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Investing in a Property

1.1 Investing in a Property

Investing in a private rented property can be achieved in a variety of ways
and sometimes landlords inherit a property that they then turn over to
renting. This guide is not a financial guide to housing investment but there
are a few key points worth highlighting.

It is important that an investor, before investing in a property, undertakes a
proper business plan that takes into account:

• the value of the property and the loan to asset ratio of any
loan finance obtained;

• the cost of any loan finance and over what period that loan
finance has to be repaid;

• the level of interest being paid on the loan taking into account
that interest rates are likely to fluctuate over the duration of
the loan;

• the level of investment needed to renovate the property and
meet with statutory standards;

• the cost of any management or specialist services to get the
property up to standard and into the lettings market, letting
expenses, advertising and professional fees;

• the level of rent to be charged;

• the cost of ongoing services to keep the property in good
condition: repairs, gas and electrical servicing, annual
maintenance, cleaning, garden maintenance and so on;

• the ongoing investment that will be required to maintain the
fixtures, fittings, decor and services (boiler, white goods, grey
goods and furnishings - if let furnished) in good condition;

• who will be responsible for the property while the landlord is
away on holiday, business or is unavailable because of illness.

Whilst property investment thrives on optimism, it is also important to be
realistic about the level of rent that can be charged and to allow for some
period when the property might be unoccupied (voids) between lets and
to make some allowance for any bad debts. Every landlord should allow
not less than about a seven per cent void rate for vacancies and turnaround
times between occupants

Landlords basing their business plans on low interest rates, short and risky
variable loan rates, charging high rents and not allowing enough funding to
keep the property in top-top condition, frequently come unstuck.

It is also important to consider cash flow. Just like buying a house for owner
occupation, most expenditure takes place at the beginning and, as the loan
progresses, repayments become less onerous. Consider what might happen
if outgoings continue but rent is not forthcoming or it is necessary to fund
an unexpectedly large repair. Is the cash available to keep the business or
investment running?

Investors thinking about purchasing a property to let, should consider the
financial and management implications very carefully. Some other matters
to be considered are:

• the demand for rented accommodation in the area in which
the house is located. In many areas, including popular inner
city locations, there may already be an oversupply of rented
accommodation and it could be difficult to find suitable
tenants;

• the sort of market that the property is intended to serve. Each
has its own characteristics, benefits and problems [see section
1.1.1];

• the potential investment return. It is important to be realistic
about the returns that can be achieved. When investing in
property, it is more realistic to expect lower short-term gains
and higher long-term profits;

• remember that although over time the capital value of
property tends to rise, in the shorter term property prices can
go down as well as up and that capital gains made over time
on a property that has appreciated in value are taxable [see
section 1.6.3];

• the level of experience in managing property and tenancies
required. The knowledge and skills needed to be a landlord
are considerable and the penalties for getting it wrong can be
serious.

1.1.1 Private Rented Sector Markets and the Relevant Standards

When deciding to let a property it is important to consider what market
that property is entering. Broadly speaking there are five private rented
sector markets:

• renting to those on benefits;
• renting to students;
• renting to working tenants;
• renting to professionals;
• luxury lets or corporate lets at the higher end of the market.

If the property is already in ownership its type and location may already
determine the market to be aimed for. If a potential landlord is looking to
invest in a property that decision may be influenced by the location and
type of property that can be afforded. Different markets will command
different rent levels and will require different standards and types of
letting and management. Some of the issues that might be considered are:

• professionals will insist on high standards and will expect
showers and sometimes en-suite facilities;

• housing benefit renters, whilst commanding a lower rent, are
likely to be more stable tenants;

• young professionals tend to be more mobile and this may lead
to higher voids and increased re-letting expenses;

• renting to sharers or students results in higher occupancy
rates which can maximise rental income, however the wear
and tear on a property will be substantially higher with
a greater density of occupation. Many students may be
living away from home for the first time and may not fully
understand their responsibilities towards their property.
Renting to sharers and students is also likely to bring with it
the need to meet regulatory standards that have been set by
the Government in respect of Houses in Multiple Occupation
(HMO) and property licensing. These additional regulatory
standards acknowledge and seek to address the high risks
associated with HMOs;

• student lets may not extend for a full year;

• all tenants will expect a high level of customer care from
landlords and expectations generally rise in line with the
amount of rent paid.

If a mortgaged property, or a room within it, is to be let then it is necessary
to obtain permission from the mortgage lender. If the property is subject
to a long lease, permission may also be required from the freeholder
before renting, and there may be a cost associated with this. This will
be determined by the terms of the lease. Where these are not clear it is
advisable to seek assistance from a lawyer or the local housing advice
service.