Low interest rates and now the Stamp Duty holiday have helped to make buy to let look a little more attractive again, with some investors feeling that now could be a good time to add to their buy to let portfolio. With that in mind we’ll look at what makes the very best buy for a buy to let property.
Properties that are in the right location. Location, location, location is a widely held mantra in property but it’s especially important with a buy to let.
The best locations for rental are the locations that offer the things tenants look for or most often move for. A number one reason here is job opportunities. So check out local employment opportunities when starting your property search.
The Covid-19 pandemic has, and will continue to, have a huge impact on the jobs market so this should be an even more important factor to consider going forward.
Other important considerations include transport links, local amenities and schools.
Locations where there’s lots of demand .... but not much supply. It goes without saying that to let a property easily there needs to be tenant demand for it. But there’s a bit more to consider than that: If there’s a huge supply of tenants together with a huge supply of rental property you could still find that your property is hard to let.
The key here is to look not just at the supply of property in any given area but at the average time to let. The best rental areas are often those where property lets fastest. You can find this out by speaking to letting agents or examining the listings on lettings portals. (Sometimes, although locations with lots of rental listings might look to have good demand, there may actually be higher demand in places with very little rental property.)
Home.co.uk’s Market Rents by Town and Postcode data can give you useful insights on supply levels and time on market as well as rents.
Important. Look for any upcoming new developments, such as new estates or apartment blocks, which could affect the supply-demand balance in the area.
Properties that are the right size. This is something of a how-long-is-a-piece-of-string-issue, but the best properties for buy to let are usually properties that are not too big and not too small!
Bedroom numbers are the key here: One bed properties and studios have quite limited potential as they can only be let to one person or at most a couple. Two and three bed properties usually have the very widest letting potential. They can be let to a couple, a family or sharers, allowing you to tap into three rental markets not just one.
Very large properties, for example, four or five bed houses and especially flats also have quite limited letting potential. (Although the exception here is if you’re interested in the house share market.)
The average house (or flat) in the average street. When buying property it’s often said that you should buy the worst house in the best street. In buy to let a better strategy might be to buy the average house in the average street.
Here’s why this makes sense: The properties that most people are looking to rent are also the properties that most people are looking to buy. While many people might dream of living in a luxury designer house or a country mansion these kinds of properties only have a very small market in reality. Middle-of-the-road houses (or flats) in middle-of-the-road locations are generally much more lettable.
Like every rule there are exceptions of course. In some locations there’s a brisk demand in prime and luxury properties. But it’s a very niche market for buy to let investors.
Properties that need work. Properties that are ready to rent – including new builds which are often promoted to investors as ‘hands off’ investments – may appear to be a good buy. But properties that need work are often much better as they can be bought more cheaply and offer an opportunity to add value. As well as boosting the rent you can charge improvement work can add to the property’s value so making you an instant capital gain too. Newly improved or renovated properties are usually more attractive to tenants as well.
It’s important to get the balance right though: For example, a light renovation will pay off almost immediately but it will take longer to get your money back by extending a property.
Cheaper properties. A more expensive property will earn you more rent. But it probably won’t make you the most money! As the value of a property rises the likely achievable rent will rise, but not in direct proportion. For example, a £200,000 property might rent for £1,200 a month but a £400,000 property in the same area won’t necessarily rent for £2,400 a month.
Yield (the likely annual rent divided by purchase price) is a simple calculation you can make to find the sweet spot between price and rent. While you should calculate your own yield figures for a property you’re interested in Liveyield’s data can give you an idea of potential yields in any given postcode area.
Remember that there’s also more demand for cheaper properties – because the market is bigger as more people can afford to rent them – so they’ll likely let quicker too and have fewer voids.
How has the Covid-19 pandemic changed what makes a good buy to let?
While the above factors have always held true the Covid-19 pandemic is likely to affect what makes a good buy to let property in the future.
Going forward tenants are likely to be on tighter budgets and looking for properties that are more affordable to rent and more affordable to run. There could be an uptick in demand for shared properties too, where not only the rent but also the bills can be shared.
Another useful insight for landlords, which emerged during the coronavirus lockdown, is that outdoor space is more sought after than it used to be. Properties which have space for working from home might also be more popular too. Plus, tenants could well be more interested in locations where they can walk or cycle to work, and where they can walk to local shops for daily essentials.
