The other day I got chatting with one of my out of town landlords who was back in Derby visiting his family. To enhance his retirement, he has a small portfolio of four properties in the derby city centre and wanted my advice on where to buy the next property in Derby (as he lives in a college owned flat and anyway, would never dream of buying where he lives in Kensington (where the average value of a flat is £1.62m and a City house £4.1m. Eye-watering to say the least!!).
Before I could advise him, I reminded him that the most important thing when considering investing in property is finding a Derby property with decent rental yields for income returns, yet at the same time, it must have the potential for capital growth from rising house prices over time. Going forward, Derby landlords will be under more pressure to find the best permutation of yields and capital growth, as extra stamp duty charges for buying properties and a squeeze on mortgage interest relief will raise their costs.
However, (you knew there would be a however) before we look at yield and capital growth, one important consideration that often many landlords tend to overlook, is the propensity of how likely the rent will increase. Interestingly, the average rent of a Derby property currently stands at £659 per month, which is a rise of 2.9% compared to twelve months ago (although it must be noted this rise in rents is for new tenancies and not existing tenants). Anyway, back to yield and capital growth, the average value of a Derby property currently stands at £179,000, meaning the average yield stands at 4.41% per annum, which on the face of it, many landlords would find disappointing. That is the problem with averages, so if I were to look at say 2 bed houses in Derby which are the sort of properties a lot of landlords buy, in Derby, the average value of a 2 bed house is £80,000, whilst the average rent for a 2 bed house is £475 per month, giving a yield of 7.12%.
Ultimately investors want to be making gains from both rent and house price growth. When combined, the rental yield and capital growth gives you the return on investment, and that is what I told our friend. Return on investment is everything. So, looking at property values in Derby have risen in the last year by 5.52% …. which means the current annual return on investment in Derby for a typical 2 bed house is 12.64% a year …. not bad.
If you would like advice on any potential buy to lets in Derby , please get in touch.