One of the key business decisions that a landlord has to make is what part of the rental market they want to aim their residential investment business at. There are a number of sub-sectors within the overall rental market each appealing to different types of tenants. A landlord should be clear about the sort of tenant that they are looking to attract before they purchase their investment property to ensure that they purchase a suitable type of buy-to-let property. The different parts of the lettings market can be summarised as follows:
Young professional tenants (20-30s)
These tenants are employed and require clean, high quality accommodation. They are attracted to locations with good access to work and amenities such as bars & restaurants. Parking can be important for older tenants who frequently own and use a vehicle for work and socialising. The lifestyle of these working tenants means that most are without children and therefore 1 and 2 bed accommodation is ideal.
These individuals whether renting alone or as a couple, are not going to stay in the same place for long. Anticipate that they are likely to vacate the property within a year or two of moving in. They generally look for clean, ‘trendy’ well designed accommodation probably with much of the appliances already in place- such as washing machines, fridge, cooker etc. Their prime motivation is convenience and ‘cool’. Space is not so much of an issue because many will have relatively little furniture and possessions. The good thing is that they are likely to have a fairly high level of disposable income and will be prepared to part with it for the right quality of accommodation. They may have initial difficulties in raising the deposit if it is high, however be wary of reducing it too low because parties and the fact that the relatively ‘footloose’ nature of their occupancy means that minor repairs and letting costs are likely to be proportionately higher than with other types of tenants.
Still singles (30+)
These are people who chose to live on their own and their numbers are increasing. Recent Office for the Deputy Prime Mister (ODPM) stats project an additional 3.8 million households being created between 1996-2021. 71% of these will involve people living alone. ‘Still Singles’ have passed the ‘funky’ stage in terms of interior design, so something a little bit more subdued; neutrals are always good. Generally, unless on short term company lets where they have moved for short term work reasons, they are likely to be a little bit more stable than their more ‘dynamic’ younger brethren. Being slightly more mature, this group attaches more importance to home comforts such as dishwasher and car parking; in some cases a garden will be a selling point for some green fingered occupants.
This category of tenants comprise of those individuals that find themselves single after a failed marriage or relationship. Their financial circumstances can vary from the very wealthy to being extremely short of cash following for example expensive divorce proceedings. Their requirements are likely to vary depending on the circumstances of their break up. They may have a houseful of possessions that they are looking to relocate; or nothing at all, having moved out at speed. They might also be in the process of forming another relationship and use your property as ‘stop gap’ accommodation, in which case they probably won’t stop long.
These people could be single or with families and are often well paid professionals that need to move because of their job. Their requirements are likely to depend on their age and family circumstances. In the case of a single person, moving to accommodation to for fill a temporary assignment it is likely that they will require fully furnished accommodation, including all domestic accessories such as: cutlery, pans, bed, furniture, curtains etc. Where the relocation may be permanent for a couple or family, they in turn are likely to want an unfurnished place where they can move all their belongings into. The let in the case of the former is likely to be relatively short. The other situation may involve a relatively long-term let, especially where children are involved. In this case the quality of the local school will be an issue. Equally if the job move is permanent, the let may only be for the duration where a property for purchase is identified and bought. In both cases high rents are realisable reflecting the availability of a company relocation package. In all cases tenants will demand clean, well-appointed accommodation and car parking is likely to be required. This type of tenant often has their rent paid by their employer for part if not all of their stay. Where the tenancy is signed between the landlord and the tenants company they are known as a company let. Great if you can get them because normally you are able to charge a premium. In return the tenants are often quite demanding. I had a case where I let a house to a Japanese businessman. After the initial end of the 6 month Assured Shorthold Tenancy (AST) let we negotiated a new tenancy with additional services such as gardener and a ‘new gate’ thrown into the bargain. In return the rent was increased by 25% and the contract length doubled. A true company let actually involves the company taking on the liability of the tenancy and therefore the tenancy will be different to that of a standard Assured Shorthold Tenancy (AST). Others are still effectively company lets but operate by the tenant taking on the AST and then claiming the rent back from their employer in the form of expenses. I would always advise that if you get a company let, try and think creatively. Are there any services that the tenant might want and could legitimately charge back to the company? After all, they are not paying and if it makes things better for them, they are happy. You as the landlord get a higher rent or and possibly an improvement to your property, you are happy. The employer is happy that their new employee is happy; everybody’s happy!
