Buy to let
| Event Date: | 1st January, 1970 |
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BUY-TO-LET
By buying a property to rent out, you aim to make money in two different ways:
- The monthly rental income in excess of costs
- The growth in the capital value of the property over time
There are lots of different varieties to look at, but they all share the basic model: regular income, with the hope of further gains over time.
PROFESSIONAL SINGLE LETS
You can think of this as “normal” or “traditional” buy-to-let: renting out a property as a single unit to a working individual or family.
It’s been around forever, and it’s about as simple as it gets. All you need to do is get your sums right in the first place, buy in the right place, get a tenant in, and make sure they’re happily paying the rent.
Pros:
- Easy to understand and get started
- Easy to get mortgages for, compared to other types of buy-to-let
- Takes up little management time – or a letting agent is easy to find
- Predictable returns, as long as you make an adequate allowance for costs
Cons:
- Returns aren’t as high as some other types of buy-to-let
If you’re interested in this type of investment, it might be worth talking to Property Hub Invest and having a free strategy meeting to see if they can help you build your portfolio.
Pros:
- Higher yields than single lets
- Diversified income streams: if one tenant stops paying, there’s still income from the others
Cons:
- More intensive management required
- More regulations to comply with
- Harder to get a mortgage than for a single let
HMOS
An HMO is basically a “house share” – where a property is rented out room-by-room to unrelated individuals. There are different definitions of what constitutes an HMO for different purposes, but the basic definition will do us for now.
Renting out a property by the room tends to generate more revenue than letting it as a whole. For example, you could take a three-bedroom house with two reception rooms, create a fourth bedroom, and rent out each room for £400 per month. As a single property, you might only get £1,000 – so the HMO makes £600 more in rent per month.
However, there are also higher costs: HMOs tend to be let furnished with bills included, plus there’s likely to be more wear and tear. Management is more time-consuming too, which means either higher letting agent fees or more involvement from the landlord.
Even after the extra costs, HMOs generally offer a higher yield – and as a result, they’ve grown massively in popularity over the last five years. The knock-on effect is that councils are taking more action to regulate them: tightening up existing regulations, increasing the types of HMO that need to be licensed, and refusing permission for new HMOs to be set up in some areas.
STUDENTS
Student lets are really just a sub-type of HMOs – but are worth considering separately, because the student market has its own characteristics.
Generally, the management of a student property is more predictable because they sign up for a set amount of time, and you know exactly when they’ll be moving in and out. Also, they’ll usually be on one joint contract – so if one student leaves, the others will have to continue paying their share of the rent.
The challenge is that traditional student house-shares are coming under pressure from new purpose-built student accommodation. Increasingly, students (particularly international students) are attracted to high-spec city centre flats with lots of facilities – and in some areas, this has made traditional student houses hard to let.
Pros:
- The increased revenue of HMOs, with less management overhead
- A predictable student “cycle”
Cons:
- Pressure from purpose-built accommodation in some areas
HOUSING BENEFIT TENANTS
The terminology around housing benefit is tricky: it’s calculated using something called Local Housing Allowance (LHA), but in some areas it’s been rolled into Universal Credit (UC), and many people (tenants included) still refer to it as DSS.
You’ll see all these terms mentioned, but all mean the same thing: renting to tenants who have their housing paid for by the local authority.
The upside of this tenant type is that the rent paid by the local authority is the same for all (for example) two-bedroom properties in the same area, so you know exactly how much you can charge – and due to the way it’s calculated, it can be higher than a private renter would pay for the same property.
The downside is that the tenants can be (but aren’t necessarily) trickier to manage, and councils tend to pay the housing benefit to the tenant – who may or may not pass it to the landlord.
There are ways around many of the challenges, and it can be a high-yielding strategy – but it’s best approached deliberately, with a willingness to put time and effort into finding the right tenants and building knowledge about the workings of the benefits system.
Pros:
- High yielding
- Predictable levels of rent
- High tenant demand
Cons:
- More specialist management required
- Properties tend to be less desirable and benefit from less capital growth
