Many new investors are often confused about what to do next having decided upon a possible investment area or areas. A classic mistake is often to jump in and start researching properties for sale with a view to identifying a specific property for purchase.
This is NOT the first thing you should do.
Researching which properties are in greatest demand, the types of rental fees you could command from these properties, and which properties are in shortest supply should play a vital role in your planning.
Rather than heading straight off to the estate agents’ offices, you should instead talk to the local letting agents and familiarise yourself with the market. There are two simple questions you can ask which will go towards helping you make the right decision. Firstly, “What type of property are tenants looking for in this area?” and secondly, “Which streets (or suburbs) are they looking to live in?”.
The answer from each letting agent might be along the lines of: “If you give us two or three bedroom terraced houses to let in x, y and z areas of the town, we will let them all day long for you at between £425 and £450 a month”.
Armed with this information, you can then start searching for your first investment property. Having spoken to the local agents and done your research, you should know exactly what type of property to look for – for example, a 2 or 3 bedroom terraced house, you should know exactly where to look – in x, y and z areas, and you should have an overview of what prospective tenants want and how much they would be prepared to pay for this type of property.
This sounds logical but it’s not uncommon for many new investors to get this process backwards. Those with little experience will first look for a property that they can afford. They will look for it in an area that appeals to them personally (if the price allows them to); and they will most likely choose a property that they would like to live in themselves, or its nearest equivalent – price permitting.
This is wrong on many levels. Having gone on to buy a 4 bedroom, detached, executive house, these investors would go to their local letting agents only to find that tenants for these types of properties are few and far between.
Another scenario is that they’ll hear anecdotally from the guy in the pub that “if you want to get into buy to let, you should get a 1 bedroom flat”. So they buy a 1 bedroom flat only to find that most tenants in that area are actually looking for 2 bedroom flats or 2 or 3 bedroom terraced houses.
It’s only when they struggle to let the property with the interest on the finance clocking up daily that they realise they have got it wrong and are likely to be faced with long void periods between future tenancies.
Ten years ago a handful of investors who bought 3 and 4 bedroom properties along the River Thames as buy to lets came across the reality of a situation like this. To break even and to just about cover the mortgage, they needed to net between £1,500 and £2,000 a month after costs. With few tenants looking to occupy 3-4 bed homes, (and even fewer willing to pay the price tag) most stood empty and were up for sale. As a result, many were sold on and only a handful were lucky enough to recoup their investment after stamp duty, legal fees and mortgage costs. These investors hadn’t factored in what tenants in the area were looking for and they certainly failed to consider what the occupants would be willing to pay.
Wherever you are in the UK (or the world even), it’s important to realise that each individual area is different and has its own “micro market”. For this reason, research really is key. Talk to your local agents, take the time to make sure that there really is sufficient rental demand for the type of home you are interested in – and at what price (to help you avoid void periods) – and only then think about moving on to look for investment properties for sale.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, Author & Property Investor
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