Experienced property investors know that market conditions can change; usually quite slowly but sometimes much more quickly, as the current pandemic has shown. However, landlords don’t always have to accept that change or absorb any financial impacts that come with it. They can sometimes adapt their rental strategies in an effort to maximise the size and value of their target market.
This is a general principle and it applies to a wide range of circumstances, so the following article isn’t solely about reacting to the coronavirus outbreak. It’s about always maintaining a flexible mindset and staying alert to opportunities to maximise your occupancy and returns.
Using Rental Properties to Break ‘Sales Chains’
Estate agents will be all too familiar with the frustrations associated with residential sales chains. It’s a common situation: both the buyer and vendor have agreed on the sale in principle, but one or the other of them can’t complete. Perhaps the buyer needs to sell his/her own property to release essential funds, or perhaps the vendor can’t complete because he/she doesn’t yet have a property to move into. There may be other reasons, too – a change in financial circumstance, for example, or a worrying survey result. A transaction may fail for any number of reasons and what’s worse, chains can extend to include multiple participants. The longer they become, the harder they are to resolve.
A chain can normally only progress at the pace of the slowest mover, and with so many solicitors, estate agents, surveyors and lenders having an influence on the process, it’s easy to see why things lose their momentum. And, of course, if they slow down too much, one or more people in that chain might decide to cut their losses and try their luck elsewhere. That’s the other problem with chains: they are only as strong as their weakest link.
In practice, the interdependencies and delays inherent in the system mean that many chains break, causing grief for all concerned. Homebuyers’ plans are dashed, money is very often wasted on surveyors’ fees and searches, and estate agents have to face lost commissions and wasted effort.
However, rental properties can play a useful role in solving some of these problems. For example, if things are being held up because a vendor can’t move out into his/her intended new home, one option would be to move temporarily into a rented property. Whether it’s for just a couple of nights or a matter of a few months, that could be the move that breaks the log jam and allows the various house sales to progress.
A vendor moving into a rented property benefits from being able to resolve his/her end of the chain and then, being chain-free, being in a better position to buy. It many cases, it may also be a cheaper option than taking out a bridging loan, though of course, it’s important to do the maths beforehand. For estate agents, it also represents a winning scenario because it can help to move one or more transactions forward to completion. So it’s an option that can potentially benefit everyone.
Of course, it won’t work in every circumstance but it can be a good, viable option for many. And for landlords, these short-term tenancies represent a potential new market that may deliver better returns than conventional, longer-term agreements. Short-stay properties often command higher rentals, and in some cases, an existing property can be set up for use as serviced accommodation, which is a popular choice in many towns and cities. Typically targeted at the higher end of the market, serviced accommodation can be a pleasant temporary oasis for house movers and it can deliver good yields for the investor, too.
There are certain types of property that can’t really be used in this way. Purpose built student accommodation (PBSA) is one obvious example; student units are generally occupied for most of the year and they’re typically much too small for the average house-mover.
However, many other property types can be suitable for chain-breaking and, at Residential Estates, we’ve been seeing more landlords adopting this strategy in areas such as Chester, North Wales, Manchester and Liverpool. The coronavirus pandemic has impacted on this market, like most others, but once it has passed, we would expect activity to resume quickly.
Leaving aside the subject of housing chains, we’ve been seeing increasing numbers of landlords looking at making a transition from longer-term lets to offering fully furnished serviced apartments. That is to say, there has been growing interest in boosting the market appeal of conventional flats by providing furniture, housekeeping and other services.
We’ve looked at the benefits of serviced accommodation in previous posts and there’s little doubt that they are growing in popularity. Offering more of a sense of ‘a home from home’ than impersonal hotel rooms, to say nothing of considerably more space, they are a relatively recent phenomenon but, in the right locations, they can be an excellent investment choice.
Serviced apartments probably work best in popular urban locations where there is plenty of demand for short stay accommodation. This could come from customer groups such as tourists, the family and friends of university students, or workers engaged on short term contracts.
As ever, it’s essential to do the proper research before transforming a property and changing your business model. If a conventional assured shorthold tenancy (AST) is already delivering healthy and reliable returns, then it may not make sense to take a risk on a new target market. But if demand is patchy or you are struggling to make a decent profit on an existing buy to let investment, then it could be worth considering your options.
Bear in mind that serviced apartments tend to produce better returns per diem, but you’ll be reliant on attracting a steady stream of tenants rather than enjoying the relative predictability of a loyal, long-term tenant. That means you’ll need to find effective ways of marketing the property, either through your own promotional efforts or by using a rental management agent. In either case, there are costs attached.
There are also other costs to consider. Typically, you’ll be expected to provide a change of bed linen and towels, and a regular housekeeping service. There may be further requirements, too, depending upon the building and the extent of local competition. Most serviced apartments have a check-in facility and the single fee paid by tenants will have to cover all the associated costs such as power, water and the use of any shared facilities.
