If you want more bang for your buy-to-let buck each month, you need to steer clear of pricey London and head for more rewarding destinations in Birmingham, Glasgow, Ipswich, or Liverpool. Postcodes in these areas have been named as best places in the UK to get a decent monthly return on a buy-to-let investment. However, the calculation isn't quite as simple as that.
When you're considering potential locations for investment, you're looking for an ideal balance of reasonably low property prices and fairly high rents. You also want to be investing in an area which will increase in value over time.
The balance between rents and property prices (found by dividing the annual rent by the property price) is known as the yield on your investment.
Peer-to-peer lending company LendInvest used figures from Zoopla in the first three months of this year to work out that the average yield on a one-bedroom property is 5.9%, for two beds it's 5.3%, three beds is 4.7% and four beds is 4%.
However, within the figures are some striking differences. The best returns were in Birmingham postcodes beginning B44: the Old Oscott area north of the city, where you get a 13.4% return.
This is followed by its immediate neighbour B42, with returns of 11.9%. This 11.9% return is matched by G34 in Glasgow, east of the city, near the Seven Lochs Wetland Park, and the final postcode in the top 5 is IP4, just to the east of the centre of Ipswich, with a yield of 10.8%.
The rest of the top ten is made up of the Birmingham B98 postcode in sixth place, G21 in Glasgow in seventh, G22 in Glasgow in eighth, B23 in Birmingham in ninth, and L28 in Liverpool in tenth.
However, when you are investing, you have to bear in mind that the overall return comes not just from rental, but also from the increase in the house price between buying and selling up. The research noted that some parts of Manchester and Liverpool have seen prices fall, so this needs to be taken into consideration when choosing a location.
Central London is unsurprisingly the area with the biggest gains, with the highly expensive WC, N5 and W3 postcodes rising the most. The sheer scale of the price rises mean that despite less impressive rental returns, the best overall return on investment is offered by properties in WC1, WC2 and N5.
Of course, whether investors decide to focus on these expensive London properties, or spread their money across more properties with higher yields - and diversify their risks more - will depend on their investment approach.
Word of warning
Buy-to-let is an increasingly popular option, with demand for buy-to-let mortgages up more than 10% in the past year. Research from specialist lender Kensington recently found that 40% of people over the age of 40 would consider it for their retirement portfolio, and it's expected that a big chunk of the money taken out of pensions under the new pension freedoms will be directed into property investment.
While there will be people with a diverse portfolio, plenty of resources if things don't go to plan, and a high tolerance for the risks associated with buy-to-let, there will also be those who could be heading into the market without fully appreciating the challenges involved.
Part of the battle is finding the best postcodes to invest in, but this is just a small part. First you need to be completely certain that buy-to-let property investment is right for you.
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