London buy-to-let has become harder. That's not opinion. It's arithmetic. Between Section 24 mortgage interest restrictions, the 5% additional property stamp duty surcharge, and base rates above 4%, the margins that once made London an obvious landlord play have compressed significantly. But harder doesn't mean impossible. Certain areas still generate positive cash flow if you run the numbers properly.
The Cost Stack in 2025
Before picking an area, understand what you're paying. A typical London BTL investor in 2025 faces this cost structure:
- Mortgage rate: 5.0-5.5% on a 75% LTV buy-to-let product
- Stamp duty: 7-12% effective rate for additional-property non-resident buyers
- Management fees: 10-15% of gross rent (if using a letting agent)
- Maintenance: budget 1-2% of property value annually
- Void periods: 2-4 weeks per year (depending on area)
- Insurance (landlord + buildings): £500-800/year
On a £450,000 property with a 75% LTV mortgage at 5.25%, your monthly interest cost is approximately £1,477. If the property rents for £1,800/month, you're left with £323 before management, maintenance, and void periods. Net cash flow is razor-thin or negative.
This is why area selection matters. A 1% difference in gross yield, say 5.5% vs 4.5%, changes the equation entirely.
Section 24: The Tax That Changed Everything
Since April 2020, individual landlords can no longer deduct mortgage interest from rental income before calculating tax. Instead, they receive a 20% tax credit on the interest. For a basic-rate taxpayer, the impact is neutral. For higher-rate taxpayers (40-45%), it's devastating.
Example: £24,000 annual rent, £18,000 annual mortgage interest, 40% taxpayer. Before Section 24, you paid tax on £6,000 profit (£2,400 tax). After Section 24, you pay tax on £24,000 (£9,600 tax), then receive a 20% credit on £18,000 (£3,600 credit). Net tax: £6,000, more than double the old amount, on the same rental income.
This is why many higher-rate taxpayers have moved to limited company structures. Companies still deduct mortgage interest fully. Corporation tax is 25%, but with full interest deduction, the effective rate is lower. The catch: higher mortgage rates for company purchases (typically 0.5-1% premium) and additional accounting costs (£1,000-2,000/year).
East London: Stratford, Barking, and Dagenham
Stratford (E15) is the standout. Average two-bed flat prices sit around £400,000-450,000. Monthly rents for a two-bed: £1,800-2,100. That's a gross yield of 5.4-5.6%. The Elizabeth Line and Central/Jubilee connections make it one of the best-connected areas outside Zone 1.
Barking (IG11) is cheaper. Two-bed flats from £280,000-320,000, renting at £1,400-1,600/month. Gross yields hit 5.8-6.0%. The tenant demographic is younger, price-sensitive, and mobile, so expect slightly higher turnover. The Barking Riverside development is adding 11,000 homes, which could pressure rents medium-term but improve the area long-term.
Dagenham pushes above 6% gross but carries regeneration risk. It's a bet on the Beam Park and Dagenham Dock developments completing their transformation. For investors with a 7-10 year horizon, it's interesting. For shorter holds, Stratford is safer.
South London: Lewisham and Croydon
Lewisham (SE13) offers strong yield-to-growth balance. Average two-bed: £380,000-430,000. Rents: £1,600-1,850/month. Gross yield: 5.0-5.3%. Lewisham's advantage is upside potential. It's one of the few remaining inner-London boroughs with prices significantly below the Zone 2 average.
Catford, within the Lewisham borough, is even cheaper. Two-beds from £330,000-370,000 with rents tracking £1,500-1,700/month. The Catford regeneration plan (centred on the shopping centre site) hasn't fully launched but is expected to start construction in 2026.
Croydon's numbers are the most compelling for pure yield. Two-bed apartments from £270,000-320,000. Rents: £1,350-1,550/month. Gross yields of 5.5-6.0%. East Croydon station puts you at London Bridge in 15 minutes. Croydon's corporate centre (Nestlé UK, Home Office) provides a stable tenant base. The borough has some of London's highest rental demand relative to supply.
Where the Numbers Don't Work
Zone 1 buy-to-let is essentially a capital appreciation play. A £700,000 one-bed in Pimlico renting at £2,000/month yields 3.4% gross. After mortgage costs at 5.25%, management, and Section 24 tax, you're cash-flow negative by £500-800/month. You're betting purely on price growth.
Prime Central London (Mayfair, Knightsbridge, Chelsea) is even worse for cash flow. Gross yields of 2.5-3.5% and prices above £1,500/sqft make these areas unsuitable for income investors. They're trophy assets, bought for lifestyle, status, or long-term wealth preservation, not rental returns.
Making It Work: Practical Guidelines
Target areas with 5%+ gross yield. Below that, mortgage costs eat too much of the rent at current rates. Focus on two-bed flats. They attract the widest tenant pool (couples, sharers) and command the best yield-per-square-foot.
Use a limited company if you're a higher-rate taxpayer buying multiple properties. The upfront structuring cost pays back within 2-3 years through tax savings. Self-manage if you're local. Saving 12% in management fees on a £1,800/month flat is £2,592/year, which often makes the difference between positive and negative cash flow.
Don't overlook ex-council flats. They're cheaper per square foot, often in excellent locations, and attract reliable tenants. The stigma is outdated. Well-maintained council blocks in Bermondsey, Peckham, and Hackney are some of the best-performing BTL assets in London.