So you are looking to invest in a property but not sure which one to go for and why?
Most people will look to buy an investment property scan the horizon for a buy to let, then look at the return and how much work you need to do and then make a decision. I would like to offer you an alternative (or additional) way of going about the business of property investment.
Rather than simply being property led, why not look at the market you wish to tap into and once you have identified that, then you can search suitable properties in that group.
Equally once you have mastered this simple concept you can then look at possible properties, cross reference them with this simple and effective concept and add value and knowledge of the potential markets into your purchasing equation to get a fuller and more complete buying decision. It will also impress your lenders that you understand the business of property investment better than the average “punter”.
I tend to categorise the market into 6 areas and we will look at the pros and cons of each sector so you have the correct information to use in your decision making process. Whereas it would be impossible to highlight all the issues and obstacles, I have outlined some basic questions that need asking. Always consult with a local specialist in both the area and the market sector you are considering investing in. After all, you wouldn’t go to physiotherapist to treat your toothache would you!
The sectors we will address today are;
- The single tenant.
- The first time couple or two first time sharers (friends, brothers / sisters)
This is one of the most intricate market sectors so we will spend a little more time on this first option. This is normally the first time that people start the renting process and again frequently they have already spent the first year in Halls of residence and most likely they will be sharing with friends so you could be looking at anything from 2 to 12 sharers. The golden rules here are;
- Make sure there are universities in the local vicinity and that you are buying student accommodation in a student area. It is unlikely that students will be welcomed in a residential area and vice versa so make sure your property is fit for purpose and has (if possible) a successful history of being rented out to students.
- Base the number of occupiers on the number of bedrooms. This could have a direct effect on HMO and licence implications so “Caveat Emptor” (Buyer Beware)!
- Three or more unrelated sharers are known as a House of Multiple occupancy (HMO) and there are a set of criteria available on line or from your local council so please make sure that the property complies, especially if you are taking the property on with either tenants already in or about to enter when the property is legally yours. Five or more unrelated tenants sharing over three floors is a licensable HMO. Licenses are non-transferable so ensure you can obtain a fit and proper person certificate otherwise you are not legally allowed to hold a licence. The local authority will have all the relevant information you require.
- Student lets unlike professional ones, are normally pre-let. i.e. we start to view (and let) properties for the forthcoming academic year (Sept 2017 – July 2018), in November 2016. This is great news as you can in theory, let your property up to 10 months before it comes vacant! I know of no better way of mitigating voids, but always remember to plan in any maintenance needs before agreeing a move in date. Also many student tenancies in the North East will start in July although the academic year normally starts in September. This means that you receive a full 12 months’ rent, the tenants have somewhere to store their possessions (rather than take them all home and bring them back three months later) and you only get 9 months wear and tear in a 12 month contract!
- ALWAYS wherever possible, get a financial guarantor for each tenant and ALWAYS credit reference them. Fail to plan and you have planned to fail. If you get 4 sharers all with guarantors then they are jointly and severally liable therefore your rent is much safer than renting by the room. There are other tips to help and I am happy to discuss these with potential landlords.
- The larger the number of rooms, normally the greater the return on your investment (R.O.I.) and conversely, the greater the risk. Study the area, look at the trends and talk to your local property specialist who can help often with valuable information.
- I would advise checking if there are any “Article 4 directives” or “Selective Licensing directives” either current or pending in the area you are considering, as that too can seriously affect your potential calculated returns.
- Finally what sort of students are you looking to attract. Whereas there is a popular misconception that students live in run down properties (normally as that’s what we did in our day)! Whereas in reality most students have never rented before, their only experience of living in a house is with their parents. Most (especially the better off students, who not only have the money but also the best financial guarantors), are used to an excellent standard of accommodation and their parents want them to be as comfortable and as safe as possible. In Newcastle a typical rent can range from £65 p.p.p.w. to £100 p.p.p.w. plus bills. In Durham it ranges from £90 – £130 p.p.p.w. and normally includes bills. The most frequently asked question in 2015 was “Does it have a dishwasher”?
