Investing in a Property
Investing in a private rented property can be achieved in various ways. Sometimes landlords inherit a property that they then turn over to renting. Sometimes owners of properties become unintentional landlords because they are unable or unwilling to sell a property at the value the market currently dictates.
This guide is not a financial guide to housing investment, but there are a few key points worth highlighting.
Before investing, an investor (and all landlords must see themselves as investors) should have a proper business plan that takes into account:
- the value of the property and the loan to asset ratio of any loan finance obtained
- the cost of any loan finance and over what period that loan finance has to be repaid
- the level of interest being paid, taking into account that interest rates are likely to fluctuate over the duration of the loan
- the level of investment needed to renovate the property and meet statutory standards
- the cost of any management or specialist services to get the property up to standard and into the lettings market, letting expenses, advertising and professional fees
- the level of rent to be charged
- the cost of ongoing services to keep the property in good condition, including repairs, gas and electrical servicing, annual maintenance, cleaning, garden maintenance
- the ongoing investment that you will require to maintain the fixtures, fittings, decor and services (boiler, white goods, grey goods and furnishings) in good condition
- who will be responsible for the property while the landlord is away on holiday, business or is unavailable because of illness
- the cost of paying an agent if the landlord is not going to manage the property themselves.
Whilst property investment thrives on optimism; it is also essential to be realistic about the level of rent. Allow for some period when the property might be unoccupied between lets (voids) and make some allowance for any bad debts. Every landlord should allow not less than about a 7% void rate for vacancies and turnaround times between occupants.
Landlords who base their business plans on low-interest rates, short and risky variable loan rates, charging high rents and not allowing enough funding to keep the property in tip-top condition frequently come unstuck.
It is also important to consider cash flow. Like buying a house for owner-occupation, most expenditure takes place initially, and, as the loan progresses, repayments become less onerous. Consider what might happen if outgoings continue, but rent is not forthcoming, or it is necessary to fund an unexpectedly large repair. Is the cash available to keep the business or investment running?
Investors thinking about purchasing a property for rent should carefully consider the financial and management implications. Some other matters to be considered are:
- the demand for rented accommodation in the area in which the property is located. There may already be an oversupply of rented accommodation in many places, including popular inner-city locations, and it could be challenging to find suitable occupiers.
- the sort of market that the property is intended to serve. Each has its characteristics, benefits and problems.
- the potential investment return. It is essential to be realistic about the returns that you can achieve, and it is more practical to expect lower short-term gains and higher long-term profits when investing in property.
- remember that although over time the capital value of property tends to rise, in the shorter term, property prices can go down as well as up and that capital gains made over time on a property that has appreciated are taxable.
- the level of experience in managing property and agreements required. The knowledge and skills needed to be a landlord are considerable, and the penalties for getting it wrong can be severe.
Private Rented Sector Markets and the Relevant Standards
Private renting is increasingly popular and of growing importance as part of the country’s housing stock. When deciding to let a property, it is essential to consider what market that property is entering. Broadly speaking, there are five private rented sector markets:
- renting to those on benefits
- renting to students
- renting to working people
- renting to professionals
- luxury lets or corporate lets at the higher end market.
If the property is already owned, its type and location may already determine the market to be aimed for. If a potential landlord is looking to invest in a property, that decision may be influenced by the area and the type of property they can afford. Different markets will command different rent levels and require different standards and types of letting and management. Some of the issues to be considered are:
- professionals will insist on high standards and will expect showers and sometimes ensuite facilities
- housing benefit renters, whilst commanding a lower rent, are likely to be more stable tenants
- young professionals tend to be more mobile, and this may lead to higher voids and increased re-letting expenses
- renting to sharers or students results in higher occupancy rates, which maximises rental income. However, the wear and tear on a property will be substantially higher with a greater density of occupation. Many students may be living away from home for the first time and may not fully understand their responsibilities towards their property. Renting to sharers and students is also likely to bring with it the need to meet regulatory standards that have been set by the Government in respect of Houses in Multiple Occupation (HMO) and property licensing. These additional regulatory standards acknowledge and seek to address the higher risks associated with HMOs
- student lets may not extend to a full year
- all occupiers will expect a high level of customer care from landlords, and expectations generally rise with the amount of rent paid.
- If a mortgaged property, or a room within it, is to be let, then it is necessary to obtain permission from the mortgage lender. If the property is subject to a long lease, consent may also be required from the freeholder before renting, and there may be a cost associated with this. The terms of the lease will determine this. It is advisable to seek assistance from a lawyer or the local housing advice service where these are not clear.
There are many more options other than standard Buy to Let (BTL) lenders. Commercial lenders have a good appetite for residential property investors, particularly those with portfolios.