Owning and letting property is no small undertaking, and there is much to consider before making an investment in rental property – even before you buy. We look at how you can ensure the property is a good investment match for you, so you can buy a property that can deliver the type of let you want as well as your financial goals.
Property investment can help you to achieve your financial objectives, but it is not right for everyone. The first thing to consider is your financial objectives. The right rental property might:
- provide you with a regular monthly income;
- be an investment in which to increase equity in exchange for a lump sum later in life; or
- provide an asset that can be passed on to your dependents.
In most cases, landlords invest in properties local to themselves. If you intend to be a hands-on landlord, this may be the best option for you. However, good investment properties exist in all areas of the country.
You do not need to want to live in the property yourself, so you should only look at a potential investment in terms of what a tenant would want. You need to consider the type of tenant you want to attract. A three bedroom unfurnished house will provide a family home, and these are in big demand in most areas. However, if you would prefer to concentrate on rental income, it might be more profitable to invest in a furnished flat or HMO that appeals to young professionals and students.
The costs of buying rental property are different from those when you buy your primary residence. Stamp duty is payable at a higher rate for second properties and the tax is applied to the full price of a property valued at £40,000 or more. However, the stamp duty paid can be deducted from capital gains tax should you come to sell. Purchasing a buy-to-let property using a limited company can provide other tax benefits and this method of investing in rental property is becoming more popular.
Whichever way you buy, you will need to budget for any works required to bring the property in line with lettings standards. These include refurbishment, upgrades or furnishing expenses. In particular you should factor in electrical and gas safety checks as well as health and safety considerations, including fire regulations.
There will be ongoing costs in addition to buying and preparing the property for letting, including mortgage payments, landlord’s insurance, ongoing gas and electrical safety checks, and any local council licensing fees and make provision for ongoing repairs and maintenance.
Allowance should be made for potential non-earning periods between renters. Not only will be there be a loss of rental income, but council tax is still payable on empty second properties and in some areas may even be charged at a higher rate.
There is a degree of contract knowledge and responsibility for landlords letting out property to ensure it is (and remains) legally compliant and well managed. Both the landlord and tenant have rights and responsibilities and failure to observe the law can result in hefty fines. This responsibility can be offloaded by appointing an agent, albeit for a cost, and the agent will also be able to handle tenant queries, rent payment issues and the complicated process of evictions. However, an experienced, professional agent can result in savings that outweigh the fees involved.
The key figures when assessing the return on a letting property are yield, profit and return of investment (ROI).
The yield is the percentage of annual rental income as a proportion of the property’s value. Profit is the amount of rental income left after costs have been deducted (including any allowances made for non-earning periods and major maintenance works). The ROI is the amount of annual profit expressed as a percentage of all the money you have invested (including equity growth and inflation on any cash used in the purchase). This figure can be used to compare your investment with other financial products available for the same investment.