How tube links can boost, or break, buy-to-let returns in London

If you’re looking to invest in buy-to-let in or around London, then latest research from Benham & Reeves could help you gain a serious advantage.

The estate agency analysed the hundreds of London Underground stations across the network and the average rents of buy-to-let properties in close vicinity to these stops. What the data showed was that the monthly rent for properties close to one of the capital’s 11 tube lines (and the Docklands Light Railway) was 34% higher than the London average. Properties located close to stations on the Circle Line commanded the highest average rents.

Commenting on the data, director of Benham & Reeves Marc von Grundherr, said: “Most of the time, home sellers and landlords will assume a property price premium simply due to the close proximity of an underground station. However, where buyer and tenant are concerned, there is certainly a preference when it comes to which station [and] line and some are willing to pay way over the odds for the convenience.”

Pulling out the stops

It shouldn’t come as much of a surprise that properties close to stations in the most affluent areas of Central and West London tend to command the largest monthly rents, as the table below shows:

At the other end of the scale, homesteads located near tube stops on the outskirts the capital, or outside altogether, tend to generate smaller rents:

Better places to invest

Despite some of the monster rents the data shows though, London is anything but the land of milk and honey for many landlords. Recent evidence actually shows there’s been an exodus of buy-to-let investors in the capital because of high property values and increased stamp duty costs compared with elsewhere.

So is the answer to take that investment cash and buy rental property outside London? Absolutely not, in my opinion. Relentless tax changes and regulation tightening in recent times are decimating landlord returns and making the business of buy-to-let ever-more problematic. What’s more, the problem’s likely to keep going and going as the government tries to free homes up for first-time buyers by penalising those in the rental sector.

A much better way to get rich from property would be to buy into the homebuilders, in my opinion. Taylor Wimpey was the most recent of these construction specialists to remind the market just how strong the homes market is last week. Some of the possible returns from the housing sector are nothing short of staggering.

This is a share that offers a forward dividend yield of around 10% but it’s not the only one. Bovis Homes Group, Crest Nicholson and Persimmon also offer yields around this level, trumping the British blue-chip average which sits around 4.5%. And such companies are also dirt-cheap, all of which mentioned above trading on forward P/E ratios of 10 times or below.

So why take a chance on buy-to-let when such lucrative returns can be found elsewhere? I own shares in the homebuilders and plan to hold them forever. My advice? Come join the party and create some giant returns.