Partner, National Head of Lettings
Purchasing a property to let can be a good investment – but you need to know what type of home to buy. Kate Eales, Strutt & Parker’s national head of lettings, looks at what makes a good one…
When investing in a buy-to-let (BTL) property there are a number of factors to take into account from location to condition of the property.
A growing market
While changes to the stamp duty levels on BTL purchases have caused a slight drop in the market, it’s still a strong one that has been growing for some years.
The BTL mortgage market accounts for 14% of all new lending in the UK, according to the Council of Mortgage Lenders, and the market grew from just 840,000 mortgages in 2006 to 1.8 million by the end of 2015. The value of these mortgages rose from £93.2bn to £214bn over the same period.
Since the above figures in 2015, a stamp duty rise of 3% has been implemented on additional home purchases from April 1, 2016. Therefore if you combine the primary purchase Stamp Duty Land Tax with the additional 3%, one would pay 3% for the first £125,000, 5% on the portion between £125,001 and £250,000, and 8% on the amount above £250,001.
But figures suggest this hasn’t dampened the market that much. In March 2016, just before the new tax, the number of BTL house purchases rose significantly from 8,800 in March 2015 to 28,700 in March 2016.
And while that dropped off in April (directly after the tax came in) to 4,200, it has started to climb back up to pre-stamp duty levels with the most recent figures for December 2016 putting it at 6,400 purchases.
But this strong market has brought up another matter – the competition from high-end, build-to-rent properties developed by institutional investors. These will have plenty of add-ons and amenities, be super modern and often come furnished to a high standard. These are your competition so any property needs to match or better them.
What to look for…
Financially, there are a lot of aspects to consider from rental yield to management fees. But when it comes to the actual physical building and what you should be looking for, these are the questions you need to ask yourself…
Is it the right location?
There are a few things to consider when you’re choosing somewhere to start looking. There are the usual house-buying items to tick off – like being away from main roads.
But there are more rental specific ones to consider, such as making sure it’s close to transport links as many renters do so for work and will want a quick commute; and that there are plenty of local amenities. People renting might be living alone and want to get out to restaurants, bars and shops.
Then you’ve got to consider your potential property’s location with regards the local rental market. Make sure there is a demand for rental properties – it’s no use buying the perfect rental property if there’s no market for it nearby.
Is it a suitable property type?
While most good quality properties can be rented out, there are some that suit the UK’s rental market better – 1 or 2 bed flats.
These are the most likely to get good rental returns over a long period. If you’re going for a 2-bed property, make sure the bedrooms are of roughly equal size. This will mean it’ll more appealing to friends who are renting together.
New builds are a good option, as they require less maintenance than older or period properties. But check what’s included in the building and how it’ll affect your bottom lines. Features like on-site parking, gyms and a concierge service are all great and will attract potential renters – but they will also add to the cost of the service charge, which usually isn’t passed on to the tenant. But these are costs worth paying as they appeal to most renters.
On the other hand, something like a swimming pool will increase your service charges massively but won’t increase the demand for that property enough to cover the additional costs.
If there are a number of additional services offered you’ll need to either have professional managing agents to make sure these are kept in good condition or make contact with a selection of good locally-based contractors to respond to issues at short notice.
For those looking at a property in a new build rental scheme, consider ways to differentiate it from others in the building, such as using better furniture, or looking for the best property in the building – e.g. penthouse apartments, those with the biggest balconies or best views, or ones away from noisy stairwells and lifts.
When buying older properties, consider if it can be sub-divided. Many Victorian terraced properties in city centres have been bought as family homes and converted into flats. If you’ve got the budget, these can make great investments.
What will it be used for?
The usage of the property is also important and will shape your decision on what to buy. Yes it’ll be rental, but there are a variety of rental markets.
Are you looking for long-term rents? This is usually professionals in city centres so look for smart, centrally-located properties. The student rental market is strong in big university cities, but you’d be looking at lower value properties and probably rent them out unfurnished or furnished with basics.
Holiday lets can provide higher income but for shorter periods and will often be located at a greater distance from you, making up keep and maintenance a bit harder.
What condition is it in?
As mentioned, many new rental properties are being built specifically for the rental market and so will be smart, modern and in good condition.
There is still room in the market for you to buy a property that needs a bit of work, but opt for a property to which you can easily add value – something that’s a bit rough around the edges but a bit of elbow grease could get looking good.
Look for properties with in-built storage. As many modern flats don’t come with this, find ways to add some new wardrobes and clever storage ideas. Things like shared storage in the basement, cupboards in the hallway or even garden sheds are good selling points to renters who might be downsizing.
If you’re buying a home that’s in a conversion property, check the standard of the communal areas. Shared lobbies, gardens and even libraries are becoming desirable features – but they need to be of the highest standard and in good condition. After all, they could be the first thing someone sees of the property.
Inside, it pays to be a bit flexible on furnishings. Hire some local storage so that you can offer a flat either furnished or unfurnished. Show it as furnished but make it clear you’re willing to store it if they want to bring their own.
Take a look at our range of 2-bed flats that could make ideal rental properties.