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How to buy a rental property?

Posted by Jehan Anis on September 22, 2022
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How to buy a rental property?

 

There are numerous reasons to consider purchasing a rental property. Additional income, an appreciating asset, and a relatively secure investment fund. These are just a few of the many reasons why investors choose property.

 

If you want to become a buy-to-let landlord, you must have a thorough understanding of the rental market. And also understand how to purchase a rental property that will generate high returns.

 

Let’s examine how to purchase a rental property and whether buying one in 2022 is wise.

 

 

Rental Market in the United Kingdom

 

In November 2021, rental growth in the United Kingdom reached a 13-year high. A lack of available housing combined with a strong employment market is increasing demand and preserving rental growth.

 

In the 12 months beginning in April 2022, rents paid by tenants increased by 2.7%. By the end of 2022, it is anticipated that growth will remain resilient, with a total increase of 4.5%

 

 

Rent Increase Variations Nationwide

 

The East Midlands experienced the highest annual growth in private rental prices, at 4%, while London remained the lowest, at 1.1%, despite a significant increase in recent months.

 

Workers no longer need to be close to the office because of remote work, and rental growth rates in the capital fluctuate more than in the rest of the country. As a result, the supply-demand imbalance in London is more significant than in other high-growth metropolitan areas.

 

 

Average UK Rents

 

The average monthly rent in the United Kingdom is currently £995, or £830 excluding London. London’s flats rents have risen faster than in any other part of the city, reflecting a shift in tenant behaviour as people seek more space in the suburbs.

 

 

Single Occupancy vs. Shared Housing

 

A third of renters in the United Kingdom are single occupants, and the average tenant now spends 37% of their gross income on rent, putting a strain on affordability. The average rent paid by the two-thirds of renters who live with friends, family, or housemates is approximately 18.5% of their income.

 

 

Affordability and Price Increases

 

Amid rising living expenses and a global energy crisis, the average renter in the United Kingdom pays up to £62 per month more than at the outbreak’s onset. Moreover, due to sharp rent increases and rising living expenses, renters today spend twice as much on bills and living expenses as people over the age of 51. Still, they have lower earning potential than their parents at the same point in their careers.

 

 

Pandemic Tendencies

 

The rental market in the United Kingdom has always been competitive, but Covid-19 exacerbated this trend. In addition, as hybrid work trends become more prevalent, renters are searching for additional space to work remotely in addition to the ideal property in the ideal location and within their budget.

 

 

Offer and Demand

 

There is an ongoing mismatch between housing demand and supply in the United Kingdom. Outside of London, asking rents are at an all-time high. As a result, demand for rentals is up 6%, while the number of available properties is down 50% compared to the same time last year.

 

On the supply side, tenants increasingly sign longer leases, resulting in less inventory being returned to the market than usual. As a result, existing renters considering relocation and new renters entering the market have limited options.

 

 

Excellent news for landlords

 

For landlords, the situation is entirely different: those with rental properties in desirable locations are experiencing high rental demand, solid returns on investment, and shorter vacancy periods.

 

Location will affect a landlord’s experience, but rents are expected to remain high and increase further over the next year. Some tenants may be willing to pay a higher rent to secure the most desirable rental properties.

 

 

 

The Economic Situation for Purchasing Rental Property

 

Low-interest rates and unusually high inflation characterise current market conditions. This means that inflation-protected assets, such as rental properties, are among the safest investments (when compared to other avenues like the stock market).

 

Now is an excellent time to be a landlord or borrower, as you can acquire an appreciating asset with depreciation debt. In addition, purchasing a property with a fixed-rate mortgage can be a wise investment. Even if inflation moderates, it may remain elevated for several years, and housing remains a relatively safe investment because people will always need a place to live.

 

 

Where are The UK’s Hottest Rental Property Markets?

 

Strong Evolution in the Northwest

 

Regional rental markets vary greatly. The North-West continues to experience high tenant demand, with seven of the top ten rental demand hotspots located in North-West cities.

 

 

Northern Hotspots

 

Manchester and Liverpool are particularly desirable locations for tenants and real estate investors. Manchester’s asking rents have increased by nearly 20% in the past year, while Liverpool’s are up around 17%. In addition, both cities offer excellent employment opportunities and have more affordable rental housing than London and the South-East.

