Looking to invest in rental property? There are many things to consider before getting involved in buy-to-lets.
Whether you’re trying to increase your portfolio or you are just getting on the ladder, it’s worth keeping these key principles in mind when choosing a rental property to invest in.
Here’s a comprehensive guide to rental property investment.
Is Investing in a Rental Property a Good Idea?
In short, yes. Rental properties are very attractive to landlords as mortgage rates and interest rates are low and rental return is high. The current housing market means that there is a great demand in tenants looking to rent.
As a landlord, you need to have a business plan for rental property investment. It’s worth familiarising yourself with how much mortgage interest you will be able to claim and what income tax you will need to pay. By 2020, landlords will get a 20% tax credit on their mortgage payments which may push some property owners up a tax bracket.
Before investing in property, you will also need to consider stamp duty, how much maintenance costs will be and whether you need landlord insurance.
Once you’ve decided you will buy a property, there are some significant factors you need to take into account.
Choosing the Right Area
This is the most important thing to consider in real estate. You need to perform market research to work out whether you will get a good return on your investment.
It may sound simple but choose an area that renters would like to live in. There will be a price growth for properties bought in up and coming areas. You will get a higher return by investing in a developing area. Consider:
- Transportation links
- What are the local schools like? (if renting to families)
- Are there enough shops, restaurants and businesses?
- Is there a university?
- What are the other properties in the area like? Do the neighbours correlate to your desired tenants?
This needs to be an area that your tenant will be able to afford.
Carefully consider how much rent to charge. Ideally this will be competitive for the area.
If you’re renting to students or younger tenants, they will be unlikely to afford high rent prices. You need to calculate the percentage of rent return compared to your mortgage rate.
What is the neighbourhood like for insurance premiums? Is the house likely to be broken into? Will you need to pay excess? These are all questions you must ask regarding your property.
Do you want to buy a rental property that is close to where you live or work? Being close to your property will allow you to monitor it if your tenants need assistance. However, there may be better areas further afield. If your property is not in a convenient location, you can hire a property manager to look after it.
Decide which cities to invest in by researching average rental yields. Invest in Manchester or areas surrounding London. Colchester, Essex had the second best rental yield after Manchester.
Choosing The Right Tenant
Deciding who you will rent your property to will inform what kind of property you will invest in.
It is important to choose the right tenant. These are some factors you need to consider about your tenant:
- Their age
- Is it a family? (E.g. single family or two income family)
- What is their financial situation?
- What do they want out of a rental?
The type of tenant you rent to will affect decisions you make about decorating your property, where the property will be located and the type of property you choose. To secure the best tenants, perform a tenant reference check.
Is it worth renting to students? If you decide to rent in a student area, you need to be aware of the benefits and pitfalls of this. There will be a consistent turnover of tenants who will keep your property from sitting empty and generate cash flow. However, students can be unreliable and do not always treat the property well. Maintenance of the home may cost you more in the long term.
The Type of Property
The type of property you choose will dictate what kind of tenant you will have. If you invest in a HMO (house in multiple occupation) property, it will likely be occupied by tenants aged between 22 and 30. A four bed house will be well suited to families or, you can convert a house into several flats and have multiple tenants.
This depends on what kind of landlord you want to be. Do you want to be hands on or would you prefer to outsource to a letting agency? Consider your schedule and your expertise.
What is the Condition of the Property?
You need to think about how much upkeep your property will need. If you want to invest in a property that needs renovating, you need to take into account the amount of time and money a renovation will take. In the long term, you may be able to charge a higher rent which will be a better investment.
Choosing to buy a home that needs little upkeep will be better for landlords who wish to receive a passive income. Tenants will not require as much assistance and you will not need to be too hands on with your property.
The Tenancy Agreement
Creating a good tenancy agreement is fundamental to your investment. Seek legal advice before choosing a rental property. This contract will set out what is expected from your tenants and how you will be expected to act as a landlord so it’s important to get it right.
For a standard tenancy, ensure your agreement covers the following:
- A full inventory of the home
- Clauses regarding the deposit and when it can be withheld
- How you expect the tenants to treat the property
- When the tenancy can be terminated
If it is a HMO property then you may need a license from the council. Your property may fall under the general definition of a HMO but might be exempt from licensing laws. Seek legal advice if you are unsure if this applies to you.
Seek out a tenancy template that will help you draw up your contract and familiarise yourself with the relevant bylaws.
It is important to prevent void periods. Choose trustworthy tenants who will occupy the home for long periods and try to be an organised and efficient landlord. If a tenancy is coming to an end then be sure to advertise your property as soon as possible.
How to Market Your Property
Once you have bought a rental property, you need to be able to market it successfully. You will find the best tenants by thinking about how to market to them.
- Advertise the area your property is in and the benefits of that location according to what your desired tenant would be interested in. For example, a group of professionals are likely to be drawn to somewhere with good transport links for commuting
- How is your property decorated? Is it furnished? What kind of facilities are there?
- What is the length of the tenancy and how much will the rent be?
- Describe the property as accurately as you can
The easiest way to market a property is by using a letting agency. They will be able to do the work for you, such as arranging newspaper advertisements and showing prospective tenants round the property. Agents will also be in charge of collecting deposits and rent payments and drawing up tenancy agreements.
Using a letting agency does not mean you won’t be involved with the management of your property. You can choose how much work you want to delegate to an agency and how much you want to do yourself.
It is important to look after your investment. For help with your property, use No Letting Go inventory services. We can conduct full reports on your properties so you can be confident that your investment is secure. Browse our full list of services to find out more about how we can help.