How to Buy a Rental Property
If you’re thinking of buying a rental property there are plenty of good reasons to do so. Extra income, an appreciating asset and a relatively safe haven as an investment. These are just some of the reasons investors choose property.
If you want to become a buy to let landlord, it’s important to have an overview of the rental market. Also to understand how to buy a rental property that will deliver good returns.
Let’s take a look at how to buy a rental property and whether buying a rental property in 2022 is a smart investment.
State of the UK Rental Market
In November 2021, UK rental growth hit a 13-year high. A supply shortage compared with a robust employment market is supporting demand and sustaining rental growth.
In the 12-month period from April 2022, rental prices paid by tenants increased by 2.7%. By the end of 2022, predicted growth will remain strong with an estimated total rise of 4.5%.
- Rent Growth Variations Across the Country
Taking a regional view, The East Midlands saw the highest annual growth in private rental prices (4%), while London remained the lowest of English regions at 1.1%, despite a significant pick up in recent months.
Remote working has meant that workers no longer need to be close to the office and rental growth rates in the capital always fluctuate more than the rest of the country. The supply/demand imbalance is much more significant in London when compared to other top growth areas.
- Average UK Rental Prices
The UK average rent currently sits at £995 per month, or £830 excluding the capital. In London, rental asking prices are being led by the city’s flats, indicating a behavioural change from the race for space away from the UK’s cities.
- Single Occupants vs. Shared Accommodation
A third of renters in the UK are single occupants and affordability has become more stretched with the average tenant paying out 37% of their gross earnings on rent. For two-thirds of renters that live with friends, family or in-house shares, the average rent paid is a much smaller chunk of their income – around 18.5%.
- Affordability and Rising Prices
Amid rising living costs and a global energy crisis, the average renter in the UK is paying up to £62 more per month than at the start of the pandemic. With sharp rises in rents, and a backdrop of rising living costs, renters today are spending double on bills and living than people aged over 51, but have lower earning potential than their parents at the equivalent stage in their career.
- Priced Out of the Market
Property prices in the UK market are at a record high, while more people search for properties, many are priced out of the market as first-time buyers. Pandemic job security, loss of earnings from furlough and student debt all add to financial pressure. With property prices so high, many in the market are saving for longer in order to have the 25% of the property price in order to get a mortgage.
- Pandemic Trends
The UK rental market has always been competitive and Covid-19 exacerbated this trend. Renters are no longer looking for just the right property in the right area within their budget, but they’re looking for extra space to work remotely as hybrid work trends are more widely adopted.
- Supply and Demand
The UK has an ongoing mismatch between the demand for houses and the supply available. Asking rents outside of London are being driven to a record high. Rental demand is up 6% while the number of available properties is 50% lower than the same time last year.
On the supply side, tenants tend to be signing longer leases, which means less stock is coming back onto the market than it normally would. There is a lack of choice for existing renters thinking of relocating and for new renters entering the market.
- Good News for Landlords
For landlords, it’s another story completely: those with properties to rent in desirable locations are seeing high rental demand, offering solid returns on investment and shorter void periods between occupation of their properties.
A landlord’s experience will vary by location, but rents are forecast to remain high over the next year with more rental growth expected. Landlords with the most in-demand properties may see some tenants willing to pay higher rents in order to secure them.
The Economic Arguments for Buying a Rental Property
With the market as it currently stands, we are seeing low-interest rates and unusually high inflation. This means that inflation-protected assets like rental properties are one of the safest places to put your money (when compared to other avenues like the stock market).
Now is a great time to be a landlord or borrower, because you can get hold of an appreciating asset with debt that’s depreciating in value. Buying a property with a fixed-rate mortgage is an investment that can make a lot of sense. Even if inflation may cool down, it could remain elevated for some years to come and investing in housing is still a relatively safe haven because people always need a roof over their heads.
Where are Top Hotspots in the UK Rental Market?
- Strong Growth in the North-West
The rental market varies hugely by region. The North-West continues to see strong demand from tenants and seven of the top 10 rental demand hotspots are nearby cities across the North-West.
- Northern Hotspots
Manchester and Liverpool, in particular, are extremely popular hotspots for tenants and property investors. Manchester has seen asking rents increase close to 20% in the last year alone, and figures in Liverpool sit at around 17%. Both cities offer great job prospects and rental property is better value than areas around London or the South-East.
As the cost of living increases, accommodation is often a person’s largest monthly outgoing. It’s likely that we’ll see demand for rental properties in the North-East continue to rise due to their affordability compared to other areas of the UK.
What you Need to Know about Owning a Rental Property
While owning a rental property can be a great move from an investment perspective, many investors underestimate the risks. Yet they overestimate the results and forget to consider the amount of work that comes with owning a rental property. What are some of the risks when owning a rental property?
- Investing in an Undesirable Rental Property
Landlords should understand the importance of investing in a rental property that is in a good area. Those properties that aren’t located in a good rental market may have trouble attracting good tenants. This can mean a loss of income due to unexpected void periods.
