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Fancy buy-to-let yields of 10%? Here’s where you may need to invest

In an environment of rising tax bills, increasing running costs and greater administration fees, it’s clear buy-to-let investors need to do a lot more nowadays to generate any sort of decent returns.

Fortunately then, TotallyMoney has cropped up to reveal the best places landlords can expect to generate sumptuous profits. The bulk of landlords own and operate their buy-to-let properties in locations close to their own personal homes, and this makes sense. Though if the credit scoring expert’s data is to be believed, then it could be time for investors to start thinking outside the box.

Look North

So what does TotallyMoney have to say? Well, in what it describes as being a “strong” buy-to-let market, the firm says many of the best-performing postcodes in the UK boast a yield of between 7% and 8%.

The report took a look at 478,486 properties that were either up for sale or ready to rent across the length and breadth of the country. What it showed was that those investing in the north of England or Scotland could expect the best returns on their cash. Sitting at the top of the tree is Liverpool, where landlords can expect to generate a yield of around 10%. Furthermore, 16 of the 25 top-paying postcodes in Britain are located either in the north-west or north of Hadrian’s Wall.

The UK’s best-yielding postcodes

Rank Postcode Postcode Town Median Rental Value Median Asking Price Yield
1 L1 Liverpool £750 £90,000 10.00%
2 FK3 Falkirk £495 £62,450 9.51%
3 G52 Glasgow £595 £82,000 8.71%
4 L11 Liverpool £650 £90,000 8.67%
5 TS1 Cleveland £425 £60,000 8.50%
6 KA1 Kilmarnock £450 £64,995 8.31%
7 L6 Liverpool £575 £85,000 8.12%
8 LE1 Leicester £667 £100,000 8.00%
9 LS2 Leeds £825 £125,000 7.92%
10 S1 Sheffield £750 £115,000 7.83%

By comparison, landlords in and around London and the commuter belt can expect to generate much worse returns. According to the research, the AL5 postcode in St Albans boasts the worst average yield, of 1.95%, while the worst-paying bottom 10 pay something in or around just 2%.

The UK’s worst-yielding postcodes

Rank Postcode Postcode Town Median Rental Value Median Asking Price Yield
1 WC1X London £2,825 £1,484,408 2.28%
2 RG10 Reading £1,100 £585,000 2.26%
3 GU10 Guilford £1,295 £699,950 2.22%
4 KT7 Kingston upon Thames £1,350 £737,475 2.20%
5 S7 Sheffield £638 £350,000 2.19%
6 B73 Birmingham £680 £375,000 2.18%
7 W8 London £3,356 £1,962,500 2.05%
8 GL6 Gloucester £795 £470,000 2.03%
9 IP13 Ipswich £650 £397,500 1.96%
10 AL5 St Albans £1,300 £800,000 1.95%

The better route to 10% returns

When calculating the average yield, TotallyMoney took the average annual rent and divided it by the average asking price. But clearly, this doesn’t factor in the multitude of suffocating costs that can considerably diminish actual profits.

As the credit giant notes: “Continued changes in tax relief and greater landlord responsibilities are two factors that may have you wondering if residential investment properties are worth it.” And boy those costs can really mount up.

It’s not just a case of investors having to pay larger and larger sums to the taxman, whether it be a result of bigger stamp duty bills, the loss of tax relief, or larger capital gains tax bills when selling your rental property. Legislative changes also mean heftier administration costs, such as those introduced under the recent Tenant Fees Act, or bigger safety and maintenance fees, as per new laws governing day-to-day buy-to-let operation.

Those 10% yields in Liverpool look mighty tempting, sure, but clearly they might not make landlords the sort of money they’d be hoping for.

I’d much rather put my money to work in the stock market. Why? Well, long-term investors could expect to make up to a 10% return and without the immense cost or aggravation that buy-to-let landlords have to deal with. And there’s some truly brilliant low-cost dividend shares out there to help you generate a solid income from your investments.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.