Selecting a Property Investment
How to select an investment property
There are a number of steps and considerations a landlord must go through if they are going to select a successful buy-to-let investment. This article takes a landlord through the critical things they need to consider in their investment selection strategy looking at the key attributes of the investment property and how a landlord needs to evaluate their ultimate investment property.
Landlord must use their heads
For many first time landlords looking to buy their first buy-to-let it can be difficult to divorce themselves emotionally from their property purchase. Many first time landlords will approach their property purchase as if they were buying another home. Wrong! This is dangerous because you are not selecting a home for yourself to let. It needs to be a hard nosed business decision where a big part of the decision will be based around the type of tenant and lettings market you are looking at getting into. Having said that a new landlord is right not to divorce themselves totally from any personal or emotional reactions to a potential buy-to-let. This is because if the property leaves you feeling cold and uninspired and wanting to walk on buy then there is every chance that the same will be true for any prospective tenants.
A landlord needs an investment budget
Key to any successful property investment or any other investment is having some understanding of the budget and the expected returns. A landlord needs to be realistic about how much they can afford and what kind of potential returns they will make. We have written in some detail about calculating returns
on your potential investment property. When your look at returns this will come in the form of capital appreciation as hopefully your property rises in value and also your rental profits. Historically, you should be targeting a double digit return over the long-term. When it comes to budget the most significant factor will be where a landlord wants to buy their property. If you have a budget of £150,000 and you are looking at buying in Central London you probably will be disappointed and won’t be able to make a successful investment. That budget in Manchester is likely to yield a decent property. Remember it’s all about the ratios and multipliers. A million pound investment should clearly produce a large actual return on the investment. But say a £20,000 annual return may sound impressive but works out at a mere 2% on the capital sum. A very modest £5,000 annual return doesn’t sound impressive but if you have only invested £50,000 it equates to an impressive double digit !0% return. So read our article and understand that what ever your budget to secret of success is the yield and the multiplier effect on your initial capital investment.
The strategy for selecting a property investment
The type of residential investment property that landlords choose will be largely derived from the type of tenant they want. Tenants in the bottom and mid range part of the market are reasonably flexible about style, as long as it’s not too ‘in your face’. All tenants want somewhere that is well maintained and clean. If a landlord is aiming for upmarket tenants then a place that has a ‘wow’ factor is important. This can be created by buying a property with impressive architectural features or taking somewhere, which might be bland from the outside and refurbishing it to create a modernist palace. Landlords should remember the 3 pillars of buy-to-let.
Top end lettings are ‘risky’
Some landlords like to specialise in upmarket lets by purchasing ‘trophy assets’. Going for the ‘top end’ is high risk, especially for a first time landlord. By doing this a landlord will be aiming at a very small proportion of tenants, may be 5-10% of the market. Whilst in London demand for this type of rental is well established because of its international nature and high numbers of ex pats, out in the provinces, even in the biggest cities you are only talking about a market of hundreds of tenants. Therefore, if demand slumps or a landlord doesn’t get it right, they might not achieve the premium rents they need to justify their investment.
One attraction of an upmarket rental property is the reduction in management responsibility on their investemnt, Simply put, a property that is three times the value of others can bring in the same return on investment for a third of the management responsibility, in comparison with three separate rental properties.
You could also reasonably hope that the quality of the tenants in a higher priced rental will mean that the tenancy should be relatively trouble free. This however is not always true.
The risks however are focused on a singular high cost asset, and if the rental property remains unlet it will be a huge drag on a landlord’s finances. The saying ‘eggs in one basket’ comes to mind.
Mid market rentals are less risky
A less risky approach for landlords is targeting mid-market tenants, and purchasing a ‘cash cow’.
By going mainstream a landlord can access the largest pool of prospective tenants. It is also possible to buy property more cheaply in areas that are improving. A landlord could pick up a bargain in these areas and then refurbish so that they are still attractive to tenants, who might not normally consider living in these locations. The landlord should then achieve a higher than average rental yield, as well as securing an investment ‘play’ on ‘gentrification’ or area change.
Traditional terrace houses provide a good stock of property that can be upgraded relatively easily and cheaply. They can provide spacious living conditions for tenants and are always popular particularly with couples and sharers. Landlords should consider 60’s and 70’s houses for their space and light and relative cheapness, which in expensive areas can often be seen as ‘ugly ducklings’ and as a consequence are a ‘bargain’. In London ex local authority blocks offer good build standards and low maintenance costs and service charges for landlords. They don’t always look great from the outside but to tenants this is probably less important than a nice new kitchen and bathroom. Landlords should make sure that they can get a mortgage, as not all lenders will lend on ex local authority stock.
Council houses on the better estates can also be bought relatively cheaply and are ideal for couples or small families. These post war houses are often semi detached properties with parking and gardens and have two good bedrooms and a box and are generally light and airy. Landlords should make sure they do your homework properly. The last thing a landlord wants to do is to buy into a ‘sink’ estate surrounded by council tenants and their social problems. On the other hand these working class areas mean that often people who have grown up in the area and want to live close to friends and family will prove willing tenants. A landlord may have to be prepared to accept tenants on benefits so make sure that you understand the full implications of this by reading the relevant section in the Landlords Bible.
General ‘kerb appeal’
If promising areas exude charisma, what makes individual properties attractive? External appearances unsurprisingly are important when it comes to the letting and off course the sale of a property. The old adage that ‘first impressions count’ is very true. In the new build market this is known by developers as ‘kerb appeal’. Making a favourable impression by having a well appointed exterior or common areas (in the case of flats) will do a great deal to attract a potential tenant/ or purchaser.
What gives a property ‘kerb appeal’? It can be any number of things. Often they are small; nice door, a feature window, an attractive garden. These factors can often be added with relatively little work or expense, so bare this in mind in your viewings. A new door, or creative landscaping, can all be added later if the property has underlying potential.