Rents hit ANOTHER record high

Becoming a landlord is an increasingly attractive prospect, as rents and tenant demand continue to rise.

The nation’s landlords, and those considering investing in property, have been given further evidence that now is a great time to be involved in buy-to-let, with rents hitting a new high in June.

Average rents have smashed through the £700 a month barrier to reach yet another record high, according to the latest buy-to-let index from LSL Property Services. The average rent in England and Wales increased 0.7% from May, up to £701 a month.

Perhaps unsurprisingly, London has seen the biggest growth in rental prices over the past 12 months, reaching £1,006 a month, representing an annual growth of 6.9%. However, the North East and West Midlands have seen significant annual growth of 5.1% and 4.6% too. Indeed, only the East of England has seen rents fall over the last year (by 0.3%).

Cashing in

Of course, the rent level only tells part of the story – what any professional landlord is really interested in is the yield they are enjoying.

And while these have been dented by struggling house prices, they are still more than healthy. According to LSL’s research, the total annual return per property reached 1.3% in June. And if current trends continue, the firm forecasts that investors could be looking at a 2.3% return over the next year. That's the the equivalent of £3,776 per property!

An unaddressed problem

A big factor in these ever rising rents is the significant undersupply of rental property. According to the latest figures from the Association of Residential Letting Agents, three quarters of the association’s members have reported prospective tenants outnumber the available properties, rising to 82% in central London.

Incredibly, two years ago the figure stood at just 10% for the UK as a whole and 8% in central London.

This clearly represents a great opportunity for existing landlords to expand their portfolios, and new investors to enter the market.

So how do you go about picking a buy-to-let property?

Target the right tenant

A rental property is a business, after all, so it’s important that from the outset you ensure there are potential customers – in this case, tenants.

Work out the sort of tenant you want to target, and the sort of property that will appeal to them. So if you’re targeting young families, you’ll know that having decent schools and public amenities like parks in the local area are pretty much essential. Similarly, if you are targeting commuters, you’ll want a property within a short distance of stations, etc, as possible.

This process will also allow you to figure out the type of property you want to buy. Again, if you’re targeting families then a studio apartment in the middle of town without any parking is not a great purchase!

Narrowing down the location

So you know what you are looking for from the local area. But you also need to consider the existing rental market in that area.

For example, while the property may seem perfect, if half the other homes on the street are also available for rent, and aren’t shifting, then clearly it’s not such a great investment. It’s a good idea to have a chat with some local letting agents to see what rental demand is like in the area.

Does it need work?

When buying a property for yourself to live in, some people (my wife for example) like to take on ‘a project’ – namely a property that needs some work, but which will allow you to stamp your own personality on the place.

That’s not a great idea when picking a rental property. For starters, your decision needs to be as emotion-free as possible. Just because you see the potential for a feature wall (whatever that is) doesn’t mean that said wall will be a big attraction for potential tenants.

What’s more, tenants expect a lot for their money now, understandably so with rents so high. So it may be worth paying a little extra for that property that already has the updated bathroom, etc, so that you can get it out on the rental market quicker, and don't have to go through the hassle of getting it all updated.

Finally, the Association of Residential Letting Agents advises against buying something with potential maintenance problems (large gardens, lots of woodwork, etc) as these do not particularly add to the rental value, but may cause a lot of expensive issues.

A long term investment

Back during the property boom, buy-to-let was seen by many as a get-rich-quick scheme. Buy a property, rent it out for a year or two, and then sell it on, laughing at the money you’d made as house prices rose.

That was never a sustainable model, and indeed was never the model at all for most professional landlords, who realised that investing in property in this way is a long-term process. Yes, capital appreciation – in other words, your property growing in value – is nice, but the real moneymaking process from buying to let is in the monthly yield. So if you are buying a property as an investment, it’s really important you do so for the right reasons, and in the knowledge that it is for the long-term.

While they may be figures of hate among some, the fact is that landlords play an important role in the UK housing market, a role that is going to be even more important in the years to come. So it’s vital that we get the right people, with the right intentions, taking up the mantel.

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

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