Things to consider when buying below market property as a buy-to-let investment

on Dec 17, 2014
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Investing in rental property is one of the hottest tactics in the market at the moment, with landlords enjoying rental yields as high as 8.73 per cent in the best areas around the country. 

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The most effective way to secure strong returns as a landlord is to invest in below market value property, which increases the potential profit margin and can greatly increase returns. It also allows investors to see strong gains in value over the years. 

However, while the temptation will be there to just dive in and purchase a home that seems particularly cheap, there are still things that need to be considered. We take a look at some of these factors. 

Is it really below market value?

This is probably the first thing any investor needs to look at. Is the property really below market value? It may seem cheap, but you should always check the area in general to make sure that this really is the case. 

Websites like Rightmove and Zoopla have search engines that allow you to check areas for recent selling prices. Look for properties of the same type in that area, and try to see what they have sold for in the last six months. Any longer than that is likely to be irrelevant given how fast the market has moved in 2014 (prices have climbed 11.3 per cent this year according to LSL Property Services). 

Will it rent? 

There are some 3.5 million homes in the UK’s private rental sector, but there are still some areas of the market where people predominantly buy rather than rent. It’s important to know that a property will rent before you buy it. Even if it’s cheap, if it’s going to remain void or see long void periods, you’re still likely to lose money. 

Best practice is to look at what’s around locally. Are there amenities such as train stations, schools, hospitals, shopping centres, commercial offices and other employment hubs that attract the most common types of tenants, for example? Another strong tactic can be to talk to local lettings agents to find out how properties of a particular type perform in that area. 

Do the maths

It’s important to work out what a property will bring in for an investor. Weigh up the price of what you are buying, any management and maintenance fees or costs and local rates like council tax as well as contingency money for any unexpected issues against the rental income it is likely to bring in. Will it be worth your while, and are you likely to see a strong return in the long term given what people are paying to rent there?

What work will need done?

Finally, you need to examine why a home is below market value. Is there work that needs to be done to bring it up to standard? What will this cost? Will it impact on the income you make and does it make the lower initial price worthwhile?

These are all important considerations when checking if a below market value property will make a profitable buy-to-let opportunity.

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