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Assess Tenant Demand Before You Buy Rental Property

Today I couldn’t resist – I had seen a 65k building going to auction with a predicted annual rental income of 22k. Yes – a whopping yield of 34%. So I knew the area – and I knew it wasn’t particularly salubrious – but at that sort of yield it’s got to be worth a look…

So what do you get for 65k…well you get 6 x 1 bedroom flats – with a market rent of c£300 per month per unit.

It’s a HUGE building…which goes on and on…and on and on!!

 

Let’s just take a look from the rear:

Admittedly it lacks any kerb appeal and it’s neglected and in need of some TLC…but just think of that yield!

So I checked the market rents and I saw we had let 1 bed flats previously in the area for £350pcm, so £300 seemed pretty realistic.

BUT…then I decided to check how long the previous flats had taken to rent – and it had taken approx 8 weeks – this is against an area average of 1-2 weeks.

I then checked the number of enquiries we had had on the previous flats we had let – and it was single digits. Again, our area average is at least 20 enquiries per property.

These two additional facts are key – and made my mind up – the demand isn’t high enough for this type of property in this area.  If this property had been situated in a different part of town I  knew these type of units would fly (even with the lack of kerb appeal) but in this part of town people are looking for 2 bed houses and not 1 bed apartments.

So my takeout is – don’t just look at the figures – because they may stack up on the surface. You need to drill down and look at wider factors. Work out if the type of property you are planning to buy will let to the sort of person you are planning to let to. There is no point having a huge building with the potential to earn a great yield if it remains empty for most of the time.

6 comments
  1. David

    Sound advice about assessing rental demand for the type of property in the area, much like any other business really.

    Would you consider letting through the Local Authority as generally they’ve got a waiting list of prospective tenants? I’ve got a few properties in Folkestone and let them all out through the council, touch wood they’ve always been great tenants.

    1. Sam

      David thank you for your comments.

      Yes, we did consider renting with the local council – esp. given the reduced LHA rate we thought that maybe this would suit the market. However, in our experience a property such as this when let to all LHA claimants may potentially be very management intensive. If the council in the area had long lease agreements whereby they would take it on for a number of years then the outcome may have been very different, but unfortunately in this area the council do not do this.

      Do you do long term council rents with Folkestone? I visited Folkestone a while back (actually to see a theatre) – here’s the link: http://www.whatsamsawtoday.com/2010/10/05/the-former-theatre-in-folkestone/

  2. David

    They’re all AST tenants. It’s all quite easy management wise as they’re just 3 bed houses with 1 family in each.

    I did speak to Shepway council to see if they were interested in doing a long term let but they declined, actually worked out better for me as longest that one of these places has been unoccupied is 1 month.

  3. Sam

    Hi, yes when single family units on ASTs that’s not much of an issue – it gets more management intensive when you have multiple units!

  4. Mark

    I agree that you need to look beyond the figures but this could provide such a fantastic rental that I would still not want to give up on this deal.
    Yes, the type of HB tenant that this type of property will attract will probably take a fair bit of management but with that yield you could easily afford to pay an agent to do all the hard work for you.

    1. Sam

      Mark – my issue was that while on paper this seems to stack financially – the snag (in my opinion) is there is insufficient demand for this type of accommodation in this type of area. Of course, I could be wrong. It’s being sold by receivers. Auction was yesterday and I see it did not meet it’s 65k reserve: Here are details should you wish to look into further: http://www.eddisons.com/pages/home_page/property_auction/previous_auction_results/default.aspx?ShowLot=077&ForAuction=161&Page=2

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