Have you been wondering where the best location is for your next buy to let HMO or single let property? There’s so much conflicting advice. Some say chase yield, others say buy local and look for long term capital growth. To make matters worse, every few months there’s a new list of buy to let hotspots.
The good news is that this blog post will help you figure out which location will work best for you and your target renters, rather than just being good on paper. In other words, helping you find your location “sweet spot”, where the various criteria overlap.
Overview: How to find the best buy to let location
- What objectively makes a location great for Buy to Lets?
- What matters from a financial perspective
- Important Practicalities
- Where is your Buy to Let location sweet spot?
What objectively makes a location great for Buy to Lets?
Choosing a location for your rental portfolio that works for you, is more complicated than it might seem at first.
Whereas when you buy shares in companies, it doesn’t really matter too much where the assets are located, as buying shares is truly a desktop, passive investment. Some people might decide to go to Annual General Meetings in person, but these days it’s easy to attend an earnings call virtually. It’s even relatively easy to buy shares of companies in other countries.
However, it’s difficult to be entirely objective when looking for where to locate your buy to let portfolio, as so much of what’s right for you, will depend on your circumstances and priorities.
Here are some key factors of what objectively makes a location good for buy to lets. Locations will rarely tick every box, and yet may very well still make great places for rentals. The factors do also vary for different target renters and market segments, and whether it’s a single let for a family or an HMO for student sharers. For instance, student renters will look to be within easy reach of their university, with nearby schools and quiet residential streets being less of a priority.
I’ve put many of the objective factors onto the map below, to illustrate the reasons why I this particular area of Maidstone appeals to me for my rental properties, and my target renters of families. That said, apart from the schools, these factors also appeal to couples and singletons.
1. The right balance of supply and demand
It doesn’t matter how nice a location is, a property is unlikely to make a successful BTL unless there’s a strong and steady demand from the type of renters you’re targeting.
It’s worth speaking to lettings agents to find out which areas are popular, and for what type of tenants. The needs of different renters (eg students, professionals, commuters, families, couples and singletons) will differ. This affects the types of properties that are in demand locally.
However, if there’s good demand from renters, but too much supply, it may make a property more difficult to let, and will keep rents down. This is particularly the case where there is strong competition from new developments.
So you’re looking ideally for a location where supply is a little less than demand, and isn’t likely to change.
I monitor areas on Rightmove by setting up an alert for properties to let. This lets me see how quickly properties are let, what the going rate is, and what type of properties tend to be available.
There’s a high demand for good quality HMOs in the larger towns and cities, from students and young professionals, who can’t afford the cost of a single-let property. If you’re targeting HMOs, it’s important that the location is somewhere attractive to a decent volume of the right sort of sharers.
Student HMOs do best when they’re walking distance or an easy journey on public transport from the university or college. HMOs for professional sharers are popular when they’re close to employment opportunities.
However, do check whether the area is covered by an Article 4 Direction (which means you’ll need planning permission) or licensing, as that will affect your timelines. You can find out more about HMOs by clicking here.
Again, the location needs to have the right type of housing available to attract the renters you’re looking to attract for a single let of the whole property.
In my target area of Maidstone, nice family homes to let are in short supply, and get snapped up quickly. This is great for me as I specialise in two and three bedroomed Victorian houses with gardens, which I refurbish and modernise before letting. They get snapped up as soon as I list them to let online (take a look here for tips on letting online).
2. Good transport links
Good transport links make a location very attractive to renters, particularly if they need to commute to work. Depending on your target renters, this might be motorways, A roads, commuter train links, bus stops, or tube stations in London.
New public transport can transform an area’s attractiveness for renters. For instance, the opening of High Speed 1 in 2007 drastically cut down train journeys into London St Pancras from large parts of Kent, including Ashford, Ebbsfleet, Faversham and Maidstone. Consequently, there has been an increase in the number of people wanting to rent larger properties in Kent, and commute into London. This process has accelerated pos-Covid now that many have the ability to work from home for some of the week.