 

As the cost of living rises, housing is frequently a person’s largest monthly expense. As a result, demand for rental properties in the North-East will likely continue to grow due to the region’s relative affordability compared to other areas of the United Kingdom.

 

 

 

What to Consider When Purchasing a Rental Home?

 

Every investor seeks a profitable property.

Here are several things to keep in mind:

 

The Neighbourhood

 

High urban sustainability, conveniences, and access to public transportation are indicators of a neighbourhood’s strong rental market. If you purchase near a university, your target market will likely consist of students. Families will probably reside in the suburbs, so invest in an area near excellent schools. Targeting young professionals will be easier in regions with a thriving job market.

 

 

Future Developments & Re-Generation Plan

 

Check with your local government for information on upcoming construction projects. A great deal of construction typically indicates a region’s potential for growth.

 

However, you should know the developments that could harm your property. For example, more new housing could decrease the value of neighbouring properties and put your property in direct competition for rental listings.

 

 

Listings and Openings

 

A neighbourhood with an unusually high number of listings may be a sign of decline. High vacancy rates frequently compel landlords to reduce rents to attract tenants. Conversely, low vacancy rates often allow landlords to increase rent.

 

 

What is a Good Rental Property Yield?

 

Typically, rental yield is a good indicator of a property’s profitability. Ensure you know the average rent you can charge for a property. If a flat is extremely expensive and the market is saturated with rental properties to the point where the average rent is low, the property may not be a good investment.

 

  • Gross rental yield is the annual income from rental property as a percentage of the purchase price or value of the property. To calculate the gross yield on the rental property, follow these steps. Divide the annual rental income by the property’s value, then multiply by 100 to obtain a percentage.

 

  • Net rental yield is the amount remaining after deducting all expenses, such as letting agent fees, maintenance costs, accounting fees, rental property insurance, etc.

 

Before investing in a property, you must calculate the rental yield. Otherwise, you may pay too much for a house or apartment. Only to discover, after deducting expenses, that average rents do not make it profitable.

 

 

 

What are The UK’s Average Yields?

 

The average yield in the United Kingdom is approximately 4.4%, but varies significantly by region. Your property’s purchase price will dramatically impact its rental yields. Nottingham is one of the most lucrative regions in the United Kingdom. With properties in the NG1 postcode producing rental yields of 11.99%.

 

Close to two of Liverpool’s universities, the L7 district offers average rental yields of 9.79%. Manchester also ranks highly in the M14 postcode area, with rental yields of 7.07%.

 

 

What is a Good Rental Income?

 

Generally, a buy-to-let property with a net rental yield of 7% or higher is considered to have a good yield.

 

 

What Tax Applies to Rental Properties?

 

Capital Gains on Rental Property

 

The sale of a rental property can generate substantial profits, but you may be subject to capital gains tax. 

 

Stamp Duty on Rental Real Estate

 

Landlords have paid 3% more in stamp duty on each band when purchasing a buy-to-let property since 2016. This surcharge could add thousands of pounds to the bill for stamp duty.

 

Those purchasing a second property are subject to an additional 3% tax over and above the applicable tax rate as per the threshold bands. However, if you sell your primary residence within 36 months, you are eligible for this tax refund.

 

 

Tax Exemptions

 

When you sell a rental property, you are eligible for certain deductions. These include sale-related expenses such as real estate agent commissions, title fees, etc. You should consult a tax professional to determine which deductions you qualify for.

 

 

How Can You Locate the Best Buy-to-Let Neighborhoods?

 

There are several ways to identify emerging buy-to-let and real estate investment areas, including:

 

Inflow of Youngsters:

 

Young professionals in their twenties and thirties frequently set the trend for the following best areas to invest in property.

 

Employer Influx:

 

When mid-sized to large employers relocate to a region or city. This indicates that property values may increase and the area is rising.

 

Investment:

 

Infrastructure investment in cities can be a good indicator of a region’s potential for growth.

 

Amenities:

 

Well-serviced areas with respect to amenities. Shops, schools, and supermarkets – can indicate an area’s potential desirability.

 

 

Conclusion 

 

It’s a fantastic opportunity to become a landlord in the UK if you’re considering purchasing a rental property. The appeal of real estate is enhanced by stable rents, robust demand for rental property, and the fact that real estate remains a relatively secure investment. Just be sure to comprehend the risks, costs, responsibilities, and buy-to-let regulations associated with UK rental property ownership. To learn more about buy-to-let properties, please contact our property experts.

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