With property values in London rising at a surprising rate, there are very high numbers of investors searching for buy to let (BTL) property, many of whom are first timers in this field. Sales prices are at an all-time high so it’s important for investors to ask the right questions before purchasing, to minimise any potential risks or void periods.
What is my long term aim?
It is almost impossible to buy a property that will offer both a top end rental yield as well as good capital growth, so it’s sensible to choose which is most important to you. The best question to ask yourself here is how long do you intend to keep the property before you sell it on again? A good rental yield is better suited to those preferring a short term investment while capital growth will be achieved through holding your investment for longer. It’s important to take tax advice for either option as Capital Gains Tax and tax on rental income are calculated differently.
What style of property do I want to buy?
This is the next most important decision to make. New build homes are often very popular among young professionals and require minimum maintenance, however they can be more expensive to purchase and after a few years, might not look quite as new as they once did. Period properties meanwhile are also very popular but may require additional funds to modernise after purchase and can also prove costly to maintain in the long run if things like the boiler break. Period homes do however tend to hold their value well and are the most likely to benefit from high levels of capital growth in the long run, although they also tend to have the poorest rental yields. Ex-local authority flats are a good option for savvy investors who want to target the cheaper end of the market. They tend to sell for significantly less than other homes in the area and rental values are often comparatively very good, which results in a very attractive rental yield. Capital growth on these homes is not normally as much as other styles however.
How much competition is there in the market place?
Because the lettings market is dependent on the levels of supply and demand, which dictate the rises or falls in rental prices, competition is a huge factor for many landlords. New build properties and ex-local authority flats in big blocks can often prove tricky as there can sometimes be a few of the same property available at the same time which results in more choice available to tenants and therefore a great opportunity for them to negotiate down the rental price. Opting to buy a property in a smaller development rather than a large scheme with many units can therefore prove more beneficial because in a softer lettings market there will be less properties in the building to compete against. Similarly, landlords need to think about the number of bedrooms they are offering as often there can sometimes be an oversupply of a certain size such as one or two bedrooms, with not enough tenants looking to match the stock available.
Who is my target market and what are their requirements?
Finally, consider your target market. Areas with good transport links, a vibrant high street and a good selection of one and two bedroom flats are usually in high demand among young professionals and couples keen to be near to the City. Somewhere a little further out of town, located within a good school catchment and which is relatively safe and with a good community feel is always in high demand among families and so larger houses are usually preferred. Also consider the type of person who will live there and look after your home. A well proportioned one bedroom property with a private garden will normally let better than a smaller two bedroom flat, because couples often prefer private outside space over paying extra for a small second bedroom for occasional use. Sharers on the other hand, prefer two similarly sized double bedrooms with a garden as a bonus, not a must have, so this is important to bear in mind. A shared garden is often not very sought after as most tenants who ask for outside space want to know it is for their own exclusive use. For the sharer market, a good investment can be a three or four bedroom property as often there are fewer of these size properties available but quite a lot of demand. Most people letting a house this size prefer to let to families, so when they come available, the limited stock available ensures they hold their value well. A key thing to avoid however is going larger than five bedrooms over three levels as this then falls into more complicated and expensive HMO (houses with multiple occupation) territory where a licence is required from the local authority.
The best thing to do before buying your investment property is to speak to your local lettings agent, especially the one you hope will find you a tenant. The longer they have been in the area, the better they will know the seasonality of the lettings market and will be able to advise you on exactly what kind of property you should be thinking of purchasing.