1.2 Investing in a Property
Investing in a private rented property can be achieved in a variety of 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.
It is important that an investor (and all landlords must see themselves as investors), before investing in a property, undertakes 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 on the loan, 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 with 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: repairs, gas and electrical servicing, annual maintenance, cleaning, garden maintenance and so on
- the ongoing investment that will be required to maintain the fixtures, fittings, decor and services (boiler, white goods, grey goods and furnishings – if let furnished) in good condition
- who will be responsible for the property while the landlord is away on holiday, business or is unavailable because of illness.
Whilst property investment thrives on optimism, it is also important to be realistic about the level of rent that can be charged and to allow for some period when the property might be unoccupied between lets (voids) and to 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 basing 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. Just like buying a house for owner-occupation, most expenditure takes place at the beginning 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 to let, should consider the financial and management implications very carefully. Some other matters to be considered are:
- the demand for rented accommodation in the area in which the house is located. In many areas, including popular inner city locations, there may already be an oversupply of rented accommodation and it could be difficult to find suitable tenants.
- the sort of market that the property is intended to serve. Each has its own characteristics, benefits and problems.
- the potential investment return. It is important to be realistic about the returns that can be achieved. When investing in property, it is more realistic to expect lower short-term gains and higher long-term profits.
- 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 in value are taxable.
- the level of experience in managing property and tenancies required. The knowledge and skills needed to be a landlord are considerable and the penalties for getting it wrong can be serious.
1.2.1 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 important 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 tenants
- renting to professionals
- luxury lets or corporate lets at the higher end market.
If the property is already in ownership 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 location and type of property that can be afforded. Different markets will command different rent levels and will 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 can maximise 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 high risks associated with HMOs
- student lets may not extend to a full year
- all tenants will expect a high level of customer care from landlords and expectations generally rise in line 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, permission may also be required from the freeholder before renting, and there may be a cost associated with this. This will be determined by the terms of the lease. Where these are not clear it is advisable to seek assistance from a lawyer or the local housing advice service.