Target Your Tenant Market
Before you decide to enter the property investment business, and become a fully fledged landlord, it’s important to think carefully about your target market for tenants.
Without good tenant demand a rental property can be a liability rather than an asset.
You need to be confident that you can keep your rental property fully let 95% of the time. Any void periods will cut into your returns and will put a burden on you if you are paying a big mortgage.
You must factor in time and loss of income for void periods when you do the preliminary calculations on annual income and outgoings. Local agents are the best people to know the state of a particular rental market, so spend time getting to know the area well and most importantly, some of the letting agents.
If you already own a property, then your choice of market is limited to the characteristics of the location you are in. If it’s high end or middle of the market then you will most likely be looking at working and professionals or families at that level, depending on whether it’s a house, flat or apartment etc.
On the other hand, if the location is low end then you may be limited to lower income tenants, students, or you may even be looking at bed-sits and multi-occupation houses – HMOs. In all these situations expect more hassle and work, but multi-occupied properties do give higher income yields.
If you are searching the market to buy, then the world’s your oyster: decide on the type of tenant you would like to target and choose the location accordingly, once you have done thorough market research.
Remember, single lets are less profitable than multi-occupation, but they are much easier to manage and singles or couples, working and professional tenants, are more reliable income providers than low income or unemployed tenants.
You can break the private rented market down into:
- Letting to working or unemployed tenants on Housing Benefit (HB) also known variously as DSS and Local Housing Allowance (LHA). These could be singles, couples, bed sits or family homes. Many experienced landlords who are prepared for a bit more work are very happy with these types of tenant. They often stay longer than professionals but bear in mind reductions in allowances with changes to benefit laws.
- Letting to Students. These are viable in areas where there are large student populations but you may need planning permission if you are starting a new multi-occupied (HMO) house. They are more profitable than single lets, but you need some landlording expertise to manage them well. You may not be able to let for the whole year. Houses in Multiple Occupation (HMO) may require you to have a licence to operate from your local authority and additional management and regulatory standards will be required because of the higher risks associated with HMOs
- Letting to working tenants, singles, couples or families. Skilled or semi-skilled workers often make good reliable tenants and will often stay for long periods, especially families
- Letting to professionals. These are usually young people working in cities that may be mobile and do not always stay long, so expect a higher turnover. They are usually good reliable tenants who live to good standards so will respect and look after your property. Plus you can charge full market rents but they will demand high standards
- Letting at the top end of the market – luxury apartments or detached properties in high end areas. These are often taken up by companies for executives who will move in for a given period of time, perhaps foreign staff on high salaries and expenses. These usually deal only through letting agencies
- Holiday lets – this is a specialised lettings market which suits some holiday locations. You need to meet some very specific criteria in terms of days let per annum, but there are some excellent atx advantages as this is classed as a business by HMRC instead of an investment
- Commercial property – investing in and letting commercial property is an alternative to residential lets. Commercial property is very much tied to a local economy, so in a recession when businesses are struggling everywhere, extreme care is needed. However, a good commercial let with a decent tenant and a long lease can provide excellent returns over many many years.
All your tenants have a right to expect a safe and warm environment in which to live and a level of professionalism from their landlord which will rise pretty much in-line with the amount of rent being paid.
Remembers, you may need certain permissions before you can let your property, particularly if the building has not been used as a rental before.
- There are certain planning restrictions in some areas, particularly in the case of student lets and HMOs
- If you have a mortgage in your property you may need permission from your mortgage company to allow you to let the property out. You may need to convert to a buy-to-let mortgage and pay a different rate of interest, there may be fees involved and the company will probably restrict lettings to 6 month assured shorthold tenancies.
- If you are a long leaseholder you will need permission from your freeholder. Check your lease carefully as some will not allow lettings
- Make sure you have a good landlord’s insurance policy in place before you let – a standard household policy will not cover you for letting risks which normally includes £5 million public liability cover
- Make sure you have fulfilled you safety checks and obligations before introducing a tenant to the property – see Safety
Knowing the property market in the location you are letting in is paramount. Spend some time researching the market if you don’t already know it well, you will find it’s time well spent.
By Tom Entwistle,
©LandlordZONE All Rights Reserved – never rely totally on these general guidelines which apply primarily to England and Wales. They are not definitive statements of the law. Before taking action or not, always do your own research and/or seek professional advice with the full facts of your case and all documents to hand.