The UK’s private rental sector has boomed in recent years, with the number of landlords in the UK reaching 1.75 million in 2013/2014.
Thanks largely in part to the government’s buy-to-let scheme, it’s estimated that landlords will own more than one in three properties in the UK by 2032.
If you are thinking about joining the ranks and investing in a residential rental for the first time, there are a number of things to consider to ensure it generates profit. While a successful property can be hugely profitable, getting it wrong can have the opposite desired effect.
When thinking about selecting your first investment property then, there is some preliminary due diligence that should take place to look at factors such as…
What’s your budget?
Unlike homeownership, the first step when selecting a rental income isn’t the favoured “location, location, location.” In order for your venture to be profitable, you need to calculate the margins to allow for damages, property maintenance, advertising and tenant screening fees, insurance, EPCs, and other things you have to factor in on top of the monthly mortgage payments. Unlike your primary residence, your rental will likely experience periods of vacancy, during which it won’t be generating any income (ARLA estimates the average vacancy period to be around 20 days a year). You should also think about a back-up plan in the event your tenant falls into arrears, or fails to pay at all. Remember, the aim is to make money not to break even, so you should be diligent and formulaic with your projections before thinking about where to buy,
Do you want to buy a turnkey property or renovation project?
The answer to this will, again, be largely determined by your budget. You may wish to buy a new build or a property that has been done up by the seller so that it is immediately ready to market and fill with tenants, or you may wish to buy under budget, renovate, and then let if your budget precludes you from buying new. Of course, you’ll need capital for the renovations, but in heated markets this can still work out to be a less expensive option than buying turnkey.
Consider your tenant demographic – do you want to let to students? Families? Young professionals? This will help you decide the best type of property you’ll need to attain the tenants you want, and therefore help you pick the right area geographically in which to focus your search. While many first-time investors may be attracted to properties they like as they would when house-hunting, it’s important to remember that this is not about what you like, but what your tenants want.
Once you have determined your rental yield, your desired tenant type and your budget, you can narrow down locations for your investment property. If you are in the market for a student property, it makes sense to focus your search on homes near to campuses. Commuters will likely value a property that’s near to transit, while families will often focus a search around local schools. Buying locally has it’s perks – you likely already know the area, which can make the search easier, and you are nearby to deal with tenant or property issues. However, if you live in a small area in which there isn’t a high demand for rentals, you will have to broaden your search. Of course, if you don’t invest in a property that is near to you, or if you choose to move yourself and are no longer close by to manage the property, you’ll need to consider the issue of maintenance.
Rental property maintenance is something you need to weigh up when running your figures and selecting your property of choice. With this in mind, you will need to think about whether you have the time, the know-how and the ability to commit to property maintenance. This means responding to any issues with the physical property itself, as well as the collection of security deposits, rent, and so on. Many property management companies will be able to offer you help in this area, as well as managing tenant turnover, property inspections, post-tenancy cleaning, property advertising and tenant screening. All of this of course costs a fee, but if you build this into your calculations, it could potentially save you a great deal of time. Ultimately, it comes down to whether or not you want to be a hands-on landlord, whether you live locally, and how many properties you have in your portfolio.
Finally, when thinking about your first investment property, you should have an idea for an exit strategy in mind. For how long do you aim to hold onto the property? Is this a long-term property to be the first of many buy-to-let ventures, or something you plan on flipping in a few years? This will help you calculate the costs that come with selling a property and ultimately enable you to decide whether you’re ready for the commitment that is being a (successful) landlord.
FJP Investment is a team of investment specialists sourcing a wide range of investment opportunities both in the UK and overseas. Products include the recently launched Bar Works investment.