Investing money in rental properties is one of the UK’s most established forms of investments. Generations of investors have trusted rental property to deliver a strong, long-term passive income. The best investments can grow your wealth, deliver steady revenue for your retirement, and leave you with a fantastic asset to bequeath to your loved ones.
But there are some important things you need to consider before investing in rental properties. Consider some of the rental property investment tips below to ensure you secure an investment that will deliver you success.
1. Do your research
Seems obvious, but too many investors – especially first-time investors – rush into a purchase before doing enough research.
Firstly, to get a good guide to rental property investment, speak to fellow investors. Maybe you know friends or colleagues who are property investors. What things do they recommend? What advice do they have for you based on their experience?
Next, read up on the latest market news and insights. Staying informed will give you a solid foundation to plot out your rental property investment plan before rushing into any purchase.
2. Set realistic ROI goals
When deciding how to calculate return on investment for rental property, it’s important to remember that it should be viewed as an ongoing, long-term strategy. The best property returns take years, not months.
Then think about what you will be using your rental income for. Is it to pay off other outgoings? To build a pension pot? Or will this rental revenue be your main source of income?
Balance this against what you can realistically achieve from the rental market. What is a good ROI on a rental property? This depends on a number of factors, from location to the type of property you’re investing in. For example, a modern rental apartment in Manchester city centre could achieve anywhere between 4-7% each year. A property in London, where property prices are more expensive, is likely to achieve something a little lower than this.
Once you’ve set a good rental return from your investment property, you can then make plans to ensure that the investment you make will help you to achieve this figure.
3. Choose your location carefully
There are a number of different factors you need to take into consideration before deciding the best places to invest in rental property:
- Which locations have an undersupply of rental property, versus rising demand levels?
- Which locations – and types of properties in those locations – are attractive places for people to live?
- Which locations are convenient for work/transport/education/leisure hubs?
- Investing in desirable properties, in convenient locations and in areas of low supply will give you a strong foundation for any rental property investment.
Next, look at local average rental prices and yields. If property values are high, you may find yields are lower. For example, London has a large rental market, but as properties are more expensive than other parts of the UK, yields tend to be lower.
Using your sources of research in step one, check those locations where yield growth is strongest. Once you’ve decided on a specific town or city, you can then begin to drill down on the areas and properties within that location which will be most attractive in the rental market.
4. Decide on management prior to investment
As you begin evaluating rental property investment, one thing that is sometimes overlooked is property management.
Firstly, from a time perspective, managing a rental property can require a lot of your attention. From marketing the property and sourcing tenants, to ongoing repair and maintenance works. Being a landlord could soon begin to eat into your spare time.
Next are the cost implications – and the impact they will have on your overall returns. Managing a property can be expensive, whether it’s advertising costs or buying new materials to fix repairs. If you decide that you will be managing the property yourself, these cost implications will need to be factored into your decision making when setting your ideal yield target.
You may consider working with a property management company to deal with this on your behalf. They will deduct all management fees from your rental income, also giving you a clearer idea of your overall return.
5. Take time before your next move
It may take you a while to achieve your desired yield, and maybe slightly longer to see your returns grow even further still. Unlike assets such as stocks and shares, property returns take months and years, rather than days and weeks.
Don’t make any rash decisions to sell too early. Similarly, even if you enjoy success quickly, don’t rush to expand your portfolio. Take some time to manage one property and navigate peaks and troughs in the market.
Once you’re comfortable with your investment, you can then begin to explore the possibility of building on your rental property investment portfolio.
6. Stay up to date with the latest trends
It’s important to never be complacent when it comes to rental property investment. Times change, attitudes change. What makes your rental property desirable now may not in a few years’ time.
A good case study is 2020 and the impact of the global pandemic. As more people spent time at home in lockdown, new tenant priorities emerged, for example:
- Larger living spaces for home working
- Fast Wi-Fi connections
- Access to outdoor space
- Homes within close communities
2020 shone a light on those rental homes that are becoming increasingly outdated and unable to meet these new demands.
By staying up to date with the latest trends, you can react to market changes and ensure your property – or any future investment – is able to deliver on more of the things tenants want.