Buying a property to rent out to tenants is a medium to long-term investment that has the potential to yield high returns, but it also involves a fair amount of risk. Here’s what buyers need to know about choosing a buy-to-let property as an investment.
Moving up the property ladder in the UK can be a daunting prospect for home owners, and especially those who intend to become landlords, but with demand for rentals on the rise and a predicted one in four households in Britain to become tenants by 2025, now is a good time to consider investing in a buy-to-let property.
Anyone looking at a buy-to-let investment is set to join 1.75 million other landlords in the UK with the same idea – just last year the number of landlords in the UK increased by 7%, with 89% being private individuals, and despite challenges like additional stamp duty, tenant arrears and rents increasing faster than house prices in some areas, 71% of landlords cite property investment as preferable to any other kind of investment.
In addition, private rental prices have seen steady growth in Britain with a 14.3% increase in six years. This has largely been driven by the growth of private rental prices in London, with inflation in the rental market spurred on by demand outstripping supply in some areas.
Earning an Income
There are two ways to earn an income from a buy-to-let property:
- Through rental yield, which is the money left over after all maintenance and running costs are subtracted from the total rent paid.
- Through capital growth, which is the growth in value of the property and the profit you could potentially earn from selling it.
It is worth looking at market trends and rental yields of different areas while making your decision. For example, despite the fact landlords are able to charge high rents in London, rental returns are typically lower due to the cost of property being higher than average. See below for cities with high versus low rental yields.
UK Cities with The Highest Average Rental Yields
UK Cities with The Lowest Average Rental Yields
|Manchester – 6.73%||Cambridge – 2.73%|
|Salford – 6.68%||Chester – 3.04%|
|Portsmouth – 5.75%||Chelmsford – 3.07%|
|Leeds – 6.67%||London – 3.25%|
How to Choose a Potential Investment Property
- Thoroughly Research the Buy-to-Let Market
As a potential landlord, it is essential to know the benefits as well as the risks when entering the buy-to-let market. In addition to having a large enough deposit to gain better rates and incentives on a buy-to-let mortgage, it’s essential to be aware of the risks of having your money tied up for a long period of time, especially when property prices fluctuate. It is essential to speak to a professional about wider market trends and the risks and benefits involved.
- Pick an Area to Invest In
The most important factor to consider in a successful buy-to-let investment is not whether the area is the most affordable or expensive, but what it can offer. Is it in the commuter belt with good transport links, is it close to a popular business hub, near schools or close to an exciting development? These are all factors to consider while trying to match the affordability of the property you want to buy with the kinds of people you want to market it to.
- Commit to Investing for Income or Capital Growth
Are you entering the buy-to-let market to grow capital over the long-term or are you investing for income through rent? While you should be expecting a rise in house price values over the long term, your main focus when entering the buy-to-let market for the first time should be rental yield. To
Average Private Rental Prices in London
Average Rental Prices (postcode median)
|Barking and Dagenham||£1,100|
|Kingston upon Thames||£1,300|
|Hammersmith & Fulham||£1,582|
|Richmond upon Thames||£1,595|
|City of London||£2,102|
|Kensington and Chelsea||£2,492|
The growth of private landlords in the UK is on the rise, so if you’d like to look at your property investment options, speak to us today for advice.
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