8 Things You Should Know Before Buying a Rental Property
Buying a rental property is one of the most popular property investment strategies in the UK, and a fantastic way to increase income through consistent returns. Many first-time investors will go ahead with buying a property to rent out before researching the best ways to do so, and while their investment may still be a success, they could be limiting their potential and might not get the most out of owning a rental property.
Before buying an income property and getting started with buy to let investment, it’s a good idea to do your research, and this helpful guide contains information on eight things you should know before buying a flat to rent. If you’re interested in owning rental property and want to know how to maximise your returns, the costs involved, and not only the benefits of owning a rental property but the risks, too, then our tips will help you get started. Continue reading to find out how to buy your first rental property in the UK.
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1. Market Research is Key
If you’re not too familiar with the UK property market, doing market research is the best place to start before buying rental property. In order to secure the best opportunities, you need to know exactly what you’re looking for in terms of area and potential rental returns. You also need to know about house price trends and population statistics, as these can also play a significant role in the success of your investment.
So where is the best place to start when conducting market research before buying property to rent out? And how do you buy a good rental property? Below is an easy to read checklist of the things you should research before purchasing an investment property.
What to Look for When Buying a Rental Property: A Checklist
Focus on Rental Yields – Rental yields are an essential element of any successful buy to let investment. Your rental yield indicates the level of return on investment you can expect through owning a rental property, so make sure you aim for the highest yields possible. By researching the UK market, you can find out about areas which are more prone to high yields, and learn which areas you should avoid.
Look at house price trends – Aside from rental returns, another benefit to owning a rental property is the ability to make returns in a lump sum form when selling the property. This is why researching house prices is crucial, as properties in areas with past house price growth and future growth predictions indicate a good place to buy rental property to benefit from capital growth.
Think about population statistics – The population of an area can play a big part in the success of buying a property to rent in the area. After all, the type of people who live in an area are the people you’ll be renting your property out to. Look at the number of young people in the area, particularly students if you’re thinking of buying a student property, and work out whether or not the population aligns with your target tenant.
What is the Best Place to Buy a Rental Property?
With rental yields, capital growth, and population in mind, the best buy to let area to consider when buying rental property is the UK’s North West region. Home to major cities Liverpool and Manchester, the North West offers rental yields of up to 10%, a high population of students and young professionals, and predicted property price growth of 24.1% by 2024.
Other UK opportunities, such as Leeds, Sheffield, Edinburgh property investment and more, offer strong investment potential, although yields and capital growth may not be as lucrative as opportunities in the North West.
2. Make Sure you Know the Risks Along With the Benefits
While buying rental property is certainly a great investment decision, there are always risks involved that you should know about. Knowing about possible risks helps you identify opportunities that you should avoid, and be more prepared for the unexpected.
The most obvious risk involved with buying a rental property is the fact that the housing market can change, which could affect your potential earnings. If, for instance, property prices were to fall, you would not get a good return on investment when it comes to selling your property during that time. Of course, while the market can sometimes experience changes and fluctuations in property prices, the housing market is very resilient and always bounces back. That’s why it’s a good idea to research the market beforehand and avoid exiting your investment at the wrong time.
What Are the Benefits of Owning Rental Property?
One of the biggest benefits of owning rental property is the fact that you’re able to make huge returns through not only rental income but also capital growth. Owning a rental property can also be highly affordable compared to other investment types, and comes with less risk than stocks and shares investments.
3. You Need to Do the Maths
One of the first things you should do before you buy a rental property is to do the maths for your real estate investment, working out all the costs involved while also thinking about the rental income you will receive. The additional expenses you need to think about are buy to let mortgage repayments if you plan on using a mortgage, taxes such as stamp duty tax and income tax, and property management fees if applicable. You should also consider any insurance costs you may need to pay, and if you’re buying a leasehold property, you’ll also need to think about how much you might be paying in ground rent for the maintenance of the buildings grounds and communal areas.