That all said, all these costs should be covered quite comfortably by the higher pricing that serviced apartments typically command. They can therefore perform exceptionally well in the right locations, greatly outperforming comparable properties that are let out on an AST basis. It’s a move that many other investors have made before, and our advisors can provide information and guidance on request.
Rental Management Agencies
If you are considering new options for increasing your rental returns, one useful question to consider is whether to use a rental management agency.
Some landlords regard them as an avoidable expense, and doing without them fine if you’re living within easy travelling distance of your property and you’re able to handle all the services that an agency would normally provide. But in many cases, using an agent can produce a net financial benefit.
Most notably, agencies make their money by making sure that the properties they manage stay occupied and that they keep delivering a good rental return. They have a vested commercial interest in maximising your rental returns, so they can generally be relied upon to ensure that your property is marketed effectively, in the right areas and through the right channels. This is particularly helpful if you own property outside of your own area – because in the event that a tenant leaves, the agency’s local knowledge and connections are likely to produce better, faster results when it comes to finding a new one.
Rental management agencies are also very often the gateway to rental guarantees that keep your investment safeguarded against rental void losses. In turbulent times, rental guarantees can be invaluable – delivering a steady, predictable return every month – and often well worth the cost of using an agency.
For some property investors, another way to maximise rental returns is to make physical changes to the layout of the property.
One of the most common approaches taken by landlords is to convert an existing domestic property into a house in multiple occupation (HMO). We have looked at the pros and cons of HMOs in a previous blog post. In essence, HMOs can deliver good yields if they are in well-chosen locations, and provided that the property itself doesn’t cost too much to bring up to the necessary regulatory standards. However, they can be expensive to manage and rental management agencies tend to charge more for looking after them because they know that they can require a lot more work. All that, together with increasing legislative requirements, has prompted some investors to make the move the other way – i.e. to convert HMOs back into more conventional rented homes or into serviced accommodation.
We’ll cover this kind of ‘reverse conversion’ in more detail in a future post. It’s still a relatively new phenomenon, and the coronavirus restrictions mean that we probably won’t see any big new trends any time soon, but it’s a factor to bear in mind. Sometimes, a conversion that takes a property into a more up-market bracket can be a way to achieve substantially better yields and with a lot less personal effort.
New Property Acquisitions
Buying a new property is an option for first-time investors and those who want to extend their portfolios. It might also be an option for those who want to sell one or more of their less rewarding properties and restructure.
Unfettered by house-buying chains, new units offer a number of important advantages. Firstly, at a time like this, when viewings and ad hoc valuations are impossible, off-plan properties can still be bought and sold, so investors can still take advantage of good opportunities as they arise. Moreover, they can often be secured with a lengthy rental guarantee in place; one that promises good yields for periods of five or more years. This provides an important degree of financial certainty that should readily outlast shorter-term considerations such as viral outbreaks and transient economic shocks.
In practical terms, newly built units will be covered by construction guarantees, and they won’t present their owners with as many maintenance and repair costs as older properties. Similarly, they shouldn’t deliver any nasty surprises such as the presence of lead pipes, faulty wiring or asbestos. What’s more, because rental management agencies regard them as being easier to market and maintain, they will tend to price their services lower than they would on more challenging property types such as HMOs.
Monitoring the Market
The fact that an investment business model has worked well in previous years does not mean that it will always work well. Market conditions change and investors should stay alert to what is happening. By spotting changes early on, landlords can change their marketing and/or purchasing strategies to ensure that they are always ready to target the most lucrative rental markets.
One example might be a conventional AST property in a city with a fast-growing university. If the existing property is delivering only modest returns, or if there are problems with void periods, it could be worth crunching some numbers and deciding whether to adapt and re-brand to target that burgeoning student market. Yields can often be good and demand is typically very steady and predictable, so if the traditional AST approach isn’t working, the student market might be a viable alternative.
But of course, it could work the other way, too. Let’s say an investor has a 3-bedroom terraced house that he/she is currently letting out to students. The student population is static, the university isn’t growing, but the town’s economy is doing well and it’s attracting new residents who are finding new jobs in the area. In this example, the returns are okay but the tenants don’t look after the place very well and maintenance costs are high. Then comes the news that a developer is creating a big new PBSA, with lots of attractive facilities and excellent WiFi connectivity.
In this scenario, the chances are that student rental demand might will move towards the new PBSA and the investor might have to reduce prices to keep attracting tenants. It’s a recipe for a slow decline if things are left as they are, but if the landlord is fortunate enough to have recognised the situation early, then there will be plenty of time to consider new options. Contrary to the previous example, one prudent course of action might be to consider relaunching the house as a conventional AST and aiming it at the growing body of new incoming professional workers.
These are obviously simplified examples but they do illustrate the value of staying alert to whatever might be happening in the local property market. By recognising threats and opportunities, by taking good advice and by acting in good time, investors should be able to adapt their plans and ensure that their money continues to work as hard as possible.
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If you would like more information about any aspect of property investment, please talk to one of our professional advisers. Call us today on 01244 343 355.