Most landlords make a success of buy-to-let but not doing so is usually down to one reason: failure to carry out due diligence.
It is impossible to over-emphasise the importance of engaging in a comprehensive appraisal of an intended residential letting purchase prior to reaching the point of no return. Here are six points which any new buy to let investor cannot afford to ignore.
Do not take as gospel claims that a flat will ‘pull in tenants’
Firstly, do not take as gospel claims by a selling agent that a flat “will pull in tenants, no bother” or “is certain to secure a minimum rental of £1,500 a month”. While that may be true, it is always best to seek a second, and preferably independent, opinion – especially on location.
No one is sure who originally said that the three aspects of successful property investment were “location, location, location” (one theory is that it first made it to print in an issue of the Chicago Tribune as far back as 1926) but the saying has stood the test of time.
A nice property in a nice street is pointless as a source of rental income if the location does not appeal to most tenants – for example it’s too far from a regular bus route or not within walking distance of a convenience store.
Consequently, I have always advised inquirers to “buy the poorest property in a popular location than the best property in an unpopular location”. A person has the ability to improve a dwelling place but not an entire area.
There is another saying in the rental investment market: “A property difficult to buy is a property easy to sell”. When there are a number of competing buyers – leading to a premium price being achieved – this is simply the market’s reflection of a property’s potential for regular income and capital appreciation.
In such a scenario, therefore, there may be a good case for a buyer going the extra mile when it comes to submitting an offer. Almost certainly, when the time comes to liquidise, the situation will repeat itself leading to a swift and profitable sale for the vendor.
However, point four is a caveat. Since the financial crash of 2008 (and its consequence for property values), more emphasis that previously is being placed on rental yield. So the investor must have the wherewithal to spend on internal decoration and equipment as good presentation is essential to keeping periods of rental void to an absolute minimum. That old sofa, just discarded by mum following her recent trip to Ikea, or a second-hand cooker purchased at a car boot sale, are simply unacceptable to the majority of contemporary tenants.
My penultimate point may seem ironic coming from a letting agent of 35 years’ standing but the wise investor should avoid, at all costs, a flat in a tenement “stair” which is already wholly or mainly given over to tenants, especially students and other younger people.
Although on occasions exaggerated, problems with some student tenants – especially those in HMO properties – are not unknown and do not require repeating in detail. So all that needs to be said is that buying into a tenanted stair could lead to unwanted hassles and although a letting agent will use all their professional skills to deal with problems, it should be remembered that an agency can do only so much because current laws give tenants – even anti-social ones – considerable rights.
Apart from possible management problems, a “student stair” will mean limited interest by future buyers (both owner-occupiers and investors), inevitably leading to lower-than-anticipated capital growth.
Finally, over several decades, savings, bonds and equities have consistently been outperformed by residential letting. But the latter cannot be guaranteed to be trouble-free nor can the asset be liquidised with a quick phone call to a stockbroker.
So, if age and general level of health might be an issue, due diligence should also include asking oneself – and answering honestly – “Is a buy-to-let investment really for me?”
• David Alexander is managing director of DJ Alexander