A Guide to Property Investment part 2: Key Considerations
So, you’ve read part 1 and decided why you want to invest in property and now you want to know how to become a landlord.
In this post, we look at some key considerations you need to think about. We highly recommend taking out a notebook and pen for this one, so you can jot down your own answers.
What is your budget?
That sounds obvious, but you’d be surprised at how many people when they first start don’t have a clear budget in mind. Having a set figure in your head is more likely to keep you focused on the fact that you’re making an investment, as well as informing you what kind of property in what area you’re able to easily afford.
What type of landlord do you want to be?
Here are a few types of let, and a bit more about them.
Serviced Accommodation is essentially providing a fully furnished, home-from-home – often in partnership with companies whose staff will be living in a place to fulfil a contract. As far as landlords are concerned, this is still a buy-to-let investment, but with maybe a slightly different tenant profile than usual.
This is exactly as it sounds. With domestic holidays being so popular at the moment with travel abroad being hampered due to COVID-19 travel restrictions, this could actually be a very lucrative option if that’s what you’re looking for.
HMO stands for Houses in Multiple Occupation. A shared house is classed as an HMO if:
- At least three tenants live there, forming more than one household
- There is a shared toilet, bathroom, or kitchen facilities with other tenants.
As a landlord, you’ll basically have one property housing multiple tenants.
This one does as it says on the tin. You’ll be providing housing for students, which can be very lucrative. In high student areas there is always high demand for property, and void periods are low, as most of the time students pay for an entire year.
Individual AST Lets
AST stands for Assured Shorthold Tenancy, and it’s the most common type of tenancy. It’s actually the one most people think of when mentioning ‘landlords’, which is why we put it last, because you’re less likely to have heard of the other options. With ASTs, you are currently able to evict tenants without a reason to claim your property back using what is known as a section 21 notice, but the government are currently consulting on abolishing the use of section 21 notices, which is something worth bearing in mind.
How are you going to finance your investment?
If you have a cash lump sum, are you looking to buy a property outright, or are you going to get a mortgage? At the moment, borrowing money is relatively ‘cheap’, so it’s worth looking into whether or not you want to tie up all of your cash in the investment, or take a calculated risk of rates remaining low.
However, if you do choose to go down that route it’s important to understand the risks. Those of us who are of a certain age will remember 15% mortgage rates in the 80s, those were fun times for some!
Do you want capital asset growth, or monthly rental income return?
Locally £260,000 can get you a three-bed home in good condition which could achieve £895-£950 per month on a straightforward AST type tenancy giving you yields of 4% on purchase price.
If you’re letting your property as serviced accommodation, it will depend on how many days the property is rented for and how much it’s going to cost for each changeover.
For a HMO, you could be looking at yields of 8%-10% but this doesn’t take into consideration possible license fees and management costs. The legislation around HMO letting is quite robust, and you really need to know what you’re doing to not fall foul of fines or legal action.
Are you going to buy Leasehold, or Freehold?
Freehold is the most popular kind of property for landlords, because it means that the owner owns the property and the land it stands on, and that’s appealing.
Owning a leasehold property is a method of property ownership based on owning it for a set period. Although you’re buying the property, you don’t own the land it stands on which means that once the lease elapses, ownership goes back to the overall owner of the freehold.
This might sound like a less attractive prospect for investment, but if you find a suitable leasehold agreement which doesn’t prohibit lets, has a clause to limit ground rents, and there is a good length of time left on the lease (or if there isn’t, you can pay to extend it – something you will need to factor in when considering your investment strategy) then it could be a solid investment, especially when considering that you won’t normally be responsible for the upkeep of any communal areas.
How much time do you want to spend on this?
Are you looking for an investment that you can put your money into and forget about, or are you looking to roll up your sleeves and get stuck in to all of the responsibilities involved with becoming a landlord?
If it’s the former, then you’re looking at having your property managed by a letting agent. If so, this will be another cost you need to factor into your investment strategy.
If you want to learn more about the different types of management lettings agencies offer, take a look at our landlord page.
As you can see, there are so many different ways to cut the property investment cake, and that’s why it’s really important to understand exactly what you want to get out of the experience. You certainly can’t go wrong with talking to people who understand the market, and will give you things you might not have considered. That could be friends, family, or even us!
Why not join our landlord group on Facebook?
We have a closed group for landlords, where we provide key updates on legislation changes and more detailed insights of what’s going on in the local market.
Come and join the Maxine Lester Residential Landlords Group and see what it’s all about!