Top 10 tips for evaluating an area for investment
Landlords invest in property for two main reasons:
1. To generate a monthly profit from rental income, and
2. To achieve good capital growth over time and realise a lump-sum return in the long term.
So, when you are evaluating an area for investment, it’s worth ensuring you have a clear focus on income or capital growth, or consider properties which may be able to deliver both.
Here are ten things to research and consider:
1. Is there a solid rental demand?
The quickest way to do this is by speaking to local letting agents and asking what’s letting well today and likely to let well into the future. You can also gauge demand by looking online at portals to see what properties are letting quickly and which ones seem to be ‘sticking’.
2. How have house prices performed historically?
Most of the time we are given information about what is happening to property prices ‘on average’ in the last 12 months, but this isn’t good enough for an investment decision. Now you can check historical prices easily online for a particular property type on a street going back to 2000 or before. This allows you to look at 15-20 year property price cycles and choose not just an area, but a road and property type that has seen consistent growth over time, or that might be at the start of an upward trend.
3. Are house prices higher than the national average?
In towns and cities where property is generally more expensive, there tends to be a strong demand for rental accommodation. And with wage growth still quite sluggish and the economic outlook currently uncertain, this is likely to continue. However, these areas tend to deliver well on capital growth, but it is harder to secure an income.
4. Are businesses investing in the area?
If established companies are opening premises in an area and recruiting staff, it could be a good sign of a strong local economy. Of course if its vice versa, it is worth making some extra checks that price and rental yields will meet your objectives in the future as well as now.
5. Is there investment in transport?
When local councils and/or the national government put money into improving transport links, this can help increase property prices in areas that previously weren’t attractive from a commuting perspective. It’s worth finding out about up and coming changes in the authorities ‘local plan’ or looking for specific transport changes such as HS2 or the Cambridge-Milton Keynes-Oxford corridor. It may not even be additional transport links. For example Newport property prices have recently benefited from an influx of people moving there from Bristol due to the Severn Bridge toll being scrapped in December 2018.
6. Is there other inward investment?
Are new shops and restaurants opening or retail sites being revamped? Are schools, colleges or universities expanding? This kind of activity should draw potential tenants and additional buyers into the area.
7. What is your current competition?
Look at the standard of properties that are available for rent and what’s letting well for the best price for you. If an area looks as though it’s on the up but the current rental stock has room for improvement, you may do very well if your property is more attractive than the competition.
8. What is the future competition likely to be?
Look at what new accommodation is being built specifically for rental and find out about future development plans via the local council’s planning department – the information should be on their site along with their local plan. This is especially true if you are looking at focusing on student accommodation or if you are investing in an area popular for large landlords who are building brand new properties specifically to rent.
9. Check the local authority policies and regulations for buy-to-let.
Some local authorities work closely with landlords and support the private rented sector, others are not so keen. Find out about their rules on, and attitude towards landlords, HMOs, licences and planning. Do they have a landlord accreditation scheme for example? On top of national regulations, each local authority has the power to impose their own licensing rules, so you may find that it would be easier to do what you want in another area.
10. What is the average yield?
You need to know what kind of return you’re getting on your investment and a basic gross yield figure (rental income divided by property value) is quite useful for letting you see how one area and property compares to another. If you have £200,000 to spend, where and what property type does that get you the best return? Might you get a better return putting it all into one property in one area, or splitting it across two cheaper properties in another area?
Taking all these things together and considering how much capital you have available to invest, should help to identify an area that is more likely to give you the returns you need and want, when you want and need them.
Read our buy-to-let guide for further advice on investing in property.
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