- Demand from tenants for a home
- Property has proved to be a good investment
- Best rental yields for buy to let investors
- Understanding what the buy to let market is
- Issues to understand about the buy to let sector
- The buy to let sector in the UK
- Is buy to let a good investment?
- What are the risks for buy to let?
For anyone asking, ‘What is the buy to let market?’ then the answer is simple; a property investor will provide a home for rent to tenants.
There are still lots of attractive opportunities available to enjoy property because there is strong demand for rental homes in the UK.
Indeed, the lending rates for buy to let mortgages are very low currently, which makes investing in bricks and mortar for many people even more attractive.
However, in recent years landlords have seen stricter regulations and higher taxes but for those who plan for the long-term, the UK’s buy to let sector still offers attractive yields.
As with all investments, you should always take impartial and professional advice before embarking on buying a property and then letting it out.
Demand from tenants for a home
The demand from tenants for a home to rent varies around the country with some towns and cities having a severe shortage of supply, which helps to push up rents.
This means that the investor’s return on investment will be very good and probably better than investing in other asset classes. A recent survey by the government highlights:
- 94% of private landlords are private individuals
- They earn £15,000 on average from properties
- Just 4% have a buy to let portfolio as their main income.
It also needs to be appreciated that the buy to let market in the UK, nearly 60% of all landlords are aged over 55. Of those, a third are retired.
The main aim of the buy to let market for most investors is to either generate a second income or, more usually, enhance their retirement income.
This means that most landlords are not chasing short-term profitability but are looking to enjoy:
- Capital gains as the house price increases
- Decent rental yields.
Property has proved to be a good investment
As mentioned, property has proved to be a good investment, usually on a mid- to long-term investment scale and the buy to let sector is no different.
Essentially, there will be short-term dips, as well as difficult years that may distract a potential investor from the bigger picture.
However, there is still a trend within the country towards rental accommodation and as property prices look set to rise, there’s a lot to encourage buy to let investors.
For those who are thinking about a buy to let investment, they should consider three things:
- Look to where tenant demand is strongest
- Consider where property prices will rise the most
- Understand buy to let pitfalls.
The answer to the first issue about where tenant demand is strongest means you may not be looking to invest in a property near where you live.
Best rental yields for buy to let investors
There are lots of surveys that point to the North West of England – Manchester and Liverpool – particularly, as offering the best rental yields for buy to let investors.
According to one rental platform, the towns offering the best rental demand are Newport, Bristol and Nottingham.
They are followed by Cambridge, Belfast, Plymouth and Portsmouth.
Their top 10 also sees Bournemouth, Leicester and Manchester taking up places.
There’s no doubt too that while London’s property prices are very high when compared to the rest of the UK, the capital still offers excellent buy to let opportunities.
The rental platform points to these London boroughs as offering the best returns: Bexley, Bromley, Sutton and Lewisham.
They are followed by Merton, Croydon, Greenwich and Haringey with Enfield and Kingston upon Thames making up the top 10.
Understanding what the buy to let market is
It may also help those interested in understanding what the buy to let market is to understand where the areas with the least demand for rental homes are, currently;, Aberdeen and Swansea.
We have mentioned that one of the benefits for a long-term investment commitment is for the increase in house prices.
The average last year for house price rises was just 0.9%, but that’s not the true figure for every area.
For example, in Wales, the Midlands and North they saw higher than average increases.
Landlords in Cardiff saw a 9% rise, in Sheffield it was 7%, while in Nottingham and Birmingham, it was 6%.
Looking to the future, a Post Office Money survey points to Nuneaton, Bedworth and also Stockport and Leicester as offering the most potential for strong future house price growth.
Issues to understand about the buy to let sector
The list of issues to understand about the buy to let sector helps to prepare for potential pitfalls.
In recent years, landlords have seen the loss of buy to let tax relief on their mortgage interest and stamp duty surcharge.
Property experts also say that the tips for succeeding in buy to let in the UK during the 2020s include:
- Learn your trade and start small
To understand how the buy to let market works, it’s a good idea to buy a property that is within your budget and learn your trade. You will need to pitch the rent to cover your costs and generate a profit.
- Have the correct licences
Some local authorities in the UK insist that landlords in their area have a licence for their rental property. Not having one can be an expensive mistake to make. Also, if you have a house in multiple occupation (HMO), then you will need a licence for this.
