So, you want to be a landlord? Great – so did I, and I’ve never regretted it. But I would have done much better in those early days if I had known what I know today. This week I’ll be explaining some of the mistakes commonly made when new landlords are starting out (and some that even existing, long-term landlords may not even know they are making).
You think: ‘I’ll buy the kind of home I would like to live in – that way I know it will rent well.’
The problem: You are not going to rent your own house or flat! All too often, people approach an investment property as if they were going to live in it themselves. But think back to when you bought the home you live in. Did you love everything about the way the previous owner had it? Did you keep all the carpets, wallpaper and curtains (or even room layouts) just as they did? Chances are, like most of us, you were pulling faces at their choice of colours before they were even out of the driveway.
So why assume that your prospective tenants will feel any differently? In fact, why assume that the type of tenants you want will even enjoy the same type of home you do? As a letting agent, when I ask who you’d like to rent to, the most common answer is ‘young professionals’; so let’s use them as an example and consider things from their perspective:
- ‘I want to be able to go out and afford to enjoy myself’ – not spend everything on rent.
- ‘I want to be close to town for nights out and shopping’ – not in the suburbs.
- ‘I don’t have time to look after a garden’ – but maybe a small patio/BBQ area would be nice.
Now that’s not a comprehensive list because it isn’t possible to make one. The needs and wants of your target market will vary from area to area, which makes it important to get good advice about what properties are desirable and rent well in your area.
You think: ‘I’ll buy the most expensive property I can afford to get the best return.’
The problem: Let’s give you a quick example in the table below. Landlord 1 buys the single most expensive property they can afford. Landlord 2 buys 4 cheap flats and targets a different section of the market.
All figures for illustration only
Property purchase price
4 x £75,000 1 bed flats = £300,000
Monthly BTL mortgage interest @ 4%
4 x £187.50 = £750
4 x 450 = £1800
Total income over 25 years
Now I’m not going to pretend it’s quite that simple. With more properties comes more work, and more maintenance costs. But do you think the difference would really add up to £200,000 over a 25-year period? Me neither. If you’re thinking ‘You can’t buy anything for £75,000 these days!’, you’d be wrong. Why buy a property nearby if it is in an expensive area? I have clients who live in Australia and Singapore, but rent out property in Nottingham. I take care of any issues, while they get the rent each month.
You think: ‘Renting a property out will be a guaranteed source of income for my retirement.’
The problem: Whilst I agree that property can be an excellent part of your retirement plans (as it is for me), I would never suggest having all your eggs in one basket. More to the point, you need to choose the right property, as outlined above, to ensure that it rents consistently. If it’s not the kind of property that tenants in your area are trying to find, it may rent sporadically, leaving you with void periods where you need to keep paying the mortgage out of your own pocket. Additionally, you need to consider your exit strategy right from the outset. Are you intending to rely on selling the property at some point, either to clear the remaining mortgage or for another purpose? If so, you may choose somewhere that gives you a lower monthly income, but a higher capital return. If not, it may be better to buy several cheaper properties to give you the maximum monthly income – there is no one size-fits-all answer I’m afraid, which is why I recommend a wealth manager to all my clients. Your financial plans need to be looked at holistically, which is far beyond my remit.
That’s a good start for now I think – I don’t want to overload you! Property is a great investment when thought through carefully, with sound advice to guide you. But next time someone tells you that renting a home out is easy money, you’ll know better…
Next week: ‘I’ve bought my first investment property – now what?’