Most landlords invest for capital growth rather than rental income, but you still need to make sure that the rent from your property will cover your costs, including the BTL mortgage, letting agents’ fees and maintenance.
Remember that from April 1, landlords will no longer get tax relief on their mortgage interest or other loan interest payments, instead they will get a more miserly tax credit, so it’s even more important to make sure you’re getting a decent yield.
Rental yield is the purchase price divided by the annual rental income, so if you paid £100,000 and you get £10,000 a year rent, your yield is 10%. Unfortunately, the properties that are most likely to increase significantly in value tend to be the ones that offer a poor rental yield due to their high purchase price, while those that offer good yields are the least desirable homes and therefore it might take years before you see much capital growth.
You must make sure you buy in an area with high demand, so look for properties close to large employers like hospitals, schools, universities and private companies. You’ll need to have some public transport nearby or, if you’re aiming at the family market, nearby free, secure parking.
Be aware of any factors that might reduce the rental value or make the property harder to let, such as a busy road or train line at the end of the garden, noisy neighbours or a rowdy nightclub in close proximity. These might not be immediately obvious – I bought a flat close to a (sometimes smelly) sewage works, which I couldn’t see from a walk around the area, so I’d suggest looking at a satellite image of the location before you commit to buy!
To cut down on costs and stress, look for properties that will be easy and cheap to maintain. While they are highly desirable, period properties will be more expensive to maintain than modern flats, although not quite as expensive perhaps as a chocolate-box cottage with a thatched roof!
Types of property that offer the best rental yields
Rental yields are typically around 4.5% to 5% and they tend to be lower the more expensive the property.
Houses in Multiple Occupation (HMOs), which are larger properties rented out by the room, usually give the highest yields of around 7% to 9%, but you might find these hard to manage because you’ll have multiple tenants and possibly high tenant turnover.
Also, if you have a large HMO you might need a licence and you will have more rules and regulations to follow. Letting a big HMO is quite complex and is probably something only experienced landlords should consider.
Ex-local authority properties also give a pretty good yield, especially those in otherwise affluent boroughs. They are usually cheaper than period properties but the rent you’ll get might not be that much lower.
Two-bedroom flats give better yields than one-beds or family houses, but this is just a general rule of thumb. Make sure you check average rental asking prices in your area before you buy.
Most lucrative markets
Properties aimed at pensioners are top of the table, followed by properties let to tenants on benefits. Bear in mind though that these types of properties are less likely to show good capital growth. Also, landlord repossession statistics show that letting to tenants on housing benefit is riskier than letting to professional tenants.
Letting to students can be lucrative. Purpose-built student accommodation can offer returns of around 7% to 8%. If you’ve got a private property in a town or city with a high student population, you could be on to a winner as students are generally less fussy than professional tenants and they don’t mind sharing bathrooms and kitchens. They’ll even take properties without living rooms as long as there’s a dine-in kitchen, so you might be able to turn this into an extra bedroom.
However, there are quite a number of private student halls springing up close to popular universities, which is causing a shortage of demand for student houses in certain areas, so you need to be aware of this competition.
Check the Energy Performance Certificate
From April 2018, landlords won’t be able to let a property with an Energy Performance rating of less than E, unless it’s a listed building. Make sure you check the EPC, which you should be shown as part of the sales process, and if it’s F or worse, check how much the energy saving improvements will cost.
Check local planning rules
Many councils place restrictions on the number and type of rental properties in their area, so don’t assume you’ll be able to let any property you buy. Call the council to find out if it has a selective licensing scheme for rental properties and, if it does, what are the chances of you getting permission to let it.
Also, if you’re buying a property to let to sharers, find out from the council if you’ll need an HMO licence.