Identifying a Suitable Property

In this chapter:

- recognising properties that are in demand

- researching local trends and facilities

- the potential of an investment property

- assessing leasehold restrictions

- avoiding a HiMO property

- essential elements to increase letting potential.

If you have yet to buy a property then you are in a very advantageous position as you can locate and purchase a unit that you know will be in demand. The only restrictions are likely to be the availability of such units and having enough funds to buy one. Failing to make a profit from letting is usually the result of poor planning and inadequate preparation. Many landlords make the mistake of trying to provide accommodation that is unsuitable for the area and only later discover there are not enough tenants available to maintain a high occupancy rate. The secret is to accurately identify the location, size and style of property in highest demand and then endeavour to supply it.

RECOGNISING PROPERTIES THAT ARE IN DEMAND

Identifying your client group

There are two ways to do this depending on your personal circumstances and the preferred type of property and tenant.

- If you already have a preferred location, research the area thoroughly to assess the most likely type of tenant; this will help identify the most suitable type of property.

- If you have already decided on a particular type of tenant, examine where those tenants are most prevalent and buy appropriate property in that specific area.

In both situations, it is best to consult local estate agents who also operate as letting agents. They will advise on the best area to consider and the type of tenants seeking accommodation within it. This advice is usually free as they will see you as a potential future customer. Use their expertise as it could considerably increase your future profit margin. The following information may be helpful if you remain uncertain about your target client group.

Students

Students often seek low-cost accommodation close to their college or university and cohabit to reduce the burden of rent. This can be problematic if one of the group later decides to leave during the tenancy. It may be the students’ first experience outside the parental home and the taste of freedom may result in excessive noise, untidiness and damage to property and de´ cor. Landlords should consider supplying robust furnishings and ensure a parent acts as guarantor. Properties are likely to be in high demand during term-times only and may remain empty for periods in between. Before supplying student lets, confirm with the educational institution that a need exists for private sector dwellings as many provide their own subsidised accommodation on campus or nearby.

Tenants with young children

Terraced and semi-detached houses will be in high demand amongst this group providing they have adequate space and a safe enclosed garden area. Properties meeting the needs of a growing family are ideal, particularly those located near a school, recreation space, health centre and neighbourhood shops. Good public transport routes are also often desired.

The unemployed and/or those in receipt of housing benefit

Bear in mind that anyone can become suddenly unemployed and may therefore need to apply for housing benefit. That said, supplying specifically to those in receipt of benefit is not a course advised for the novice landlord. The benefit system is very complex and fraught with problems. Even experienced landlords are often frustrated by delayed benefit payments, unhelpful local authority staff, red tape and bureaucracy. Landlords are advised to obtain information from the local authority about housing benefit and to consult experienced landlords through local forums or associations.

Employed young couples

By far the greatest number and diversity of tenants seeking rented property of all types are young single people or couples in full-time employment. This is the ideal group to target as there will be fewer problems encountered before, during and at the end of a tenancy. The type of property best to supply will vary according to:

- employment opportunities in the area

- the income and aspirations of tenants

- and the facilities afforded by the neighbourhood.

Elderly tenants

In general, elderly tenants focus on different elements from younger people when looking for rented accommodation. Matters important to them will include:

- ease of access

- good and courteous neighbours

- security and safety

- good public transport

- and plenty of local facilities all within easy reach.

In contrast, properties:

- above the first floor with no elevator

- located in an area with a high crime rate

- with a younger age population

- or lacking security measures

are likely to discourage the elderly. This is a good group to target if a suitable property can be found, as most elderly tenants:

- care for their accommodation

- pay their rent in full and on time and

- tend to repeatedly renew contracts over a long period.

The disabled

The term ‘disabled’ encompasses a wide group of people, many of whom are poorly catered for in the private sector. This gap in provision can be filled successfully and profitably by landlords prepared to meet the needs of this group. Approach the local authority, social services, nearby hospitals, and also any appropriate charity or agency, to assess the level of demand and appropriate requirements.

Remember that, in providing a property to this group, you will have to ensure it is adapted to meet the needs of the individual and that it conforms to both local and national guidelines for health and safety (you or the tenant may be entitled to grant-aid for any necessary adaptations).

Young professional high-earners

This is a good group to target if you can acquire the right property in a sophisticated and fashionable area or a luxury residence close to a city centre. Young professional high-earners (YPHEs) rarely rent for more than two or three years in any location because they have a career strategy and frequently pursue improved positions elsewhere in the country. However, whilst occupying your property they are prepared to pay a high rent and will care appropriately for the accommodation. The only problems to consider are that YPHEs:

- have high expectations about the quality and location of the property

- are concerned about the calibre of furnishings and standard of decoration

- will demand a superior level of service from you as their landlord.

