How to Search for a Buy-to-Let Investment
With an investment property you would follow the same advice set out in previous pages. The difference is you must consider the properties investment potential and yield (the rent per year divided by the cost of buying the property). Let’s look at what you should consider:
1. Yield. The success of a Buy-to-let investment property is decided at the purchase stage. You make the most money when you Buy a rental property – not when you rent it or sell it.
What do we mean? Buy at the right price. Unlike buyers who want the property as their home, where emotion or availability can dictate a purchase price above the rational market level, psychology and emotion should never play a part in a buy-to-let purchase. Only business reasoning should prevail.
Yield is the return the property gives you each year. In basic form that is dividing the rental income you receive per year by the cost of buying (purchase price + stamp duty + costs). This is the gross yield. The net yield is attained when you remove the costs like maintenance, managing agent or estate agent finders fees, mortgage interest and so on. In London gross yields on current purchase prices are commonly as low as 4%. While this may seem better than having money in the bank, you are putting yourself at risk by leveraging yourself (taking out a mortgage) and then the net yield (what you actually take home) may only be as good as interest in a bank account (both will attract tax).
You should aim for at least 5 to 6% gross yield, yet you can’t sacrifice quality to get this, so read on:
2. Buy to Let investments need to be rented. So you must research if there is demand and will always be demand for the property. Location and Condition are the keywords when it comes to rentals.
Convenience is important: a buyer may be prepared to walk 30minutes to the train station, but renters pay for convenience and will walk for no more than 15minutes. Being close to tube and train stations, shops and supermarkets makes a big difference in attracting tenants. A feature such as off street parking, when neighbours have to park on the road, or a bathroom per bedroom will move up the demand and the rental price you can achieve.
When it comes to Buy-to-let flats, 2 bedrooms is often a good bet as tenants like to share to reduce costs (not just the rent, but also utility bills). Difficult to find, yet worth the effort are 2 bedroom flats where both bedrooms are a similar size. Generally you’ll find one larger bedroom then a smaller ‘box’ bedroom. These can be hard to rent as sharers are often ‘equal’ in their needs and no-one will want the small room, especially as many can only fit a single bed once wardrobes and storage are added. 2 bedrooms and 2 bathrooms is the real key to renting success – it’s okay if one is a smaller ensuite, as long as the bedrooms are both a good size. One bed flats still make good rentals, however the emphasis should certainly be on proximity to shops, transport and leisure facilities. 3 bedroom flats are mainly for the student market. Families will look for houses with outdoor space, professionals commonly hunt as pairs, so a 3 bed is likely to only find student renters. Keep this in mind and remember that the rental will likely be lower if going for the student market (this means you may also want to decorate / refurbish to a lower standard). Wear and tear is likely to be higher too. Prime Central London is probably the only area where 3 bed apartments can rent more easily. Wealthy couples with children, especially international residents, are more open to flat living. Unless it’s Knightsbridge, Belgravia or the finest garden squares in Chelsea, we would be cautious.
Houses will rent well from 2 bedrooms upto 4 beds. 2 bedroom houses should apply the same rule as flats – similar size bedrooms. 3 bed houses are the most commonly sought after rentals. 2 bathrooms will help you rent faster, but isn’t a necessity. Outdoor space/ gardens are required, unless it’s a Mews house in central London. 4 bed houses are still in good demand however renting them can take longer, so prepare for bigger void periods. 5 beds+ is a distinct market. Despite bigger families and amalgamated families where 2 partners have children from previous relationships, the 5-6 bed market should be well researched before buying a rental investment. Is there a particular demand indicated by local agents? Are there alot of international families moving to the area for work?
HMO’s – a House in Multiple Occupation applies in the following cases:
- A house or flat let to 3 or more tenants who form 2 or more households and who share a kitchen, bathroom or toilet.
- A house which has been converted entirely into bedsits or other non-self-contained accommodation, let to 3 or more tenants who form two or more households and who share kitchen, bathroom or toilet facilities.
- A converted house which contains one or more flats which are not wholly self contained (ie the flat does not contain within it a kitchen, bathroom and toilet), which is occupied by 3 or more tenants who form two or more households.
- A building which is converted entirely into self-contained flats if the conversion did not meet the standards of the 1991 Building Regulations and more than one-third of the flats are let on short-term tenancies.
- In order to be an HMO the property must be used as the tenants’ only or main residence and it should be used solely or mainly to house tenants. Properties let to students and migrant workers will be treated as their only or main residence and the same will apply to properties which are used as domestic refuges.
There are specific, very stringent regulations if your rental property is classed as a HMO under the above guidelines. You will have to licence your property. You should certainly seek legal advice and check this page which provides government information.
3. Look at the rentals on the same streets or close-by to the sale properties. Are there lots of rentals available or only a few? Competition is not a good thing.
Careful where supply is heavy: new developments, developing areas where big blocks of flats are going up will mean lots of competing buy-to-let investors.
4. Ask to speak with rentals teams of Estate Agents you are registered with: get the top 5 elements of the most in demand rental properties and ask them for the best streets. It’s also good to speak to a rental agent that doesn’t have a sales department as they will be less biased.