Whether investigating buy-to-let for the first time or mulling over the next property in your expanding portfolio, you need to be clear about what you are looking for. There are healthy returns to be made – an annual average of 9.7% according to recent figures – but these will only come from knowing the risks and planning sensibly. Finding the right property is an essential part of this. So here are the key things to get straight before heading out to find the property of your (or, rather, somebody else’s!) dreams…
- Who do I want to rent to?
‘As many good tenants as possible’ is a decent answer, but it’s a little vague. Have a real think about this because different groups have different needs and renting patterns. Students, for example, should be low-maintenance and generate a very regular income but they can be very messy. And then there are the groups within the groups: smokers, pet-owners and tenants receiving benefits. You may have to trade off some peace of mind to reach the largest possible market. Once you’ve got an idea of what you’re comfortable with, you can search efficiently and will have a headstart when it comes to decorating and advertising.
2. Where should the property be?
Think locally when possible. 56% of landlords live within 10 miles of their rental property and the appeal is obvious: Local knowledge will be a great help in finding the right property and, once you’ve found it, it will be easier to manage yourself, saving on agency fees. Explore further afield if your finances and tenant requirements dictate it. But research it thoroughly and accept that you’ll probably need someone to manage the property for you. Once you are familiar with an area you can narrow your focus to important amenities such as shops and transport links.
3. Is your focus net rental yield or capital growth?
Net rental yield is simply the return you get from rental income less costs. Capital growth is the increase in the property’s value over time. They tend to be at odds with each other because properties with strong capital growth generally have high operating costs, which cut into income, while those with consistently high yields tend to be in areas with large populations who cannot afford to buy, meaning capital growth is limited. Net rental yield will give you a strong regular income but capital growth will be more profitable in the long-term.
4. Will I be able to cover my costs?
Budget carefully and include a few months of arrears in the calculations just in case. Research typical mortgage rates, average rents and patterns of capital growth for the area you are keen on and make sure it can balance out. Also find out where you can make savings. Many landlords do not realise just how much they can claim back from the taxman as business expenses. There are also a few helpful tax breaks, which are always worth investigating.
5. What type of property should I buy?
The golden rule (there’s always a golden rule somewhere…) is to remember that you are not buying a property that appeals to you, but one that appeals to the greatest number of tenants. Try to look past superficial problems and think about the potential of the property and the primary concerns of your target market.
Image: From PT Money, licensed under Creative Commons