It used to be that real estate investors would ease their way into the industry by buying a “starter home,” then buying a larger home, and renting out the second home, and then buying homes after that as and when they could. But, younger investors are finding that they can use their first home as an investment. Here’s how they’re doing it.
Get The Right Tenants
You need to decide whether you want young professionals or you want to let to families. Some people don’t like the idea of letting to people with children. Others are fine with that. Whatever you prefer, zero in on your ideal tenant and only market to those people. It will make it easier on you, and you’ll find it easier to cater to one group of people, rather than several — especially if you’re renting out more than one room in the house.
Ask letting agents for advice, and search local websites, like www.WilsonPeacock.co.uk, for tips and advice on what to look for in a home and tenant.
Get The Right Size Home
You can’t let a home with 1 or 2 bedrooms if you already have a family of your own to support. What most people believe is that you need a house that’s huge, but which is turned into bedsits, or houses in multiple occupation. While it sounds like a good idea, they can be regulatory nightmares. The health and safety rules can stifle your ability to let the place, and diminish returns.
Instead of buying an older home, look for a newer home that’s already set up for multiple tenancies. It will save you time, money, and headaches.
By getting a home that’s already set up for multiple tenants, for example, you do not have to do any rerouting of the plumbing or electrical, you won’t have to creating heating and cooling zones, and retrofit the HVAC to handle multiple units. You also won’t have to section off parts of the home to accommodate tenants, and spend money on regulatory requirements for multi-tenant homes.
Get A Good Location
Like any other piece of real estate, location matters, a lot. A survey of 5,000 tenants by Knight Frank agency showed that 52pc of renters chose the property they did because it was close to their work. What does this mean to you? It means you need to buy properties for let near major employment centers.
If you’re near where a lot of people work, it makes it easier for someone to sign onto a lease knowing that they’ll be near their job.
Make Sure The Numbers Make Sense
One of the things you have to worry about is profit, of course. It makes sense to get a mortgage if you can afford to buy a property outright because you get tax relief from having it. So, don’t automatically think that paying cash is always the best option, for example.
And, if you had already planned on getting a bank loan for the property, lenders want evidence that your rental income will be 125 to 135% of the mortgage repayments. This gives them some kind of assurance that the mortgage will be repaid, even if there is a vacancy.
Really, you want to shoot for between 150% and 200% of your rental income. That means your total rents on £1,000 per month of mortgage should equal at least £1,500 in income from tenants. If you think about it, you will need at least this much to cover taxes, insurance, and maintenance, not to mention your profit.
Why You Should Furnish Your Property
Most landlords are not sure whether they should pay to furnish their property or leave that up to the tenants. According to Frank’s survey, 57pc of 18 to 24 yr olds want a partially or fully-furnished house or flat. But, if you’re letting to a family, they often want to furnish it themselves. This is why targeting your tenants early, before you buy a home, is important.
Use A Letting Agent
It’s easy to get in over your head with this. If it’s your first time, hire a letting agent. Letting agents charge between 8 and 15pc of the rental income, but they can help you manage all the regulations, health and safety changes, and help you do background checks on tenants.
You can also have them manage the property for you, so that it’s largely a hands-off affair. You’re responsible for paying all the bills, but your property manager is the one who does all the heavy lifting.
Scott Jones has recently managed to get himself onto the property ladder, and plans on building upon this to become a property investor and landlord in the next few years.