Once you have a good idea of all of the costs and potential earnings that will come from owning a rental property, you can set yourself a budget for your venture. If you have enough money to do so, you may wish to pay for the property in cash, without the help of a buy to let mortgage. This can make the investment process a lot simpler, especially if you’re an overseas investor, as obtaining a mortgage may sometimes be tricky. Investors who pay the full amount of the property also don’t need to worry about mortgage repayments taking a chunk out of their rental income.
If you’re thinking of buying rental property outright with cash, plan a budget which incorporates the price of the property along with any taxes and fees that will be required upon purchase. If you’re planning on using a buy to let mortgage, make sure you create a budget which factors in at least 25% of the property price for a deposit, along with extra cash for the other costs involved. It’s a good idea to keep some cash saved away for emergencies, such as repairs which could be needed on your property either before or during tenancy.
How Much Should You Buy a Rental Property For?
You should only buy a rental property for an amount you’re able to afford. Don’t exceed whatever budget you’ve set yourself when purchasing a rental property, especially if you’ve had to save up the money you plan on investing. There are great opportunities out there for a range of budgets, so spend some time shopping around before making any hasty and overly costly decisions.
How Much Can I Borrow to Buy a Rental Property?
The amount of money you can borrow when buying a rental property with the help of a buy to let mortgage depends on the amount of rental income you expect to generate. As a rule of thumb, the rental income you earn should be 25 to 30% higher than your mortgage payment.
Should I Pay off My Mortgage or Buy Rental Property?
Whether you should buy a rental property instead of paying off an existing mortgage depends on your personal circumstances. If you have a stable income through your regular work, business ventures, or other assets, and you’re able to continue paying off your mortgage, using any extra money you have to buy a rental property could be a good idea for you. However, if you’re at risk of losing your income streams, you may be more suited to paying off your existing mortgage before embarking on a buy to let investment, as this will give you greater peace of mind and security before buying property to rent out.
How Many Rental Properties Can I Buy?
You can own as many rental properties as you like, as long as you have the sufficient funds to purchase them. Investors with a larger budget will often purchase multiple lower-cost properties rather than one higher-priced investment. This way, you’re able to diversify your portfolio and spread your risk across different areas or property types, while maximising your earning potential.
A good example of how to buy rental property with a larger budget is purchasing rental properties in an affordable city like Liverpool. By investing in Liverpool with a larger budget, you could buy multiple properties for the price of just one in London, where buy to let investments can cost over £1 million in certain areas.
4. Your Taste May Not be the Same as Your Tenant’s
When looking for a rental property, purchasing rental properties that meet your personal taste is not always a good way to go. This is one of the biggest mistakes many investors make, with many buying a rental property with decor and designs that don’t appeal to a wider market. In order to succeed in buy to let investment, you need always to have tenants living in your property. Therefore, buying rental property that’s more likely to appeal to your target tenant is a good way to avoid your rental property going empty.
The best way to find a property that your tenant will love is to try and get into their mindset. If you’re looking to buy a student rental flat, think about the qualities that students want from their accommodation. This includes things like a location with shops and bars nearby and proximity to their university campus, along with qualities related to the interiors of the property such as plenty of storage space and a built-in desk area.
There are also ways you should consider decorating your property to increase tenant demand. When searching for a property to buy and rent out, you may find that the majority of rental properties have been decorated with a minimal colour scheme, featuring more simplistic furniture and fittings. While your personal taste may not align with the properties on the market, especially if you prefer to decorate with lots of colour and pattern, remember that what you find appealing may not match up with your tenant’s taste. Keeping your property as neutral and minimal as possible, while also factoring in certain qualities that your target tenant favours, is a good way to increase rental demand and generate regular income.
Top Tip: If you’re purchasing an investment property sold by an investment company, it’s worth enquiring about any furniture packs that may be available. Here at RWinvest, many of our rental properties come with a choice of furniture pack which can be purchased for an additional cost. Furniture packs feature stylish hand-picked pieces that match the style and feel of each space, and could help you attract more tenant interest.
5. Be Prepared to Play the Long Game
Owning a rental property can be highly profitable, but only if you’re prepared to play the long game. By this, we mean tying your investment up for a set period of time in order to generate the maximum amount of rental income, and, ultimately, huge capital growth returns.