Any faults reported must be dealt with fast and efficiently. The initial capital outlay for a suitable property will be considerable but, given its location in a good area, it should achieve above-average capital growth by the time you sell it. Meanwhile, you can anticipate a reasonable return through letting.

Company lettings

Consider targeting major employers in the region with details of your property. With a company let it is the business that is named on the tenancy agreement instead of an individual person. This type of tenancy has several advantages for the landlord:

- rent payments are usually made promptly by bank standing order

- tenancies are often renewed over several years

- any damage is usually dealt with quickly and professionally.

Companies invariably look for well maintained units at competitive rents and with a superior management service. A company letting can pay dividends if you and your chosen property can fulfil these requirements.

RESEARCHING LOCAL TRENDS AND FACILITIES

Buying close to home

If possible, choose a property near to or within easy reach of where you live. Apart from giving you some peace of mind it also means you will:

- have good local knowledge to answer tenant enquiries

- be within easy reach for viewing appointments, emergency repairs and to undertake regular inspections of the property

- recognise when the area is deteriorating to assess the best time to sell.

Local information

Find out all you can about the neighbourhood where you are considering buying property and try to match the facilities available with your chosen client group. It is rare to find an ideal property in a perfect location at an acceptable price, but confirming the greatest number of positive elements under each heading will produce mutually satisfying results for you and your future tenants.

Supply and demand are the greatest influences involved in letting. They affect the length of time a property will be let (without void periods) and the rent achievable. Assess demand by talking to letting agents who will have a unique insight into their area. Assess supply (and any potential over-supply) by looking at ‘to let’ boards in the neighbourhood and advertisements in local newspapers. Check the same boards and adverts weekly to see how quickly properties are being let.

Ask the local authority planning department about new developments under construction or any that are being proposed. What changes are likely to take place in the locality? Will they adversely affect your ability to let a property nearby?

Examine the number of major employers in the area and identify any proposals for land redevelopment. A new hospital being built will attract a growing local population. Staff will need somewhere to live and this increase in demand could sustain your property for several years. Conversely, a factory announcing closure might be symptomatic of a local recession. Property may be devalued as a result and there could be an over-supply of rented accommodation in the long term.

THE POTENTIAL OF AN INVESTMENT PROPERTY

Apartments -v- houses

If the demand exists and you are able to quantify it, invest in an apartment rather than a house. The main reasons for this are:

- apartments attract a mobile population and are always in high demand, particularly in city-centre areas;

- apartments require less maintenance, reducing annual expenditure;

- apartments are usually less expensive to buy and easier to sell;

- upper floor apartments are more secure during void periods;

- apartments generally occupy less space and therefore require less furniture, carpets and equipment;

- a garden will require attention during void periods; an apartment balcony will not.

However, bear in mind:

- in rural areas, small family houses with a garden may be in higher demand than apartments;

- apartment blocks may have a service charge for maintenance and common area upkeep which will have to be paid whether the property is occupied or not;

- the enjoyment of an apartment is dependent on there being thoughtful neighbours above, below and to each side;

- the cleanliness, decoration and general condition of the external aspects and communal entrance hallways will be controlled by the management company, whereas with a house the owner is usually directly in control;

- apartment owners are often prohibited from letting their property by the lease (but see below).

Investment property

‘Investment property’ is a title often given to dwellings that need considerable repair. They may appear attractive to the novice landlord simply because of their low price but buyers of this type of property need to be aware that:

- A comprehensive survey is essential before submitting an offer, so that all defects are identified and realistic costs of repair can be obtained from contractors.

- There will be a void period from the day of purchase to repairs being completed when no income will be earned. Despite this, there may be charges to you as the owner for council tax, electricity, gas, service charge and/or management fees, which will have to be paid from personal funds

- The property may be in a run-down area with neighbouring properties in a comparable poor condition and this will reduce the long-term letting potential.

- It may be difficult to obtain a mortgage, as most lenders will not want to accept the risk of repairs not being completed. Any loan granted is therefore likely to be low and the lender may also require additional security.

- The investment property may be classed as a HiMO (see below) and lack the minimum fire-safety and other standards required for such dwellings. Some landlords are now disposing of these properties, with vacant possession and at a low market value, to evade the long-term improvement costs.

