For property investors investing in buy-to-let property, today’s market presents a huge amount of choice. Making a decision on how to invest can mean the difference between generating high yields or making a loss.
So, in this guide, we’ll examine the pros and cons of two of the most common ways to invest in rental property: buying rental property that’s already tenanted and buying off-plan rental property.
What is tenanted property?
Tenanted property is rental property with existing tenants in situ. When an investor buys tenanted property, the previous tenants will continue to live there but will pay their rent to the new owner. Often, the conditions of a rental contract will remain the same for the tenants despite the property changing hands.
The benefits of tenanted property
1. Generate income from the outset
As a buy-to-let investor, tenanted property offers you the opportunity to make money on your rental property fast. As the property is already benefitting from paying tenants, your investment will be generating an income from the moment it’s officially yours. In addition, you won’t need to market the property which will keep costs down, and increase yields even further.
2. Background info on tenants
When you buy a tenanted property, you’ll get an insight into the track record of the tenants already living there. This will include a payment and behaviour record, and based on this information, you’ll be able to make a decision in advance about whether or not you want to purchase a property. The advantage of knowing the risks of the tenancy puts you in a more secure position than finding unknown and potentially unreliable tenants from scratch.
3. Property is often managed
Often, buying tenanted property through an investment company comes with free property management for a certain time period. This means that the day to day property management is dealt with on your behalf, limiting the contact you have with the tenants and saving you money and time.
At Fitzwilliam Capital Partners, we offer our tenated property investors 1 year of free property management to all tenanted property landlords. You can find out more about our tenanted property here.
4. You don’t have to consider Absorption Rate
Rental absorption rate is the rate at which available homes are rented in a specific area over a certain time period. For buy-to-let investors, this is a key indicator of the neighbourhood’s rental demand, so it’s vital to look at the rental absorption rate before buying property there.
However, buying a property with tenants already in place means the absorption rate around your rental property isn’t as crucial to consider. This is because you’ll be generating an income from the moment you own the property and you won’t need to worry about attracting new tenants.
It is also important to consider the type of tenants you’re hosting and how long they may stay. For example, rental turn over for young professionals and students is likely to be higher than families. So, make sure there are enough rental opportunities in the pipeline to attract more tenants if your existing ones choose to leave.
5. Ready to legally let
Most properties sold with tenants in situ will already meet the legal conditions of rental property. This includes things like gas certificates, smoke alarms and other licenses depending on the type of property. Obtaining these certificates can be time consuming and expensive, so buying a property which is already rental ready and tenanted will save you a lot of time and money.
6. No need to refurb/furnish
If a property is already occupied by tenants, it’s unlikely that you’ll need to refurbish or furnish the property. This means that the amount of money you pay for the property will be the final amount you’ll need to consider when working out your yields.
The drawbacks of tenanted property
1. A potential for legal issues
Although the majority of tenanted properties are sold rental ready (in the sense they are certified and safe for occupation as per rental laws) sometimes this is not the case. If you do buy tenanted property, it’s crucial you check that it is completely legal for tenants to inhabit the property. If it’s not, any legal issues will fall on you as the landlord, even if the problems are due to the previous owner.
2. Difficulty removing tenants
If you’re looking to buy a rental property but want to recruit new tenants yourself, tenanted property may not be the best way forward. Removing previous tenants can be extremely tricky. Depending on their contract, they may have the right to remain in the property up to 3 months after you issue them with an eviction notice. They may even be able to dispute the eviction, prolonging the process further.
3. A potential for lower yields
When you invest in tenanted property, you buy it at market rate. It’s likely you’ll also have to honour the existing rental agreement for a period of time after buying. This means that you may be left with lower yields compared to an off-plan property which are often discounted and where you can set the rental price yourself.
What is off-plan property?
Buying off-plan allows you to purchase property at a set amount before it’s even been built. A price will be agreed based on the plans for the property and the property market where it’s set to be located. And, because buying property off-plan is considered riskier than purchasing pre-built property, such property is often heavily discounted.
The benefits of off-plan property
1. Higher returns & cheaper property
Off-plan buyers often benefit from big discounts on the completed property’s value when buying it ahead of completion. For buy-to-let investors, this can improve rental yields substantially in comparison to buying tenanted property or property that’s already been completed. That’s why you often see more valuable investments with off-plan rental property, especially if you’re buying in a growth area with very high rental demand.
2. Generally high rental demand
New build blocks of flats tend to be built in high growth areas or in areas with high growth predicted. When buying off-plan property, look for a property development company with a good, stable off-plan property track record. They should also be able to give accurate predictions about projected yields for the properties based on their experience in the industry.
3. No need to refurb or furnish
Purchasing brand new property means that you won’t need to invest anything on furniture or refurbishing. Most new builds come complete with furniture packages included in the in the price of the property, and because the building is brand new, there’s no need for any refurb work.
4. Free property management
Depending on the investment company who you buy with, your new property may come with free management for a period of time. This means that once your property is tenanted, all contact with the tenants will be done through a management company, saving you time and money.
The drawbacks of off-plan property
1. Off-plan is a risky asset
Buying off-plan is riskier than buying a property that is already completed. If for any reason the plans fall through or the housing market drops while the property is being built, you can lose money. For this reason, off-plan property is generally sold cheaper to investors to accommodate these risks. That’s why it’s crucial you do your research on the area you’re buying in and on the company that is building the property. Make sure whoever you’re buying with is adequately insured for any issues that may arise.
2. You have to consider Absorption Rate
As you’re looking to let your off-plan property, a high rental absorption rate in the property’s area is vital. In order to generate optimal yields, rental property needs to be located in an area where there’s high rental demand, improving transport links, amenities and schools. You’ll need to take a lot of time to research the area in depth to make sure you’re buying in a secure and profitable area.
3. No immediate income
If you buy off-plan, you’re buying something that either not yet built or not yet completed. This means that although the property can be secured at a cheaper cost than the completed property’s market value, you won’t be able to make an income on it until it can be tenanted. Depending on the terms of the purchase, it could take many months until you’re able to generate any revenue from your investment purchase.
4. Harder to get a mortgage
It can be difficult for non-cash buyers to secure off-plan properties. There are two reasons for this.
- Mortgage companies don’t tend to offer mortgages specifically for off-plan properties.
- If they do, a mortgage offer tends to only last for 6 months. So, if your property takes longer than to this complete, you’ll need to reapply for the mortgage.
If you’re relying on a mortgage to buy your investment property, off-plan may not be the most reliable way to purchase.
Buying Investment Property with Fitzwilliam Capital Partners
At Fitzwilliam Capital Partners, we’re proud to offer you a broad range of different property opportunities that will ensure you generate the highest possible yields.
As renowned property developers, we develop a number of high-quality properties across the UK. Our off-plan properties opportunities are located in some of the UK’s most thriving growth areas. In addition, we also offer and manage a selection of high quality, high demand tenanted properties.
Our expert team can advise you on what type of property investment is best for you. To find out more about how we can help you, get in touch today.