3. Near good schools or universities
If your target renters are families with children, being near good schools makes a location very attractive. For instance, my target area in Maidstone is a short walk from an excellent primary school, and a grammar school, with three other grammar schools a slightly longer walk away.
A location is particularly popular if the schools are within walking distance, avoiding the dreaded school run by car.
Nearby universities and colleges are clearly crucial if you’re targeting HMOs with student sharers or, even single lets for academics.
4. Near nice things
A location that’s near nice things, like parks, cafés, pubs, restaurants, leisure centres, cinemas or the countryside, culture, is popular to live in. People like being able to enjoy their leisure time, without travelling miles. I took the photo above by Allington Lock, a short walk along the River Medway from the centre of Maidstone, which is a great place for a little outing.
Another example is the area around King’s Cross station, which was derelict with a notorious red light district until the early 2000s. When it was regenerated, they made the most of its canal side location, attracted a leading art school (Central St Martins), and opening lots of cafés and restaurants at Granary Square. It even now has a Waitrose! The surrounding area has gone from being a no-go zone, to somewhere very popular with renters who work or study in central London, because it is so nice to spend time in.
5. Near useful things
An ideal rental property is located within easy reach of useful services and amenities, for instance a supermarket, chemist, takeaways, post office, hospitals. Having these useful things close by make life easier.
The Aldi that is a few minutes away on foot from my rental properties is very valued, as is the huge M&S Food which opened up nearby. Corner shops are also hand to have nearby.
What matters from a financial perspective
It’s unwise to focus on one financial measure. Instead, investors should see metrics as part of a broader picture.
The average yield of an location, or the average gross profit rental properties make before expenses, as a percentage of its value, is a popular way of assessing whether it’s an attractive area to invest in.
Average yields vary enormously across England. According to Rightmove’s Q1 2023 rental price tracker, the North East the average yield for a single let is 7.9%, which is very attractive compared to the average yield for London, which is only 5.1%. This variation leads many property investors to focus in areas where yield is high, so that they receive a higher return.
Click here for details of the average yields and rents in the other regions and countries in the UK.
Yields are typically higher for HMOs, as renters pay per room, rather than the whole property. They also tend to have fewer voids as it’s unusual for all of the sharers to leave at the same time. (Although that’s different with student HMOs when they have fixed term contracts for the academic year).
However, yield is only part of the story. It doesn’t take into account the expenses that the property will incur, which will be higher if you outsource management and refurbishments. By and large, the further your property is from your home, the higher your expenses. If the average rent isn’t high, a few round trips to oversee refurbishment or to inspect damage. It’s also time-consuming and can be emotionally draining to visit properties that are a long way from where you live.
2. Achievable rent
If your goal is to earn an income, then it makes sense to invest in locations where the rents are higher.
Also, the higher the rent in absolute terms, the less likely that maintenance will be a high proportion of the annual rent. Why is this? The cost of replacing a boiler varies little across the country with an online specialist like Boxt. However, the percentage of the rent consumed varies enormously. In London, a new boiler will cost less than one month’s rent, whereas it will be almost three in the North East.
Big ticket maintenance and repair jobs will have a disproportionate impact on your net profit as a landlord in properties where rents are low, and can wipe out your net income.
Let’s go back to our comparison of London and the North East where the average yields are 5.1% and 7.9% respectively. However, in London, the average monthly rent is £2,501, whereas in the North East, it’s only £803, as you can see in the table here.
This means that you need three times the number of properties in the North East to earn the same cash as one in London. Also, there are three properties to maintain and manage, and three times the chances that something will go wrong, costing money.
Consequently, if net cashflow per property is a priority, yield is less important than the achievable rent.
