Investing in property is not without risk, even though your money is going into bricks and mortar, there can be down sides. Many people see the letting of property as an alternative to pension planning and investing amounts of capital as deposits. The fear is that they're going into this area with their eyes closed and may not see the pitfalls around them. Many are inexperienced at running a small business and have not thought through their business plan properly.

Business Plan

This is a business and should be treated as such. You should write a plan, mapping out who is going to manage the property, collect the rent, deal with repairs and live in the property.

Before you buy a property to let, you need to decide on your target markets, Students, Professionals and Companies all make suitable tenants. All these markets have their strong points and weaknesses and you should consider carefully before letting. You should buy property in areas that are close to your target market. The property should also provide accommodation standards that each group would expect. A student would not expect to move into a flat set up for corporate let, and probably would not be able to meet the rent.

Type of Property

With so many types of property, you should match the property to the market.

You need to decide between flats and houses, garden, extra reception rooms, new build property or Victorian conversion. The number of bedrooms is important, as this determines the amount of people sharing the let. Leasehold property can involve payment of ground rent and a landlord, where freehold avoids these issues. There are no right and wrong answers; it comes down to what is right for your project. The list of alternatives is endless and should be thoroughly researched beforehand. 

Cashflow Forecast

You should write a cashflow forecast taking into account the first year's rental income and all possible expenses. Letting Agent fees, provision for repairs and periods of the property being not let should be taken into account. Mortgage interest and buildings insurance are major expenses and should be near the top of the forecast.

Tenants

You should vet your applicants thoroughly before letting. You could employ an agent to do this for you, they will typically charge between 8 and 10 % of the rental contract for this service. You are then free to manage the property yourself. You could also employ them to do this, but this could cost you an extra 4% to 5%.

Case Study

Diane and Marie have eight properties and vast experience of letting property. They buy specific types of property, around a certain price and let to the same target group. They know the area they buy in, the rent they can receive and how they're going to find their tenant. They have a 'business model'.

All serious landlords will have their own views as to the best way to build a portfolio. With tried and tested methods, many are successful. Here's an example of one set of successful property owners.

Diane and Marie always buy 'off plan', which means the property has not been built when they pay the deposit. They buy early in a development, so in a rising market they may have made £10,000 in capital growth between exchange and completion of contracts. 

They buy new properties around £170,000 - £180,000 near the city in London, paying deposits of at least 25% and keeping cash weighting in their portfolio. The properties have building guarantees of ten years.

Diane and Marie have worked hard at their local contacts, and know two local agents who find them tenants. They manage the properties themselves and only pay the agent to find the tenant. This saves them around 5% of the contract price. They always let to professionals and demand first class references.

They always decorate their properties to the highest standard and furnish with good value, quality items. They've spent a great deal of time finding the best suppliers of furnishings for their needs. Their target market would not accept anything less. They find the rental yield is more reliable by targeting this group. 

They stick to their formula, as it has proven to be successful. They keep to the market they know well and work at their knowledge. They develop contacts in the area and are always aware of when the next development is being built. They believe buying property to let is a good opportunity, but is not a soft touch. They would recommend any new landlord to do their homework first. 

Subscribe to the Pink Finance monthly newsletter and keep abreast of what's new on the site by clicking here. Your address will not be shared with any third party and you may unsubscribe at any time.

©2001-2002

Please note that the articles contained within this site were written for Pink Finance and are subject to copyright. They may not be reproduced in any form without prior written permission from the editor. Graphics/images/logos and site design are by John Myers and remain his copyright. Likewise, they may not be reproduced in any form without prior written consent.