Tenant Network
Lettings and Property Management

Buying a Rental Property : Protecting your Investment

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The decision to become someone's landlord should feel a little daunting. Investing a large sum of money to provide a roof over someone else's head is not a step which should be taken lightly. However, for anyone taking a methodical and disciplined approach there is really very little to fear.

With good research, even the most difficult decisions should prove relatively easy to overcome. A little hard work, plenty of diligence and some careful investment are all that is really required to ensure that a well chosen rental property develops into a shrewd investment.

Buying a Property as a Landlord

Anyone seeking to purchase a rental property should be viewing the building through very different eyes to someone looking to live there. Potential landlords should be focussed on the suitability of the property for their intended rental market. This should be the overriding priority, with everything else considered of secondary importance. First time landlords often find it difficult to commit to a building that does not personally appeal to them. But such feelings must be set aside; after all, they are not going to be the ones actually living there.

While the intention should always be to buy the best quality property that the budget will allow, a smarter, smaller property may prove to be the poorer investment opportunity when compared to a larger, tattier, one. Improving décor will always be an easier and cheaper option than increasing the living space by building an extension. At the lower end of the rental market, the number of potential bedrooms is often the primary consideration. At the upper end, the focus is usually on the facilities offered by the property, as well as its location. A successful landlord needs to be honest where on this scale they intend to position themselves, as this will have a bearing on every significant detail of their budget.

Choosing the Area

If there is one detail not invested with enough importance by novice landlords, it is in the choice of which area to base themselves in. A relatively small amount of time researching this point at the outset can pay huge dividends later on. Talking to local letting agents and also the target market will give a good picture of which areas offer the best opportunities. For example, if the intention is to rent accommodation to students, the best people to talk to first are the students themselves. They will readily divulge which roads are the ones everyone wishes were living on, what they most prize about the house they are currently living in, or what it is about a friend's house that they covert the most. This is free market research: all it costs is a little time. Estate agents can provide valuable information about which locations are the most likely to be the nest to see a boom. Letting agents will know which are the areas where rental properties stick and which are the ones that are the most sought after.

The internet can also be an excellent resource for researching the best rental areas. Websites like landlordzone contain a wealth of information about every aspect of life as a landlord. For property investors who are prepared to relocate in order to realise their dream, coastal cities usually offer thriving rental markets. Portsmouth is a very good example: the favourable climate, waterfront, harbour and dockyards are all factors that make it a great place to both live and work.

Timing the Purchase

Investment property purchases should ideally be made in a static, or rising, market. However, although it is preferable to acquire real estate under these conditions, some of the best purchases can happen in a falling market. At such times there will usually be an abundance of sellers in the market competing for the attentions of an ever dwindling number of buyers, meaning a lower than usual offer may sometimes be enough to secure a purchase.

Buying in a falling market may seem risky, but the boom and bust cycle of property pricing means that any further losses will almost certainly be recovered given sufficient time. As the intention with a rental purchase is to hold onto the asset for the medium to longer term, the tail end of a property slump will usually represent the best time to buy. Of course, it is never possible to know with any certainty exactly when that low point in the cycle has actually been reached. But, the fact remains that all downturns do eventually come to an end. A canny property investor should always aim to be poised, ready to capitalise on the situation, when such a significant point in the market's cycle is reached.

National and local property trends do not always run in sync. A property investor will usually have one eye on which direction house prices are moving nationally and the other on how the local market is performing. Keeping apprised of the bellwethers of these changes is something that any serious property investor should recognise as a an essential part of their work.

Covenants and Restrictions

It is good practice to always establish what legal restrictions are in place on a property before committing to the expense of a survey. For example, in the last couple of decades, many university towns have been selling off their stocks of student housing, gradually replacing them with more modern, purpose-built, facilities. The relinquished houses are invariably large, centrally located, Victorian era buildings. The intention is usually to return these, often imposing and substantial, properties to their originally intended use as family homes. To avoid these properties being immediately returned to the student rental market, a covenant is usually placed on the buildings forbidding their use as a House of Multiple Occupation (HMO). These covenants are legally binding, and normally run for a period of 25 years. For this reason, in larger towns, it is important to establish that there are no restrictions in place on any target properties that may have been used as student accommodation at some point.

Assessing the Condition of the Property

At the point where the buyer is about to offer on the property, it is a good idea to give it a really thorough inspection. Many buyers do not feel this step is necessary and that it is entirely reasonable to leave this step completely in the hands of the surveyor. That is the wrong approach. If the property is eventually purchased it will be the buyer, and not the surveyor, will be on the hook for the large amounts of money changing hands. A positive survey, as we shall see, cannot be taken as a guarantee that the house is free from defects. Surveyors can, and do, make mistakes. Therefore with any house purchase, but particularly with a property which is being purchased as a financial investment, the buyer should be take the time to investigate and record the precise condition of the property before committing any further financial resources to it.

Although far from perfect, and a source of fairly significant additional expense, a full structural survey should always be undertaken when buying a rental property. A home-buyer report will merely establish that the general condition of the property meets the basic standard required for a mortgage to be taken out. Many property owners are not aware of the limitations afforded even by a full structural survey, believing it to be a guarantee that the building is structurally sound. It is nothing of the kind. A structural survey is a guide to the condition of the building, on the day it assessed, in the professional opinion of a surveyor. The surveyor is not offering any kind of guarantee on the building itself. Indeed, most surveyor's reports often recommend seeking the opinion of an electrician to assess the electrics, a damp specialist to assess any evidence of damp, a wood-infestation consultant to check for woodworm and so on. Despite this, a structural survey is still a prudent expense, as long as it is recognised for what it is: the opinion of a structural specialist on the narrow subject of the structural integrity and general condition of the building.

