The Case for Rental Property

Letting or Renting Residential or Commercial Properties? Introduction  In recent years there has been a big increase in the number of people investing in rental properties and therefore becoming new landlords. In some areas recently more than 1 in 10 sales have been buy-to-let. From a low point of about 7% of the UK housing market in 1991, private renting has reached 11% of the market at the turn of the century and is predicted to reach about 15% by 2002.  One recent report by the Centre for Business and Economic Research is predicting a 50% growth in the private rental market by the end of the first decade in the 21st century because more people are being attracted by the flexibility renting gives them. For some, buying and letting property has become an alternative to other forms of investment. There are also many experienced landlords who are already familiar with the benefits of rental properties - the steady income stream they provide, and the steady rise in the value of their investment. Unlike bank and building society investments, property gives a double return: income in the form of rent plus capital growth, and in some areas capital growth has been quite outstanding. The income (initial yield) should be enough to cover your mortgage payments, with a margin for safety built-in. At first glance property is a foolproof way to wealth and security: once the place is successfully let all the landlord has to do is sit back and watch the money roll in! Well, it's not quite as easy as that, but a properly managed property investment can be a very good way of increasing your wealth.  There are pit falls though, and that's the point of a web site like this: well managed properties and tenants make good business sense and minimise the landlord's risks, but if the management side is neglected you could have real problems.  Letting is a relatively complex area which requires a fair amount of knowledge. You could use agents to do your lettings, and indeed agents can be very useful to you. But, if you are to really become a successful landlord and maximise your earnings (agents charge around 15% of your annual rental income) you should learn to Do-it-Yourself.  Why Renting is Popular  There are several reasons for the increasing popularity of renting and, the other side of the coin, of letting. For the tenant, renting has become a convenient alternative to buying and for some it has become the only option: Job mobility, job insecurity and short-term work contracts mean that many are now wary about becoming locked-in to owning a property. Co-habitation prior to marriage again means that couples are often reluctant to become looked-in to a property and a large mortgage, which may be difficult to unravel if there is a split. Higher divorce rates and an ageing population, with people in general living longer, has increased demand for housing and particularly single person accommodation. With the demise of MIRAS (Mortgage Interest Relief at Source) the government no longer gives the same tax breaks to home owners. In some high-priced areas first time buyers have been priced-out and renting has become the only option.  For the landlord, whether it's a side-line to an existing day job or a full-time occupation, buying to let has become an alternative to other forms of savings and investment: Renting property has become more socially acceptable in the UK, though there is still a long way to go before we reach mainland European and US levels.  We have entered a more sympathetic legal climate for the landlord, with the guaranteed ability to get the property back when she wants to, and to charge reasonable market rents. Buy-to-Let mortgages have meant that property investment has become a real alternative to building societies and stocks & shares, with an added bit of satisfaction and excitement for those who take to it. Low interest rates offered by banks & building societies encourage people with some capital to look for better returns: property is generally a solid form of investment and rarely can you lose all your money, as you can with stocks and shares. The volatility of the stock markets and problems with conventional pension schemes have made some consider property and "landlording" as a safe alternative.  Starting Out  Many start-out buying and letting as a side-line and end up owning a portfolio of properties large enough to support them financially - indeed there have probably been more millionaires created in the UK from property related businesses that almost any other occupation.  There is an added incentive to enter this field as it is now being predicted that early retirement may not be an option for most people and that pensions may not provide all we desire in old age.  Most people think of residential property when becoming a landlord is mentioned: houses, flats, student lets, holiday lets and even taking in lodgers.  However, there is another area for the lettings business: commercial property. Shops, offices, workshops, storage space etc are present in all towns and communities, large and small, and all have the potential to earn the enterprising landlord a comfortable living.  Investment Risk  All investments carry some risk, and generally the higher the return expected in terms of both income and capital growth, the greater the risk.  In terms of overall risk and reward, property investment now compares quite favourably with the relatively low returns from investments such as National Savings and Building Societies and, against the higher returns from the stock market - even  tax-free pension schemes.  Residential Property   Residential property has had strong demand in the UK for many of the reasons stated above. In general the risk involved is low. Even with the ups and downs of the market, you will almost certainly be able to sell quickly if you have bought the right property at the right price, and you may even make a profit. It is still very important to buy in the right locations if you are to let the property easily. You need to buy in a reasonably good and if possible up-coming area where renting is popular, or at least is a feature of the market.  Amenities such as shops, restaurants and public transport links within easy reach are an absolute must. Buying within commuting distance of a big town or city is also desirable - avoid remote rural locations unless there are special circumstances and you know for sure that you can let.  Commercial Property    Commercial Property is different, perhaps riskier, but offers a higher return because of this. Great care must be taken when buying commercial properties to let, such as small shops, offices and workspace in towns and small communities.  Out-of-town and edge-of-town supermarkets and other large chain retailers have put great pressure on the traditional small retailers and shopkeepers, driving some out of business. Some areas have become retailing wastelands with rows of boarded-up shop fronts. Buying in this market therefore needs some considerable care: Buying in the right location - perhaps an improving area with good amenities, plenty of activity and perhaps an added tourist attraction. Buying at the right price, taking into account the state of the small commercial property market and the property itself. Doing your market research - what tenant demand is there likely to be? Perhaps buying a large property and splitting it into smaller units for letting. Secondary Property     This, in the main, is what is available to the small investor, which houses small businesses offering somewhat less security (covenant strength) than the big "household name" tenants renting in the prime locations.  Small business tenants may default on rent payments or they may not look after your property. However, because of these risks the returns are commensurately higher on secondary property than on primary property. The risks involved in investing in commercial property, if you buy right, are not that much different from residential property investments, but often with less management time needed and the possibility of a higher return. However, unlike stocks and shares, for example, properties can be difficult to dispose of - it can take a considerable time.  You should not, therefore, invest funds you may need to realise quickly. There is also the problem of void periods when the property is not let but still incurring ownership costs. Given these problems though, the overall returns can compare very favourably with the very best forms of investment media.  There are also considerable tax advantages for those who wish to maintain high income levels whilst protecting themselves against inflation.  Contents © LandlordZONE® 2006 all rights reserved.