3. Capital growth potential
It ‘s difficult to assess a location’s potential for future capital growth, as we don’t have a crystal ball. We can look back with hindsight, but just analysing the performance in London over the past 5 years will show that the future doesn’t always follow the property cycles of the past.
However, by focusing on the objective factors on what makes a great location for a buy to let, there’s more chance that you will achieve capital growth.
Landlords should not under-estimate the practical considerations of owning buy to lets. Unless you have a large enough portfolio to employ your own team, or you don’t mind losing margin to agents, then you need to think about the practicalities. This is the reality of earning so-called passive income. Click here for more on whether passive income is a myth for landlords.
1. Proximity to home
Simply put, the further your rental properties are from your home, the harder it’ll be for you to visit them, let alone manage them.
For me to invest in the North East from Kent, the drive alone would be over 5 1/2 hours of 320 miles each way. Yes, properties are cheaper in the North East, but the mileage for one visit alone would use up half a month’s gross rent.
It’s not practical to manage properties yourself at such a distance, unless you’ve got a list of reliable trades people to call. However, things do go wrong, and sometimes visits are needed.
Of course you can outsource management to a letting agent, and many property investors are happy with this arrangement. However, outsourcing will impact margins as the average fee is 14.4% inc VAT, and invariably the cost of repairs is higher when it’s managed by an agent.
Even if you don’t want to manage the properties yourself, it’s very convenient being able to visit the property quickly in the event of any issues. I also like to check the condition of the property between tenants myself, and just before they move out. Click here for more on achieving a positive end of tenancy checkout.
I prefer not to have information about my valuable assets filtered by a property manager, and like to see any problems myself. The closer the property is to where I live, the easier this is.
2. The Advantages of Clustering
There are many practical benefits to having your rental properties in clusters. If you outsource management, you’re likely to be able to use the same agent to manage your properties. This means you’re more likely to be able to negotiate a good discount. Alternatively, you might be able to hire a part-time property manager if they’re in a cluster. Click here for more on how to manage a growing portfolio and obtain economies of scale.
If you manage them yourself, it’s easy to visit more than one property on a visit. I will usually drive past my other properties if I need to go to one of them for whatever reason, just to see how they are looking. (Whilst respecting the right to quiet enjoyment of the renters).
I also batch maintenance and safety jobs to be done on nearby properties at the same time, which makes it cheaper and convenient. Also, the more properties you have in an area, the better you’ll know the pros and cons of different roads, and the achievable market rents. This market intelligence is useful in selecting the best properties to buy.
On the other hand, clustering does increase your risk if something bad happens to the area, eg an unfavourable development or another problem. However, if the fundamentals of the location are good, and you’ve done your due diligence on the plans for the area, the risk should be minimal.
Where is your Buy to Let location sweet spot?
The sweet spot for the location of your own buy to let portfolio is the intersection of the various factors we’ve discussed, as you can see in the above Venn diagram.
For me, as I was keen to self-manage in order to maximise profits, the practicality aspect of the diagram was very important. I decided to buy my rental properties within a 30 minute drive of where I live, choosing the exact area based on the objective criteria and the financials.
I know that I could get a higher yield elsewhere, but as the rent per property is high, and the costs low due to self-managing, yield is less of an issue for me. As you can see from the graphic above, they are in the same area, which means I benefit from them being in a cluster.
Ultimately, the ideal location for your properties will depend on your priorities and target renters. For someone who wants to be truly hands off, and leave everything in the hands of trusted agents, then the financial and objective criteria will be more important than the practical considerations. If you’d like to manage them yourself, it’s best to have them close to home.
It’s also worth pointing out that our priorities do change over time, so we need to anticipate what our future needs will be, because it’s expensive selling up and buying elsewhere.
You may also find useful
Landlord Essentials: Tips on what to get for your buy to let
How can landlords make good profits?
What makes rental properties attractive to families?
What landlords need to know about energy efficiency and EPC ratings
How to self-manage your own rental properties
How to find renters without letting agents