To minimise risk, investors need to do their research ahead of time to know the best markets to invest in rental properties.
- Not Understanding the Costs
Before investing in any property, landlords need to accurately plot cash flow. While a mortgage is likely to be the largest obligation, there are other costs like maintenance. Rental property insurance may cover some unexpected costs. But even small unexpected repairs can quickly add up over time. Especially if you haven’t budgeted for them in cash flow projections.
There is also the time cost of finding tenants and dealing with issues. While you can hire a rental property management company to take care of the details, this will come at an expense.
- Tenant Risks
Having a tenant who cannot reliably pay the rent or who defaults on rent altogether can be a source of stress and financial pain for landlords. Having to track down rental payments may mean that you get behind on mortgage payments.
A bad tenant is also a risk because evicting them can be a costly and lengthy process. Expenses associated with eviction also stretch into things like court fees, legal fees, property cleanup and repair and lost rent.
What to Look for When buying a Rental Property
All investors want to find a profitable property. Here are a few of the things to take notice of:
- The Neighbourhood
High liveability, amenities and access to public transport are all good signs that a neighbourhood has a good rental market. If you buy near a university, chances are that your target demographic will be students. In the suburbs it’s likely to be families, so be sure to invest in an area close to good schools. Areas close to a thriving job market will help you to target young professionals.
- Future Developments
Check your local council for work that is due to commence in the area. Locations with a lot of construction usually indicate that they are in a good growth area.
However, be sure to understand the type of developments that may have a negative impact on your property. More new housing could hurt the price of surrounding properties and compete with your property as a rental listing.
- Listings and Vacancies
Neighbourhoods with an unusually high number of listings can be a bad sign that an area is in decline. High vacancy rates can often force landlords to lower rents to attract tenants. Low vacancy rates often mean a landlord can increase the rent.
What is a Good Yield on a Rental Property?
Rental yield will usually be a good indication of the profitability of a property. Be sure to understand the average rent you can charge for a property. If a flat is very expensive and the market is so saturated with rental properties that the average rent charged is low, then the property might not be a good investment.
- Gross rental yield is the annual income from rental property expressed as a percentage of the property’s purchase price or value. To work out gross yield on rental property this is what you should do. Take the property’s annual rental income, divide it by the property’s value then times by 100 to get a percentage.
- Net rental yield is the figure you arrive at after deducting all your expenses, for example, letting agent fees, maintenance costs, accounting fees, home insurance for rental property etc.
Be sure to calculate rental yield before investing in a property. Otherwise, you might end up paying too much for a house or flat. Only to discover that average rents don’t make it profitable once you deduct expenses.
What are Average Yields in the UK?
Average yields in the UK sit at around 4.4%, but this varies hugely by region. The purchase price of your property will have a huge impact on rental yields. Nottingham is one of the most profitable areas in the UK. With properties in the NG1 postcode generating rental yields of 11.99%.
Liverpool’s L7 area, close to two of the city’s universities, delivers average rental yields of 9.79%. Manchester also scores highly, with rental yields in the M14 postcode area 7.07%.
What is a Good Rental Income?
As a general rule of thumb, a net rental yield of around 7% or higher tends to be considered a good yield for a buy-to-let property.
What Rental Property Tax Applies?
- Capital Gains on Rental Property
Selling your rental property can deliver good profits, but you may also be liable for capital gains tax. The capital gains tax rate is 15% if your taxable income is between $80,000 and $496,600.
- Stamp Duty Tax on Rental Property
Since 2016, landlords pay three percent more in stamp duty on each band when they purchase a buy-to-let property. This surcharge can potentially add thousands of pounds to the stamp duty bill.
The rate for anyone buying a second rental property is 3% on the portion of the property up to £500,000. Then 8%, 13% and 15% respectively for the price tiers. If you sell your main residence within 36 months, you can claim this stamp duty back.
- Tax Deductions
When you sell a rental property you can claim some deductions. These include things like costs of the sale such as realtor commission, title fees etc. You should consult with a tax expert in order to know what you can claim for.
How Can You Spot the Best buy-to-let Areas?
There are a few ways to spot up-and-coming buy-to-let and property investment areas including:
- Influx of young people: Young professionals in their 20s and 30s are often the trendsetters when it comes to the next best areas to invest in property.
- Employer Influx: When mid to large employers move or relocate to an area or city. This is a good indicator that property prices may rise and the area is up-and-coming.
- Investment: Cities that are receiving investment in infrastructure can be a good indicator that the area is up-and-coming.
- Amenities: Areas that are well-serviced in terms of amenities. Like shops, schools, supermarkets – can indicate how desirable an area is likely to be.
Read more about How to spot up-and-coming areas in this article.
If you’re looking into buying a rental property, it can be a great time to be a landlord in the UK. With robust rents, strong demand for rental property and the fact that property remains a relatively safe investment all add to the appeal. Just be sure to understand the risks, costs, responsibilities and buy-to-let rules that come with owning a rental property in the UK. To find out more about owning a buy-to-let property, get in touch with our expert team.