How to identify the best buy-to-let property investments

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In an increasingly competitive field, we look at how landlords and investors can employ a canny approach to source the best possible investment opportunities.

Recent research by Moneyfacts found that landlords can now choose from the largest number of buy-to-let mortgage products since the financial crisis, while we’ve previously looked at the rising number of buy-to-let hotspots across the country. But how can landlords pick the right investment? Here, we outline some top strategies and tips to help landlords get the most from their portfolios. 

Conduct thorough research

Before committing to any investment, it’s a wise idea to get to know the area you’re investing in. Does it have a large student population? Is it popular with young professionals? Does it have excellent local amenities or an abundance of green space? One or all of these factors could mean much higher demand from tenants. By contrast, a home in an out-of-the-way development, or one in an area that is too busy and loud, could prove off-putting to prospective renters. Investing in a home in an up-and-coming area, or a soon to be up-and-coming area, might represent a risk, but you could find that properties are cheaper here, competition is less fierce and that you are able to get in before the area becomes really popular and prices soar to sky-high levels. Equally, investing in areas with planned or ongoing major infrastructure works – in particular transport projects such as HS2, Crossrail or the airport expansion at Heathrow – is usually a safe bet, as demand for rental homes in regenerated areas with excellent transport links is typically very high.

Work out rental values

You’ll want to generate as much rental income as possible, but there’s no point in charging high rents if you’re in an area where tenants can’t afford to pay them. The rents you set need to be fair and realistic, reflecting the local market value of other properties in the area. You can use the portals to search for other properties in the local market and see how much they are charging in rent. Is this level of rental income enough to comfortably cover your mortgage payments? Can you generate solid yields or do you need to consider another location? You can also talk to local letting agents to get an idea of the market you’re investing in and the makeup of the tenant demographic.

Furthermore, it’s advisable to work out if an area is prone to void periods, with properties remaining vacant for a long time before being let. Keep a close eye on research concerning void periods and also monitor listings for properties that are similar in size and appearance to the one you are thinking of investing in, seeing how long they take to be snapped up by tenants. You don’t want to invest in areas where properties remain empty for long periods of time, so it’s best to avoid areas that have low demand even if they offer high yields. When considering a new area, it’s worth keeping an eye on average time on market, as well as annual yields and rent as an average percentage of earnings. This will help to give a more complete picture of whether an area is worth investing in or not. 

Consider capital gains

While you’ll first and foremost be concerned with generating good levels of rental income and filling your homes with reliable tenants, you should also have one eye on the future when investing in a buy-to-let property. Areas with strong capital growth are appealing because this increases your chances of making a good profit on your investment if you ever come to sell in the future. Even more so, areas with affordable homes and rapidly rising house prices are ones to keep a close eye on – offering the dream ticket of low initial investment costs and strong capital gains over time. There are no guarantees, of course, that an area with strong house price growth will continue to see prices rising in perpetuity – they could just as easily stall or drop. But an area with a general trend for price growth is likely to continue on that path in the short to medium term, and therefore represents a safer investment than a location with sluggish or dwindling price growth.

Decide on a demographic

Before investing, you should work out which portion of the renter population you will be focusing on. While it’s never wise to restrict yourself to one demographic, you can improve your chances of occupying your homes fast by zoning in on one particular group. This might be students, young professionals or the growing number of family and middle-aged renters in the private rented sector. Once you’ve decided on a demographic, you can then choose the type of property you are going to invest in accordingly. A larger house, for example, will be more appealing to families, house-sharers and students, while a smaller, more intimate flat could be most attractive to young professional couples.

Read more in issue 44 of Li Magazine