What makes a good buy to let investment?06 May 2016
If you are considering dipping your toe in the wonderful and for some, slightly scary world of buy to let in the Glasgow area I thought a few ‘would be’ investors may be interested to hear a letting agent’s perspective on why some rental investments work well, and others are like a proverbial noose round the landlord’s neck!
There are various things to consider but first and foremost, you need to decide why you are investing your money in property and what your goals are.
Short v long term investment?
Most investors look at property investment as a long term venture nowadays; the days of making a fast buck on a “doer upper” are gone for the most part! Most investors look at their purchase as a minimum 10-15 year investment – maybe to act as a pension – so yield is key, as is the “let-ability” of the property and your expectation in capital growth.
Is it solely an investment?
I would recommend being clear with yourself and anyone else as to whether this is an investment purely as a ‘buy to let’ or whether you or a family member may want to live there at some point. That has a major impact on what you can purchase and where you could purchase a property. For example, if your plan is that your daughter might want somewhere to live at cheap rent when she goes to university then there isn’t much point buying a 3 bed terraced house in Bishopbriggs! Most buy to let landlords tend to buy in areas that they know, which in my opinion is not a great strategy for picking an investment. However, I can understand why many landlords, particularly first timers, go down that route.
How do I work out the rental yield?
The annual rental yield is the return you achieve on your investment, so if you take your investment (say the purchase price is £100k) and the achieved rent is £500 PCM – the yield is (500*12 months = £6000 per annum) so 6000/100,000 *100 = 6% yield.
What is a good rental yield?
Most investors would be looking for a minimum yield of 6%, but you have to weigh up the yield against the “let-ability”, as well as the eventual resale and any capital growth you think you may achieve. Many properties with really good yields could take a while to let, or may be in a location where you might (often rightly!) be concerned about the resale.
For example, a 1 bed in a tenement stair in Springburn might be available at £35,000 and the achievable rent might be £350 PCM, so in theory it would produce a yield of 12%. However, you have to ask yourself the following:
- How quickly will you find a tenant?
- How long will they stay there?
- When you try to offload it in 10 years’ time, will anyone want to buy it?
In my opinion, it would be better to increase the budget and buy a small modern or possibly ex local authority 1 bed flat as close to Glasgow city centre as you can (think Townhead, Cowcaddens or Charing Cross – probably around £70k), that will rent all day long to young professionals or mature students at £550 PCM if properly presented. This will result in an excellent yield of 9%, and will it make much easier to find a good tenant. It will also significantly increase your chances of reselling to a first time buyer or investors when the time comes. For more information on potential investment locations, check out our guide to Glasgow city centre.
Financially what else should a buy to let investor consider?
As a contingency I always advise landlords to plan for one month per year without rental income to compensate for any maintenance works. A good buy to let investment should not lie empty for any length of time; although in reality turning round a property between tenancies usually takes about a week. If you choose to use a letting agent, it makes sense to make sure your agents’ fees are reasonable and competitive. There are a multitude of regulations that your property and you as a landlord must meet, so please ensure you know the facts!
Finally: Do your homework!
An estate agent will not necessarily know how much a property is really going to rent for and as such they could estimate an inflated rental figure to make it look more profitable. Make sure you have the full picture and ask pertinent questions such as:
- What are the neighbours like?
- How are the stairs kept?
- What are the factor or communal charges?
- Does the property have an allocated parking space?
Good luck and I’d be delighted to answer any questions you might have. Please contact me at the following address: firstname.lastname@example.org.