Finding the right buy-to-let property

We list some key factors you may wish to consider when securing your next rental investment.

A buy-to-let (BTL) property has historically been a smart place to put your nest egg. Generally, lower interest rates and cheaper mortgages have meant that the potential return might have been better than what you’d make in a savings account or pension. rents are expected to climb over the next five years, according to the Royal Institution of Chartered Surveyors, as demand for rental property overtakes supply.

But while bricks and mortar always feels like a safe investment, becoming a BTL landlord is not without risk. Interest rates are forecast to rise, changes in tax relief mean landlords will not be able to offset mortgage costs, and the 3% stamp duty surcharge for second home owners might eat a portion of your return.

As with any property purchase, choosing carefully may offset the risks, so when you’re looking for your next property, what should you consider?

Identify your target market

The first thing a landlord needs to decide is the kind of tenant they want to appeal to. That might include families, students, young professionals or the retired. “What you look for should be catered to your market – if you try to mix and match you could end up with something no one wants,” advises Jennifer Price of HPH Property Consultants.

Families with young children typically want two to four bedrooms, with safe, private gardens, bathrooms with a full bath, at a property in a location near good schools, and green space. Fully furnished properties are also less likely to be required by this market.

In contrast, young professionals will typically be drawn to properties with good transport links, which are convenient for shops, pubs and restaurants. They might typically want to be in a location with other young professionals and may be attracted by a stylish interior and competitive rents.

Would you live there?

A good rule of thumb for any landlord is: would you live there? While grabbing a bargain is certainly possible, in the current housing market there might be a reason a property is competitively priced; you need to look for it.

Noisy neighbours, poor maintenance, pests, a culture of antisocial behaviour, proximity to street noise and fast food outlets can all put tenants off. It is worth visiting the property at different times of the day before you commit to buying. You might consider a walk past after dark, arranging multiple viewings and introducing yourself to neighbours where appropriate.

Look at how a shared outside area is used, for example. Is it divided fairly? Does a particular group of tenants dominate it? These are the kinds of issues that can cause headaches as a landlord.

If your tenants are likely to be put off by something, it might also make it difficult to resell the property – it’s important to think long term.

New build versus a conversion

A period property might be an attractive prospect for a tenant. But, as a landlord you’ll need to factor in higher ongoing maintenance costs. Fixing a rickety roof, treating rising damp or replacing the windows may seriously eat into profits.

However, if you identify an older property in a location that you want and get it for a price that factors in the cost of doing work then this may offset risk. Use the old property developer’s rough calculation when haggling: will the property be worth 20% more than its purchase price plus the cost of building works once it’s complete?

At the other end of the spectrum, landlords might look to snap up new-build apartments because of their hassle-free, low-maintenance nature. New builds are normally pricier per square foot but this premium is offset by lower running costs. Plus, rents can be higher. One downside, however, is that annual service charges can be considerable.

One interesting new-build option that may save landlords buying properties and Northern Ireland some money is zero-carbon housing. Zero-carbon homes under £500,000 are exempt from stamp duty and those that cost more than that have their stamp duty bill reduced by £15,000. However, this tax relief is not available on property purchases in Scotland and Wales.

Zero-carbon homes can be connected to mains electricity and gas but must have sufficient additional renewable power to cover the average consumption of a home over a year. But landlords who wish to sell up should be prepared for the potential pitfalls that come from the installation of solar panels, for instance – not least because of their negative impact on kerb appeal when they come to market the property.

Investing in an older purpose-built flat can be a good option in terms of square footage and design. However, these too can come with hefty ground rent and service charges. This might pay for shared gardens, hallways and repairs to the external building, but landlords may end up with very little control over the management services offered.

Freehold gives landlords more control than leasehold. If you have a leasehold property then your freeholder might ask for fees to complete building work, to let the property, and you’ll need to liaise with fellow leaseholders to complete necessary works – and to split costs. Also, the cost of extending a lease goes up rapidly with fewer than 80 years remaining.

Do your homework

Since 2015 there has been a government clampdown on BTL amid fears landlords were pushing up property prices for first-time buyers. “The biggest battle landlords are having at the moment is with recent policy changes. These are making it increasingly difficult for small-scale landlords to get into BTL,” according to Price.

For newer landlords, it may be advisable to seek professional assistance. “Unless you can commit a great deal of time and effort and really understand the ever-changing law and regulations, I would strongly advise any new landlord to look into a letting agent,” says Price.

There are a number of additional factors that may influence your BTL investment, including the impact of capital gains tax on your potential profits. Before entering the BTL market it is worth seeking the advice of a tax specialist or financial adviser to ensure you are making a fully informed decision.