29 Mar 2019 - Peter
This guide explains the essentials of making profitable investments in buy-to-let property in the UK. We regularly update this guide to explain how to assess potential investments and make a profit, so bookmark this page to revisit next time you purchase a property. Last Updated: March 28th 2019
When potential landlords evaluate their first investment property, there are many mistakes to avoid. Simple miscalculations early in the process can lead to loss of invested capital, lower rental yields and significant stress that could be have been avoided. Read our updated guide for 2019 and follow our simple process - and you’ll find a property perfect for your investment goals.
Start by identifying an area which is suitable for investment. The area must either be in growth or an area where your local knowledge gives you a significant advantage.
To identify an area with potential for growth, look for areas where investment is expanding in the economy or population. Look for projects such as improvements to infrastructure (road/rail), business initiatives (such as an Enterprise Zones) or large employers moving to the area.
To gain local knowledge on an area, you don’t need to live there! Read local news on a regular basis and review statistics on housing, culture, employment and crime at a glance on StreetCheck.co.uk. We’d also recommend visting the area you wish to invest in - check for signs of growth (such as new retail stores or property development) or signs of decay (unoccupied retail units, uncared/abandoned property).
You’ve found an area and a potential property to invest in - congratulations! Now, completely forget the listed price. Your next job is to find a ‘comparable’ property in the local area and establish the true value of the property.
To find a comparable property, go on Rightmove, go to the ‘Sold House Prices’ section, enter the potential investment properties postcode and explore the local area for similar properties. Go through the list to try and find a matching property, ideally with the same features, number of bedrooms and size. Once you’ve found a good match, look at the photographs to compare condition and review the floor plan carefully. Repeat this process until you have a range of similar properties.
From this list, compare the properties. For example, one property similar to yours, but with a large bathroom might be worth 10% more. A property similar to yours, but in a worse condition, might be worth 10% less. Some properties values might be outliers (properties sold for a high/low price without reason) and should be ignored. This should give you a range - for example, £160,000 to £185,000.
An alternative to this process is using an online evaluation service, such as Hometrack. This will give you an instant summary of prices in a postcode area and costs around £30 per report.
Next, identify the type of tenant you wish to attract to your property. Start by making a list of the key characteristics of your ideal tenant. Are they a professional, student or a family looking for a home? Where do they work, shop and entertain themselves? Do they prefer modern or traditional properties? What type of decor or features are they looking for?
Use this information to check your property for suitability. Importantly, you don’t want to own the wrong type of property for the type of tenant available. For example, a small studio is not suitable in an area popular with families.
If you are intending to rent a property out, remember that rent prices are set by the market and will flucate based upon local and economic factors. Therefore, you need to buy the right property initially that will achieve the rent you require.
To discover potential rents, go to Rightmove, click on “Rent” and enter your properties postcode. Explore the local area and try and find a comparable (or similar) property. For this, make a shortlist of matching propreties, being sure to exclude any short lets or room shares. This should give a range of achievable rent.
Next, check how long a property takes to rent in the area. If your property is vacant, you won’t get rental income - so it is essential to choose a property which is rented out quickly.
To check how long a property takes to rent, return to Rightmove and check how long ‘Let Agreed’ listings have been published for. If possible, revisit the same listing over several weeks. If the price has been reduced, this means properties in that area might be difficult to rent out.
You can also get reports on rental values within a postcode area by using a service like Hometrack. This will give you an instant summary of rental prices in a postcode area and costs around £30 per report.
Finally, check that the property will achieve your financial goals.
Your goal is to make money in two ways: through the monthly rental income exceeding your costs and/or by the growth in the value of the property.
Check that this is possible by calculating your monthly costs, being sure to include maintenance expenses and legal fees. Then, use the information for steps 2 and 3 to check that the rental income is sufficient and that there is strong potential for the price of the property to increase over 10 to 15 years.
By looking for capital growth over a long time period, you reduce the risk of being impacted by political and economic factors (such as the recession, credit crunch or Brexit) as you can hold the property until the economy recovers.
Once you’ve followed these simple steps, you’ll avoid the most common mistakes we see property investors make. You’ll know how much to purchase the property for, your potential income and whether it is compatible with your investment goals.
If you have any questions, or just need some advice, get in touch. We’re always happy to have a chat.