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Thinking About Buy To Let? Six Tips To Stay Ahead

August 29, 2009

As a portfolio landlord, owner of a lettings agency and director of a property matching portal, many people ask me about buying property in the UK as an investment. But the same questions arise – what should I buy, where, how many bedrooms, what sort of tenants and so on. I have put together these tips to help you indentify what to look for in your buy-to-let, it’s not meant to be exhaustive – so feel free to add your own

1. Identify areas which are experiencing positive change/ have the potential to positively change

We’ve all heard it before about the ‘Starbucks’ and ‘Pizza Express’ effect, but buying into areas which are undergoing positive change really is the best way to ensure your investment stays in demand and ahead of the game.  A new railway station, motorway or injection of regeneration funds can increase the desirability and demand of an area. The classic example is Stratford, East London where prices have quadrupled with the news of the successful Olympic bid and the ensuing improvements. But, there are plenty more examples such as the extension of the Dockland Light Railway to Woolwich [south of the river] and the new high speed trains from Folkestone to London which will halve journey times from December 2009. These types of improvements can add around 20% to property prices, which is a definite boost in investment terms. Importantly such infrastructure changes means increasing numbers of people can commute easily making the area more desirable – leading to increased demand for housing stock. The secret with all of this, is to get in well before the improvements start – that means, before the station opens, before it can physically be seen even being built. Infrastructure and transport connections are king in the property market.

2. Understand population sector changes and the impact upon different housing types

Understanding population changes will impact upon the different types of housing which is required in different areas.  Obviously I am not suggesting you study the population as a whole, but you need to look at different sub-sectors of the population and cater for their needs within the housing market. For example, immigration is a key trend which influences the housing market, and these families tend to have more children when they settle – thus there is demand for larger more affordable housing stock. Another example of a population sector change is within the Baby Boomer population [those people born during the baby boom years post World War 2 which created a demographic bulge]. We are starting to see the ‘Baby Boomers’ retiring and with that a lifestyle shifting – many want to have an active retirement and are looking for recreational activities to keep them young at heart. Locations which offer sea, sand, sun, sailing, walking, cycling and cafes are attracting this sector of the population. Thus we are seeing a shift from large suburban houses to smaller flats and houses in coastal areas such as Dorset, Devon, Cornwall and the Lincolnshire coast.

3. Identify key cultural trends which impact upon how people buy and rent houses

As a nation the size of the average UK household has reduced considerably in the last 30 years because of increasing divorce rates, more women living independently and an ageing population of “empty nesters”. Furthermore, widows are often living on their own for longer, often many years after their spouse departs. And this figure is set to increase with figures from the Office of National Statistics revealing that 2 in 5 homes in England will be occupied by only 1 person in the next 20 years. This reduction in household size is further reinforced by the general trend towards more individualistic behaviours – younger people are leaving home earlier, women, especially those with professional jobs,  are buying more property on their own.  Even people who get married are maintaining two properties for financial security, in part to mitigate the risks in case of separation, divorce or other factors such as change of job for dual careers couples.  This means people are leaning towards smaller units which they can afford to buy and maintain on a single wage.

4. Look at the consequences of market conditions – opportunities exist within market barriers

Even with house prices lower than they have been for years, it is still difficult for many people to buy. First-Time-Buyers need to raise larger deposits and increasing numbers of people are being refused credit. In addition, sectors of the population which relied upon specialist lenders for their mortgages [e.g. self employed people who self-certify their income] are unable to secure lending in these times. These are people who would like to buy, and under different market conditions could buy their own property.  They have relatively secure jobs, a healthy income and a great desire for home ownership.  These are the sectors of the population who, I term, ‘Reluctant Renters’ they want to buy, but because of the tighter market conditions are being ‘refused’ entry to home ownership.  These sectors of the market are looking to buy in traditionally family orientated, home-owner areas – and this will also be where they look to rent. They want to feel as if they ‘own’ their property and thus look for properties in areas which represent their ideals.  As a landlord, the aim is to buy the right property and gain long term tenants who in years to come will then become your buyers.  Even if they don’t – these strong owner occupier areas are likely to be the first to bounce back when lending levels start to return.

5. Look at how high end political decision making affects the ground level

The waiting list for social housing is expected to grow to 5 million by 2010 [local government association 2008]. Currently, there is little political inclination or money to increase supply dramatically. So the problem remains; there are millions of people who need to be housed by the government and the government will pay for their rent [via housing benefit]. This may not be the glamorous end of buy-to-let that you had in mind – but it is the bread and butter end which should yield well. Social housing can take many forms – it can be ex council housing stock, terraced houses – even flats above shops. The key to remember is that it needs to be affordable and within a community. Most social housing tenants have a strong sense of community and so want to stay close to their family and friends.  Buying for this type of tenant is all about location and price – get these two right and you are sure to have long term tenants who will look after your property as if it is their own.

6. Look for proven track records of solid investment return

The value of old stock has consistently outperformed new build properties over the last three years. Older properties often come with a proven track record as a rental machine – they have been around longer so demand can be assessed and compared.  Past rentals of that property or similar will be able to provide you with a firm indication of the prices achieved now and in the past.  This gives a solid base upon which you can base your rental estimates. Moreover, period properties are more in demand which has an impact upon the longer term capital gains that can be made on your property investment as well as the rental returns that can be obtained. Period properties offer features and individualism which people aspire to and which you, as the landlord, can maximise to full effect. New build flats are often in blocks with other identical flats. This can lead to landlords having to compete with each other by lowering rents in order to fill the property.  By contrast, an older property can have stand out appeal due to its difference – which can be a winner both in rental and capital returns.

In conclusion, property investing is about investing in people. The key is to know your market and buy with them in mind. Do this and you will do well.

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