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Acquiring residential property as an investment can be rewarding,
giving a combination of rental income and the potential for capital
growth. Investors should be aware that it is best considered as
a medium to long term proposition. Central London has led the primary
investor market, although attractive yields can be found in peripheral
areas as well as many UK towns and cities.
The benefits of residential property as
an investment
include:
- Strong underlying demand for rented property
- Very limited supply nationally
- Attractive risk-return profile
- Rents rise in line with earnings over the long term
Gross yield is the achievable rent expressed
as a percentage of capital value. At times of high capital increase
the gross return will be reduced as in the majority of cases the
rent may not rise proportionately.
There are a host of factors which may influence
the
type of property that is acquired as well as the geographical area
which is chosen. It is always best to seek professional advice in
each instance. Some initial considerations are listed below:
Location
Investments should be close to transport facilities and in an area
where the usual amenities are within easy reach. It is important
that you buy the right property for the market and you get to know
what sort of tenants are common to the area and what level of rent
is paid. Once you have chosen your target tenant group, choose properties
that will appeal to them.
Length of occupational Lease/Freehold
Ideally Freehold property should be acquired. If buying a leasehold
property then management/service Charges should be taken into consideration.
Service Charges
Levels of service charge vary depending on the level of services
provided within a building, eg caretaker, lifts etc.
Floor Level
First or second floor apartments are ideal. Less important if the
building has a lift. Basement flats may take longer to become income
producing.
Modern Fixtures
Tenants expect bright, clean accommodation. Follow the advice of
the experts and try to use neutral colours. Do not decorate an investment
property to personal taste. To gain maximum returns, corporate tenants
will expect a higher specification including power showers, dishwashers
and cable TV.
Because the aim is to let the property for
the longest period of time and at the optimum rent value it is worth
identifying the type of tenant that you must aim for and what they
want. A study carried out in 2002 is one of the first comprehensive
analysis of the profile, property requirements and aspirations of
tenants’ in the UK’s private rented sector.
The following points were summarized
- The typical private rented household comprises either a couple
or cohabiting adults in their late twenties or early thirties
with an average household income of £25,000 per annum
- A fifth of private tenants are employed in education and health
sectors
- Flats and terraced houses are the most common housing types.
Only a quarter of rented stock comprises purpose built flats.
- Only 12% of tenants pay rent in excess of £800 per calendar
month. This highlights the limited depth of demand for rented
property in the upper rental bands
- Tenants are broadly satisfied with the profile of their current
accommodation although half stated a requirement for more storage
space, even with an increase in rent.
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