If an expensive defect is later discovered, the surveyor may well take the view that they could not have been expected to have noticed the defect, or that the defect happened after the date on which they attended. As surveyors are not expected to lift carpets, move furniture or accurately map or measure the building, there is plenty of scope for them to potentially miss defects, both serious and trivial.

All surveyors must, by law, be a member of a regulatory body. The Royal Institute of Chartered Surveyors (RICS) is perhaps the best known of these. Whichever body they are a member of, a stipulation of their membership will be that they have adequate insurance cover in place. However, just as the surveyor's report should not be viewed as a guarantee, their insurance policy should not be viewed as something to which the buyer will have immediate access should an oversight by the surveyor be discovered. The surveyor's client cannot claim from this insurance, without the consent of the surveyor. They must instead sue his insurer in court, and prove that the surveyor was negligent. This is a scenario best avoided: the process can take several years, involve hiring expert witnesses and solicitors and, even where successful, the award will usually only be a fraction of the cost of the repair required to put things right.

Despite all the above, a professional survey still remains the best way to assess the condition of any particular property. In any case, the defects listed in the survey can usually be used to renegotiate a lower offer price with the seller, potentially meaning that the survey more than pays for itself. However, as gaining redress in the event of a bad survey is such a difficult, costly and onerous undertaking, it is also prudent for the buyer to undertake a thorough inspection of the property themselves. With enough attention to detail, even a layman can detect many of the most common building defects. A friendly builder can also be a useful ally on such a fact finding mission; builders have an uncanny knack of locating problems if it might mean more work for them.

Armed with a torch, step ladder, long spirit level and a damp meter, the buyer should photograph and document every visible defect they can find from the cellar to the roof void, both inside and outside the property. This information can then be presented to the surveyor, with a request that they comment on each defect. The intention here is to ensure that, should there be a more serious reason behind any of these defects than the one given by the surveyor, the buyer has the written and photographic evidence to enable them to claim from the surveyor's insurer. This should hopefully happen without the need for costly legal action, as both parties are aware that the buyer is armed with all the evidence they need to win should this route be taken.

Offering and Exchanging

Some estate agents consider it reasonable practice to advertise and show a property, even after a firm offer has been received, listing the property as now 'Under Offer'. The intention is to stoke interest in the property in the hope that more interested parties can be found who will begin bidding against each other, thus raising the price higher. Therefore, it is good practice for the buyer to request that the property is taken off the market immediately on hearing that their offer has been accepted. Often estate agents are understandably reluctant to cease marketing the property at this point. Making the request a condition of the offer is usually enough to persuade them to comply.

No more than a day or so before exchange, it is wise to check on the property. If it is possible to arrange to collect the keys, a security plan can be drawn up and the relevant items purchased in advance. It is prudent to change the locks as soon as soon practicable after the contracts have been exchanged. Planning the installation of window locks and security lighting at the same time may be prudent: particularly if a professional locksmith is being employed to deal with the door locks. On the day of exchange, it is also important to ensure that an insurance policy is in place and that all the details are correct.

Building Alterations

Having a clear schedule of work is essential to avoid wasting both time and money. The type of work required to bring the building up to the required standard obviously depends upon a huge number of factors. However, there is one rule that should always be adhered to: do everything possible to stay within budget. The pressure on the budget is almost always upwards when working on a property; rare indeed are the moments when a job turns out to be cheaper than expected. Therefore, it is important to strive to stay within budget at every point. It can be a huge mistake to access the contingency fund to solve the problem of jobs that have come in over budget. The contingency should be used only for additional work that could not have been foreseen.

When employing tradesmen, good recommendations from a trusted source are vital. If the job is large enough to warrant it, references should be taken up and the money released in instalments. With any structural work, building control will need to be notified. It is often easier and cheaper to use higher specification lintels and beams than are absolutely necessary, in order to satisfy building control. If they are not entirely happy with any aspect of the work, they can demand an engineer's report. Over specifying load bearing components can be a useful way to avoid this additional delay and expense.

Safety Systems and Certificates

Being fully compliant with all current fire safety is neither particularly difficult, nor unduly expensive. A guide to the current fire safety rules can be downloaded from the relevant local authority. There is also a wealth of information at the firesafe website.

With any rental property, it is worth making sure that there are up to date gas and electrical safety certificates in place. The work to obtain these usually takes no more than a few hours, and it is well worth the expense, especially as a gas certificate will normally include a useful boiler service.

Conclusion

The various risks when buying a rental property can be significantly reduced by following the advice above. Having a clear idea of the target market, and selecting the most suitable property in the right area sets the project of on the best possible footing. Checking that there are no legal restrictions and properly assessing the condition of the property should ideally be done before an offer is made. Once the property has been purchased, there may be a little work to do improving the building's security and ensuring the gas, electrical and fire safety systems are up to specification. However, the new owner will have a safe, sound and secure rental investment and the satisfaction and peace of mind that comes with a job well done.