ASSESSING LEASEHOLD RESTRICTIONS

Leasehold properties

Where a property is leasehold, the owner (‘lessee’) must abide by the conditions of the lease. Leases are usually for a term of 999 years (or the remainder of) for olderproperties, but can be for the remainder of 99 or even 50 years for many newly built inner city dwellings. Once the lease expires, the property ownership usually reverts to the headlessor. Mortgage lenders are often reluctant to advance a loan for any purchase where the lease is 50 years or less because the property value reduces according to the shortened lease-term remaining.

The lease should always be thoroughly inspected before purchase as many prohibit letting. If such a clause exists, write to the headlessor and enquire whether owners are allowed to conditionally let (or more accurately sub-let). When an arrangement of this type is made, there is sometimes an additional charge to the owner which may be a single or an annual payment or a charge per tenancy. Bear in mind that these additional expenses reduce annual letting profit.

The lease may also prohibit your tenant from keeping pets, disturbing neighbours with noise after a certain time, erecting a satellite dish or TV aerial, and many other restrictions. As the owner, you will be responsible for ensuring your tenants keep to these conditions.

AVOIDING A HiMOPROPERTY

Houses in multiple occupation (HiMOs)

The novice landlord should be extremely cautious before contemplating the purchase of a ‘House in Multiple Occupation (HiMO)’ – or of letting an ordinary house and, by virtue of the manner in which it is let, allowing it to become a HiMO. The problem is that this type of property must conform to a vast array of rules and regulations, some of which are nationally enforced, others are specified by particular local authorities.

The Housing Act 2004 introduced a stringent regime of safety requirements and management procedures that some owners of this type of property must comply with. Failure to do so can be considered a criminal offence and attract a fine up to £20,000. Local authorities have been granted tougher new enforcement powers and a new definition of a HiMO was introduced. This states:

‘House in Multiple Occupation’ means a building, or part of a building (e.g. a flat):

- which is occupied by more than one household and in which more than one household shares an amenity (or the building lacks an amenity) such as a bathroom, toilet or cooking facilities; or

- which is occupied by more than one household and which is a converted building which does not entirely comprise self contained flats (whether or not there is also a sharing or lack of amenities); or

- which comprises entirely of converted self contained flats and the standard of conversion does not meet, at a minimum, that required by the 1991 Building Regulations and more than one third of the flats are occupied under short tenancies.

And is ‘occupied’ by more than one household:

- as their only or main residence, or

- as a refuge by persons escaping domestic violence, or

- during term time by students, or

- for some other purpose that is prescribed in regulations.

And the households comprise:

- families (including foster children, children being cared for) and current domestic employees,

- single persons,

- co-habiting couples (whether or not of the same sex).

The above definition describes many let properties and, once a property is defined as a HiMO, landlords must comply with the complex array of regulations or risk facing dire consequences. Local authorities have the powers to close a property down and/or inflict heavy fines on those failing to comply.

The Housing Act 2004 also introduced mandatory licensing for certain types of HiMO. These include those comprising three storeys or more that are occupied by five or more persons, who comprise two or more households. It is prudent to note that a loft space, attic or basement capable of being used for residential purposes will be considered as one storey in the calculation. Some local authorities also operate landlord accreditation or registration schemes for HiMOs that do not automatically have to comply with mandatory licensing.

The ‘Housing Health and Safety Rating System (HHSRS)’ was introduced under Part 1 of the Housing Act 2004 as a replacement to the prior Houses in Multiple Occupation (HiMO) fitness test. HHSRS is a new approach to the assessment of risks to health and safety in residential premises. Local authorities will in future base enforcement decisions in respect of all residential premises on the basis of assessments under HHSRS.

For more information consult the Environmental Health Officer or Housing Department of the local authority region in which the property is located or the area you intend purchasing. Also, obtain a copy of the Housing (Management of Houses in Multiple Occupation) Regulations 1990 from The Stationery Office (TSO), telephone customer services on 0870 600 5522 for details or obtain online at www.opsi.gov.uk

There is an excellent website at www.landlordzone.co.uk for additional reading on this and other relevant subjects and for an overview of the regulations. The Department for Communities and Local Government was established in 2006 and its website has a wealth of valuable information for HiMO landlords, including various Statutory Instruments detailing the new regulations introduced under the Housing Act 2004. This set of data can be accessed at www.communities.gov.uk

ESSENTIAL ELEMENTS TO INCREASE LETTING POTENTIAL

There are specific elements of a property that increase its letting potential. Although these will vary according to the individual location and certain tenant groups, many are universally desired by those seeking new accommodation. Examine the following and attempt to acquire a property combining most of the components listed (not in any preferred order):

