-to-day issues such as damage to the property or a tenant leaving without giving notice. This could cost you up to 20%. 

• Repairs: We’re talking about repairs that go beyond your day-to-day maintenance. Unexpected repairs may crop up occasionally, such as a boiler breaking or something structural that needs fixing. Making sure you have a pot of money set aside for repairs can help.

• Insurance: You can take out buy-to-let landlord insurance, a more specialised type of home insurance, to protect you against risk when renting out your property. You may find that some home insurance providers won’t cover you if you aren’t living in your property, so make sure you take out the right cover for your needs. Insurance can protect you financially should the unexpected happen, such as a fire or flood, or even a tenant is injured due to a fault in the property and takes legal action.

  
  

To wrap things up…

If you’ve always wanted to start a business, what are you waiting for? Nothing compares to the feeling of being your own boss, and the property industry is a thriving one to be a part of.

Now you know the most profitable buy-to-let hotspots, there’s no reason to wait. Form your company with SUAZ today - we’re excited to help kickstart your new venture.