You could be forgiven for thinking that anyone who wants to make money from investment property should head to London. In some parts of the capital a third of the housing stock is given over to rental property, and average rents top £2,000 a month. It looks like the perfect market.

However, we’ve done the maths, and discovered that despite all this, London has one major drawback for property investors: the cost of buying the property in the first place. It means that despite sky-high rents, average rental yields often fall well below 4%.

If you want a better return on your investment, you need to look beyond London, to some of the regional cities that offer average returns of up to 8.7%.

Take a look at the top ten hotspots offering the best returns for property investors:

  • 10 Cambridge

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    Cambridge’s large rental market doesn’t come as a huge surprise, given the student population. However, as well as students, there is also plenty of demand from contract workers in local technology businesses, and young professionals who work either in the city itself or commute to London. Unlike cash-strapped students, these groups can afford to pay more for rental property. It’s one of the priciest places to buy in the top ten, with an average property price of £185,414. However, it also has one of the highest average monthly rents – at £1,001. It means the area offers average rental yields of 6.48%, which is an attractive prospect for investors.
  • Liverpool

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    Property in Liverpool is some of the most affordable in the top ten – and half the price of homes in Cambridge – at an average of £91,175. It means that while average monthly rents are a relatively affordable £494, investors can still make a very attractive 6.5% yield. The reason for the yield is that demand for rental property in the city outstrips supply. There is a large university population looking to rent, as well as demand from people who are unable to afford a property of their own – including both young professionals and pensioners.
  • Portsmouth

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    The price of property in Portsmouth is mid-table among the investment hotspots, with an average price of £146,709. The average monthly rent, however, is a relatively high £795 a month, which offers a 6.5% yield. Demand for rental property has always been high in Portsmouth, as there is a strong rental culture. And as the London commuter belt expands to include much of Hampshire, it is bringing new tenants to the area.
  • Oxford

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    Oxford is by far the most expensive place to buy on this list, with an average property price of £254,514. It makes the list by dint of the fact that rents are also expensive, at an average of £1,489 a month, and so yields are just over 7%. As with Cambridge, much of the demand comes from students and contractors in the technology industry. In Oxford this is compounded by the cost of property, pushing so many people out of the property market and into rented accommodation. It’s one of the reasons why an impressive 26% of housing stock is private rented accommodation, and still there’s demand for more.
  • Coventry

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    Coventry has relatively affordable property, at an average of £110,029, but mid-table rental prices of £650 a month – giving it a yield of almost 7.1%. This is partly because Coventry has one of the smallest proportions of private rented property on this list – at 19% – which means that landlords are benefiting from a relative shortage of supply of rental property. There is plenty of demand from University students from both Coventry and Warwick. There’s also a decent level of demand from graduates and young professionals commuting to Birmingham and London.
  • Kingston upon Hull

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    House prices are the lowest on the list at £68,243, and rents are also the cheapest at £425. However, even at this level they are able to return almost 7.5%, which is enough to pique the interest of many property investors. The yield is driven partly by demand from students at the University of Hull, but also from those who cannot afford to get on the property ladder, and those in short-term roles who lack the security to buy.
  • Blackpool

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    Blackpool offers the second most affordable property in the top ten – with an average price of £77,899. It also has one of the largest rental sectors – with rental property making up 24% of the housing stock. High demand for rental property in Blackpool means that average rents are £495, so it has a healthy yield of 7.6%. This demand comes in part from those who cannot afford to buy. In addition, like any seaside town, work is often seasonal, so workers come for the summer and need to rent. There is also a larger proportion of houses in multiple occupation, which tend to deliver higher yields.
  • Nottingham

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    Houses in Nottingham are the third cheapest in the top ten, at an average of £86,000. However, the average rent is a relatively high £550, which gives the area a rental yield of almost 7.7%. There is significant demand from the large student population, recent graduates and young professionals. Big price rises recently have also kept more people in the private rental sector, while they save to get onto the property ladder.
  • Manchester

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    Property in Manchester isn’t particularly cheap – with the average property costing £104,244. However, with robust rents of £693 a month, the rental yield is almost 8%. The area has one of the largest proportions of rental property on this list, at almost 27%, so the driver here is all about demand. The large student population – across three universities – underpins demand in some areas, while elsewhere booming house prices have kept people renting for longer and increasing demand still further.
  • Southampton

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    Southampton tops the list, but not because housing is especially affordable. In fact, it is one of the most expensive places to buy in the top ten, with an average property price of £143,011. What puts Southampton in the top spot is the incredible cost of renting – at an average of £1,040, providing a yield of over 8.7%. The city has always had a strong rental sector, with a large student population (from two universities) and demand from young professionals and families. The rising cost of housing also means people are renting for longer while they save to buy – which is increasing demand still further.

 

The Huffington Post UK | By Sarah Coles
Posted: 23/04/2015 09:59 BST Updated: 27/04/2015 15:59 BST