 

Houses	Apartments
attractive location	attractive and fashionable location
private and safe garden	well-maintained communal grounds
secure garage	secure garage or designated bay
double-glazed windows	double-glazed windows
modern kitchen and bathroom	modern kitchen and bathroom
gas central heating	gas central heating
separate shower cubicle	quality soundproof timber flooring
quality alarm system	quality alarm system
spacious living room	above ground floor
log or coal-burning fire	some storage space
south-facing garden	south-facing balcony
conservatory	lift access to upper floors
original quality features	modern hi-tech features
neutral de´cor	neutral de´cor
fitted bedrooms	fitted bedrooms
guest WC	en-suite shower
good commuting position	good public transport route
quiet roads (safe for children)	close to or in a city centre location

Who is selling and why?

Find out as much as you can about the seller and do not be afraid to ask why they are selling. The owner will be aware of any adverse conditions affecting the neighbourhood (and the property) and, although they are unlikely to freely divulge this information to a potential buyer, the way they respond may suggest you should be more cautious about proceeding.

An effective method is to knock on a few doors of neighbouring properties and politely explain that you are considering a purchase. Ask if they would be prepared to advise you about any known problems with the area and properties in it. The information given by this method has proved invaluable in my own property investments; in my experience, first-hand local knowledge should always be considered paramount when planning a purchase.

Supply and demand

Although every purchase should be assessed on its own particular merits, it is an established fact that apartments are much more popular with the mobile population of many inner city locations. Career-oriented young professionals require the flexibility and ease provided by an apartment. Some also enjoy the status symbol of chic and fashionable style living that a modern apartment bestows on its occupier. Others just want the freedom to socialise away from their accommodation rather than in it – space becomes irrelevant and less is preferable for these busy individuals.

Houses gain in popularity out of city centres. Additional living space and a garden become important elements for couples that have or are planning to have a family. Others aspire to live on their own ‘estate’, without having to take into account or be potentially irritated by those living above or below them.

Supply and demand is perhaps the most crucial of all considerations when deciding whether to invest in a particular type of property. They are location-specific qualities and thorough research before purchase is essential. Bear in mind that because apartments are more popular and more profitable, developers build more of them – check with local letting agents to assess whether an oversupply might exist in a particular area. Experienced agents will also suggest the type and size of property to buy and where to invest to get the best returns, particularly if they think they may be employed to let and manage the unit after it has been bought.

The days have long passed when the price of an apartment was generally less than that of a house. Style, size and location are now primary value-driving factors, particularly within inner city boundaries. Fashionable high-rises and des-res conversions outclass and out-cost many of the more traditional family style homes, so the conventional theory that apartments are exclusively for the financially prudent no longer applies. Whilst cost will always be a major consideration, if not the major consideration, the issue of which is cheaper to buy is more blurred these days. One point worth remembering is that whilst ground floor apartments cost about 20 per cent less than those on upper floors, they are perceived by tenants as being less secure and are therefore lower in demand and more difficult to let. As a result, the initial saving on capital outlay may not cover the losses created by frequent void periods occurring over time.

Selective licensing

Some local authorities have begun enacting new rules granted to them through the Housing Act 2004, which allow them to operate a selective licensing scheme for all private sector landlords (not just those that own Houses in Multiple Occupation). The cities of Salford and Manchester were the first in Britain to enforce the regime and fears are that it will quickly spread across all regions, so check the situation with your own local authority before buying a property you intend letting out. Whilst acquiring and complying with a licence may not pose a problem for diligent landlords, the added cost and bureaucracy could blight a buy-to-let investment.

Selective licensing is permitted in areas where rogue landlords are believed to operate and/or where anti-social behaviour is known to be prevalent. The idea is that licensing will help control both these elements for the betterment of good landlords, neighbouring owner-occupiers and tenants. The average cost of a licence is £500 per property and landlords applying must meet the minimum standards required by the particular local authority. Operating without a licence in an area where one is required can result in a fine not exceeding £20,000.

SUMMARY

- Choose a location that is popular for letting and with an abundance of eager tenants.

- Identify your target client group, learn their housing needs and supply them.

- Apartments are more popular than houses, particularly in cities, but find out what type of property people are looking for in your own area.

- Read any lease governing the property thoroughly before purchase to find out whether letting is prohibited.

- Take into account the full and real cost in time and money to undertake repairs and improvements to an investment property.

- Be cautious of buying a HiMO.

- When choosing a property to buy, assess whether it has enough good qualities to optimise its future letting potential.