This article is part of Morningstar's Guide to Investing for Income
Monthly rent for properties in the UK has surpassed £1,000 for the first time – and the average advertised rent in London has reached an eye-watering £2,334 per month.
According to the Move with Us Residential Rental Index, rents jumped £70 in the capital in just three months to the end of June.
The residential property rally has been fuelled by record low interest rates, meaning that despite stricter guidelines on lending requiring home buyers to have larger deposits, many larger mortgages are more affordable for households.
Government initiatives securing loans for first time buyers and those who want to move up the property ladder have also boosted the property market. Much speculation surrounds the sustainability of the housing market rally. The Office of National Statistics recently revealed the average UK house price increased by 8.0% in the year to March 2014, down from 9.2% in the year to February 2014. House prices in London have jumped by 17%, an increase that pushed average national prices higher.
Despite considerable fluctuations in the housing market over the past decade property remains one the favoured investments for Brits. According to Barings Asset Management, five million Britons are relying on their property to provide their pension. While over-reliance on a single asset to provide income retirement is foolhardy, property can play an important role in a well-diversified portfolio.
Commercial property funds offer investors a less correlated income stream within a mixed-asset investment portfolio, but for those that prefer a more hands on approach, residential buy-to-let property can provide a yield of up to 8% a year.
When purchasing a buy-to-let property George Spencer, CEO of lettings agency Rentify, said different tenants have different requirements but there are certain factors that will help a property rent more quickly.
“Look for properties near transport links, shops and parks, with a decent amount of storage and in a good state of repair. Good natural light, a garden and off-road parking all go down well, as does good security and low crime rates,” he said. “Landlords must research potential yields based on the area and tenant type. Yields can vary widely across the UK and by property type.”
Recent research by HSBC suggests that regionally, Southampton offers investors the best return on their investment. With an average house price of £143,011, average rent of £1,040 a month, gross rental yield totals 8.73%. Manchester has an average house price of £104,244, average rent at £693 a month, resulting in a gross rental yield of 7.98%.
Portsmouth’s average house price is £146,709, average rent is £795 a month resulting in a gross rental yield of 6.50%.
According to buy-to-let lender Paragon, students, young professionals and retired tenants bring in the largest return on your investment, while non-housing allowance benefit claimants generate the lowest average yield.
Spencer warns potential landlords that there are several fees associated with getting a property ready to rent so investosr must budget for these when doing their sums. An Energy Performance Certificate (EPC) and a Gas Safe Assessment (CP-12) are a legal requirement. Although there’s no equivalent certificate for electricity supplied to the property, the Electrical Equipment and Safety Regulations say you must ensure that electrical items are safe, with instructions provided.
“Tenants rightly expect that properties are fit places to live and most properties need some work before they’re ready to let,” he said. “Once they are, you’ll need to make sure that you have a float to cover maintenance and repairs throughout the tenancy. All soft furnishings must also comply with the Furniture and Furnishings Fire Safety Regulations 1988.”
There are costs associated with promoting your property such as professional photography, floorplans and premium advertising – although the fact that 90% of property searches are now down online has lessened agency fees considerably.
Be vigilant before installing tenants. Background checks will save you thousands in avoiding damage repairs, legal fees and lost rent. Buildings and contents insurance as well as specialist landlord insurance policies which cover for things such as missed rent, white goods, boiler cover are crucial.
“Don't assume the property will always be occupied. Void periods where you don’t have a paying tenant are more common that you may think,” said Spencer.
“Rental property is a large, long-term investment and you’ll need to ensure you get the most for your money by maintaining the property. This will mean fewer void periods by creating a desirable place to live and increasing your capital gains when you come to sell.”
Before investors pile in to buy-to-let, it is very important to consider your existing exposure to the residential property market. Your main residence is often an investors single largest holding and it should be considered as part of your investment portfolio when calculating asset allocation. If your house makes up the majority of your investment portfolio, it may be more sensible to allocate funds towards less correlated investments such as equities and bonds.