Nearly a QUARTER of families are renting or still living with parents. Things such as gardens and schools are likely to play a crucial factor for these types of tenant. It has been predicted by the Alliance and Leicester that family renting will contribute 39% to the growth of the private rented sector by 2014. Family renters offer some advantages to renting to singles in that they are more likely to stay past the initial six month term of any tenancy agreement and many will stay for several years. The downside for a landlord of this type of tenant is that the rental yield on renting a house is likely to be slightly less than that achievable by renting to singles occupying smaller accommodation. This is not always the case, particularly where there is a corporate let where the premium a landlord receives for letting to a company could more than compensate them for the lower rental yield.
Social security / housing benefit
People receiving housing benefits are often unemployed or as is increasingly likely, on disability allowance. Their means are by definition limited. This does not automatically make them bad tenants. Under the previous system the rent was frequently paid directly to the landlord meaning that rent was generally guaranteed. However, since April 08 a new system called the Local Housing Allowance
has been introduced
This new way of paying benefit means that the rent is paid to the tenant which means that the landlord no longer has the guarantee of being paid and will have to deal with the tenant in the same way as a normal tenant. Many commentators fear that this new way of paying benefit will lead to landlords having to spend more time and effort chasing payment from their tenants and ensuring that they get paid. This is something that landlords and in particular inexperienced landlords should factor in when considering what types of buy-to-let property and what sort of tenants they wish to rent to.
The continued expansion of student numbers over the last 10-15 years has meant that demand for accommodation in University towns has remained strong. The result has been that demand has outstripped supply. However, during the last 5 years there has been the rise of specialist companies such as Unite, Jarvis and Victoria Halls that have developed blocks of large-scale student accommodation in university towns and cities. This accommodation is far from the downmarket model of student digs that I grew up with. It aims to offer new, high quality almost hotel style accommodation with additional on site facilities such as broadband computer access, laundry services and shop. However, all these services come at a price. Accommodation such as this is aimed at the top end with much of it going to wealthy foreign students. The number of these coming to the UK is still growing strongly, particularly from the Far East and China.. These types of students together with post graduate or slightly older students demand higher levels of comfort and facilities than might be acceptable to undergraduates. They often also look for accommodation away from inner city neighbourhoods in more suburban locations where conditions are quieter and perceived personal security is higher. In summary, these tenants are looking for reasonable quality accommodation and comfort and are prepared to pay for it.
Undergraduates, i.e. students completing their first degree and (typically 18-22 years old) are and continue to be less fussy about the quality of area that they live in. It is often perceived as part of the student ‘rights of passage’ to spend some time in ‘culturally vibrant’ urban areas. In fact, in my work in urban regeneration, students were often used as the first wave of residential ‘colonisers’ in urban areas without an existing residential community. Students have been at the vanguard of re-urbanisation in towns and cities across the U.K. The pattern is, student accommodation, followed by expensive apartments and then, more even more expensive apartments. These signs are something to look for in spotting up and coming areas of which more later.
Despite a high tolerance to the nature of the area, all students will look to have good access to their university by public transport, walking or cycling or more often these days by car. Areas that have this will probably already have a large population of students. If the area is outside these, then make sure accessibility is not going to be a problem. Students, particularly undergraduates are going to be less demanding in terms of standards of accommodation than a professional looking to establish a home. It is after all probably a let for a single academic year and they will be very likely to move on to a place of work or another form of accommodation after that time.
The universities have responded to these problems by establishing accommodation offices that deal with private rented property. Landlords can register with these and get themselves placed on a list available to students. However, the universities will insist that a certain standard is reached in terms of furnishings, safety and decoration before there’re included.
Non standard tenancies
There are several types of lettings which are outside the standard letting governed by an assured shorthold tenancy agreement. These are company or corporate lets
and holiday lets
and regulated tenancies.
Company lets are where a landlord lets their residential investment property to a company rather than an individual tenant. In order to do this a landlord will need a specific type of tenancy agreement. Company lets can be very lucrative in that corporate tenants are often prepared to pay a premium in order to accommodate their staff and keep them happy. Landlords letting high value properties where the annual rental is above £25,000 pa also lies outside the provisions of an assured shorthold tenancy.
Finally there are also what are known as regulated tenancies.
These tenancies and the tenants are not subject to market rents and landlords buying these properties have to accept that they come with sitting tenants.