House of multiple occupancy are not just for students, professional people moving into a new area who cannot afford to live alone could join together to rent (junior doctors, recently qualified students, nurses etc.). The rules on HMO are virtually identical however Students do not pay council tax, professionals do. Should you decide to rent by the room with shared facilities, most authorities will put the onus on the payment of council tax on the landlord not the tenant so please check what your local authority’s policy on this matter is.
Again the more sharers normally the higher the yield (R.O.I.) and again (unfortunately), the greater the risk and professionals are unlikely to share with more than four per household and normally two to three are the magical figures. With this sector the higher the number of rooms the lower your target audience. The more flexible you are the greater your chances of success will be. Also if your potential property is on the edge of a student area it may appeal to both students and professionals so here you have doubled your potential market and therefore your chances of letting your property out. Finally professionals often don’t want to live like students so the higher the standard of your property the more desirable it becomes and often (but not always), the more rent you can charge.
The single tenant.
Quite often this type of tenant has rented before, they have moved to a new area and they are financially more secure and able to shoulder the burden of a higher rent than sharers. These are often young professionals moving into a new area for reasons of work (solicitors, accountants, doctors, IT professionals etc.). The wear and tear factor should be less with a single occupant, although in an ever changing work environment where redundancy is no longer the exception, often it may be prudent (wherever possible) to get a financial guarantor. This is particularly relevant with first time positions where the salary may be good but there is no financial history as they are just starting out in the professional world. Often if moving into a new area (or country) these people if they can afford it will prefer a two bedrooms so they can have family or friends to visit whilst they are in your area.
The first time professional couple or sharers;
The profile here is generally either friends who are remaining in an area after university or couples that have decided to live together for the first time at the start of their relationship. As the first three sectors, these are not necessarily long term tenants although there are exceptions. These tenants generally will have rented previously and unless an established couple, probably not with each other before. There will be dynamics that will evolve and change (who wears the trousers and who is the spokesman/woman). Although this is potentially the most volatile of all the sectors on paper, this is very rarely the case as there are many other facets of a relationship and should it survive and flourish, then providing they are in a well maintained and pleasantly situated property that is normally the least of their worries.
The types of properties required here are normally two, three or four bed properties, often within a commuter belt or rural setting.
You can normally divide this sector into two main types. Those families who cannot afford to buy (in the most normally due to either a low income, or inability to save for a deposit due to high family financial commitments). The other division are families who are moving into an area (normally for work reasons) who want to test the area before buying or families who currently cannot afford to buy but are saving up to do so the second type are more lightly to be shorter term lets than the first. Providing it is the right property in the right area (often driven by school accessibility and catchment areas), with the first type you could get a long let 3-5 years whereas with the second type it is more likely going to be a year possibly two dependant on the work contract or availability on the sales market. Due to financial constraints (unless the children are very young), there are normally two incomes for this type of property so this can represent a stable market although rental prices are unlikely to be as high as the young professional, student or executive market as they tend to be more city centre based. The upside here is that as the properties will be predominately out of city centre the purchase prices should be lower and therefore yields may be as good as if not better overall.
A great favourite with the previous sector due in the most to children and again much more likely to be with properties in a semi or rural location. This can add to wear and tear and generally speaking not a great love of landlords (unless they too are animal lovers). It is however a potentially lucrative market as most landlords are reluctant to risk any potential additional wear and tear, So if you will consider pets (always get full details, size, type, age etc. and always specify on the tenancy (i.e. one Yorkshire Terrier Ethel 6 years old) and always include a pet clause in your tenancy. This makes it difficult for tenants to get additional animals during the tenancy as clearly they do not have permission to do so as it is not stated on the agreement. My company tends to mitigate this issue by increasing the deposit (which is returned in full if the property is left in good condition). If a tenant is reluctant to pay an additional premium on a fully returnable deposit, then that could be viewed as they are worried that they may not get their money back. If that is the case, you could argue if they do not trust their own pets why should you?
I do hope you have found this article interesting, informative and thought provoking. No one piece is ever complete and this is simply designed to get you thinking more in depth about your own investments. If you would like to discuss investing in the Durham property market or require any advice, help or assistance with the lettings, or management of your existing rental property or portfolio, please feel free to call me at my Durham Office on 0191 212 6970 or e-mail me on firstname.lastname@example.org