Despite changes to the buy-to-let tax regime, there are still thousands of investors betting their house on rental property. We reveal the hotspots you should be investing in next.

Thousands of investors have made a killing buying buy-to-let property over the past couple of decades.

Looking at the past year alone, the average BTL return in the UK stood at 13.6% – £28,617 in cash terms – according to research by Kent Reliance. 

But landlords need to pick both the area they invest in, and the property, carefully if they want to make a profit.

So, where might landlords find the best returns? 

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Yields vs annual returns

Landlords make money in two ways: rental yield which is a measure of the rent relative to property value; and capital growth. A combination of the two gives an annual return.

Kent Reliance’s latest Buy To Let Britain report, perhaps unsurprisingly, found the highest annual returns in London. Landlords in the capital achieved average annual returns of 18.2% in the year to March this year. This was followed by the East of England at 15.2% and the South East at 14.7%.

However, the high cost of property in London could be a barrier to entry for many new landlords or those wanting to expand existing portfolios.

Capital growth is also difficult to predict – some experts are already calling the top of the market for house prices.

Kent Reliance found the highest rental yields away from London and the South East. The North West had the highest yields at 6.7%, followed by Yorkshire and the Humber at 6.3%, and the East Midlands at 5.8%.

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The best postcodes and cities at present

Comparison site Totally Money looked more closely at the best performing buy-to-let areas and identified the best postcodes for rental yields.

It says Sheffield S1 city centre postcodes offer buy-to-let investors the best returns in the UK, with a gross yield of 11.57%. G21 postcodes in Glasgow and BD1 in Bradford can expect yields of 9.02%.

George Square, Glasgow

None of the top 10 postcodes were in London, with some postcodes in the capital actually featuring in the “losing postcodes” list. Investors in N6 (Highgate and Hampstead Heath) have seen yields of just 1.82% and those in SW7 – which includes swanky South Kensington and Knightsbridge – are achieving yields of just 1.69%.

When analysts looked at the best performing cities, rather than postcodes, eight of the top 10 were in the north of England or Scotland. Yields in Leeds averaged 6.94%, Salford 6.3%, Glasgow 6.09% and Manchester 6.02%.

Predicting future hotspots

As well as looking at past statistics, it can be a good idea to look ahead and ask property experts their tips for the next buy-to-let hotspot.

There are plans to build a £2 billion Paramount theme park between Gravesend and Dartford in Kent, but although the consultation period has just been extended by a year, David Lawrenson of private rent consultancy LettingFocus.com, is still backing the region as a potential hotspot.

“The huge number of jobs this will bring to the Dartford and Gravesend areas allied to the fast rail links from Gravesend and Ebbsfleet to London, Paris and Brussels, allied with cheap property make this area attractive for capital and rental growth,” he says.

Meanwhile in the north, Lawrenson says the development of Manchester airport, and other developments in the area, will make South Manchester and parts of Cheshire better connected to growth areas. He predicts this will spur rental and capital growth in excess of what will happen in most areas of the north.

Infrastructure projects

Kate Faulkner, property analyst at Propertychecklists.co.uk, says for a buy-to-let hotspot to exist, demand to be higher than supply and there needs to be something to force capital growth faster than average – for example, new employment or transport links.

Crossrail is the largest infrastructure scheme to be undertaken in the UK in the past 20 years and is due for completion in 2018. The 40 Crossrail stations will link Shenfield in Essex to Abbey Wood in south east London and Maidenhead in Berkshire.

“Based on future growth, one area I would look at is the west end stations of Crossrail. You need to be careful as it will have been priced in to some extent, but it’s an unknown area like Burnham or indeed Reading, half way between the central station and the new one planned at Green Park, that you should watch” suggests Faulkner.

“Both areas have had an uplift from the recession, so the quick bucks aren’t there, but are likely to remain strong overtime. Another often unrecognised area is Uxbridge, which has good rental and good capital growth returns.”

Another rail project is of course High Speed 2 (HS2), which will link London, Birmingham, the East Midlands, Leeds, Sheffield and Manchester.

The route is likely to pass through the Nottinghamshire village of Toton – so Faulkner also suggests this and the surrounding areas for aspiring landlords to consider.

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