- Understand your AST tenancy agreement
An AST tenancy is an assured shorthold tenancy and it’s a legally binding contract for both the tenant and landlord. The contract establishes who is responsible for what and what the landlord will not do.
- Have a good tenant relationship
In order to enjoy a good first buy to let investment, it’s important that you form a good tenant relationship. You’ll also need to carry out regular inspections to see if things are going wrong, long before they come a problem. You will need to give notice before an inspection but it’s a good way to get to know a tenant.
- The tenant’s deposit protection scheme
It is now the law that landlords cannot keep hold of their tenant’s deposit and it must be held with a government-approved third-party. These tenancy deposit protection schemes are there in case of a dispute when the tenancy ends and the tenant wants a refund. The landlord can also claim for any damage that’s been caused to their property.
- Have the right certificates
All rental homes in the UK will need an energy performance certificate and this must have a rating of at least ‘E’. If it doesn’t, then you cannot rent out your property and you face being fined or even banned. You’ll also need a Gas Safety certificate for your property and this needs renewing every 12 months.
The buy to let sector in the UK
This last section highlights that the buy to let sector in the UK is highly governed and the landlord has lots of legal duties and responsibilities that they must abide by.
You cannot simply buy a property and then put tenants in it since you need to have the assured shorthold tenancy agreement in place, have the relevant Gas Safety certificate and the EPC as well.
The bottom line is that any rental property must be safe for the tenant to live in and if it isn’t, then it the responsibility of the landlord.
You may find it easier to use a letting agent if you do not have the time to commit to dealing with tenant issues because you will need to deal with major problems instantly. For example, should a boiler not work in winter, then you need to replace the boiler as quickly as possible because you cannot have a tenant sitting in a cold property without running hot water.
Potential investors in a buy to let property also need to understand the potential for an area before others do.
One example of this is the new Crossrail line in London which led to property prices increasing along the proposed route long before it was built.
You also need to decide what type of buy to let property yours will be. While flats are very popular, you may be targeting young professionals wanting a large flat or indeed student property.
You may also decide to invest in a family home that will house a family, usually for several years.
It’s also being predicted that by 2039, the UK’s private rental sector will have more tenants in it than the homeowner’s market.
That’s a big change over the years, but it illustrates just how large, potentially, the buy to let market is for those who want to invest.
It is also being predicted that one of the underlying trends is that the UK’s population will continue to grow. Experts say that over the next 20 years, it will swell to 74,000,000 people.
Again, they will need somewhere to live and there’s going to be residential undersupply with growing tenant demand.
Both of these issues help to deliver opportunity to investors.
So, for those choosing the right investment property in a location that is right, their tenants will deliver rental income and the economy will deliver capital growth.
And don’t forget too that low interest rates mean that buy to let mortgages are very cheap, which is also helping to encourage investors to enter the market to enjoy consistent rental yields from strong tenant demand.
Is buy to let a good investment?
It’s worth looking at the question of whether buy to let is a good investment in the UK as it means understanding what the market is.
There is not a simple answer to this question because a lot depends on an investor’s own strategy.
For those investors who want liquidity and easy access to funds, then buy to let is probably not for them.
However, for those investors looking for long-term growth, stable yields and an asset they can leverage, then this could be an ideal investment vehicle.
The buy to let sector is also an investment opportunity that is easy to understand when compared to other asset classes. For example, you may be trying to understand annuity rates as well as interest rates when planning for your financial future.
Also, a buy to let investment is a physical presence so you can see it, whereas investing in the stock market is not tangible and its value may decrease or increase following various factors.
What are the risks for buy to let?
As we mentioned at the beginning of this article, it’s important that you seek investment advice before embarking on purchasing a buy to let property.
That’s because all investments carry risk and they need to be carefully considered. This is also true with property – so you need to research and consider carefully what your options are.
In addition to buying a flat, a terraced house or a semi-detached, you may be interested in buying an off-plan investment.
In doing so, you will be buying a brand-new property at a discount and hopefully in a location and of a type wanted by tenants to live in.
You also need to understand that there is a risk of void periods. This is when your property is empty and there are no tenants paying your rent.
All landlords will have a void period and you will need to build into the rent an element to cover these times when the rent is not coming in.