Playing the long game also includes keeping hold of your rental property through times of uncertainty. It’s common for investors to panic during periods that the economy and property market seems unstable. A good example is the recession of 2007, during which time many property investors sold their properties out of fear that they would lose money. In reality, investors who held onto their rental properties during this time have now seen property prices grow higher than they were before the recession, benefitting from significant capital gain.
The same logic can be applied to the UK property market in 2020. Due to economic uncertainty brought on by the Covid-19 pandemic, many property investors were feeling concerned about their venture. However, with lower than usual property prices currently available, savvy buyers are able to purchase a rental property for a discounted amount, benefit from the increased rental demand that the market is currently seeing, and hold onto their investment before selling the property for an increased amount once house prices have grown.
6. Keep an Eye Out For Deals
When it comes to buying rental property, the lower you can purchase your property for, the higher your rental yield is likely to be. That’s why purchasing a property for the lowest possible amount is always welcomed by those buying an income property.
Aside from purchasing rental properties in more affordable areas and focusing on cheaper property types like studio flats or off-plan properties, a good way to secure the lowest prices is by taking advantage of deals and discounts. Many companies, particularly during the 2020 Covid-19 pandemic, started offering their rental properties at below-market rates and offering deals such as assured rental yields for a set length of time.
A lot of the time, a company may not advertise deals that are available, and may only disclose them once an investor has enquired about the property. A good tip for finding out about the latest deals before buying a rental property is to sign up to a property company’s mailing list, where you’ll be updated on new opportunities that hit the market. If this is something you’re interested in, use the sign-up form below to sign up to our mailing list and be the first to know about the best deals and discounts available with RWinvest.
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7. Owning a Rental Property Doesn’t Always Make you a Landlord
There’s a common misconception that everyone involved with buying property to rent out is a landlord. In actuality, not everyone who buys a rental property is a buy to let landlord, with a lot of investors choosing to make a hands-off investment rather than taking on a more hands-on landlord role.
If you decide you’d rather be a hands-off investor instead of taking on landlord duties, you should look into hiring a property management company to manage the property on your behalf. Property management companies, also known as rental management companies, manage everything from finding tenants for your property to chasing up rental payments or dealing with any issues your tenants may experience.
For investors who are interested in buying an income property as a way to make some extra money alongside their day-to-day career, using a property management company is a perfect solution. At RWinvest, we collaborate with a number of excellent property management companies who will be recommended to our investors, all of which have a great reputation and plenty of industry experience.
8. You Don’t Need to be an Expert
While it’s definitely crucial to have a good idea of the property market and the buy to let investment process before buying rental property, you shouldn’t feel discouraged if you’re not an expert in all things property. Many investors, especially hands-off investors, will not have in-depth knowledge about property investment but will know enough to be able to identify strong opportunities.
One of the best things about using a property company when buying property to rent out is the guidance you receive during the purchase process. Property consultants tend to have many years of experience and training in property investment and the housing market, providing clients with advice and answering any queries they might have. When buying rental property through an investment company, you’ll also usually be able to see the rental yields you can expect to receive, whether they’re assured or projected yields. If purchasing a rental property privately, you may need to work out potential yields yourself.
How to Buy Your First Rental Property
If you’re a beginner investor looking to buy your first rental property, one of the first things you should do is search for investment opportunities and select one in a high-performing location. Focus on strong yields and high growth, while also thinking about levels of demand for your target tenant.
Interested in Buying an Income Property?
If you’re ready to purchase your own rental property to begin generating consistent rental returns, explore our opportunities at RWinvest today. At RWinvest, we’re always building our portfolio of investment opportunities, focusing on top buy to let cities Liverpool and Manchester and offering rental yields of up to 8%. Whether you’re still wondering ‘how do you buy a good rental property?’ or ‘how do I find the best investment deals?’, get in touch with our team of property consultants today, and we can advise you on the best investment for your needs and goals.
For more property investment tips and information on all things buy to let, head over to our buy to let news page and property guides section to read our other articles and guides.
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