Don’t overdo home improvements when renting out

The UK buy to let market has been very buoyant over the last decade or so and despite the 2008 economic downturn it seems that investors are willing and able to buy again. The introduction of the Internet together with an array of television programmes which make buy to let “look simple” has seen many inexperienced investors dipping their toes into the buy to let market.

When you buy your first property there is likely to be an over exuberance to make an example and ensure that the property is renovated to the highest standards possible. The vast majority of first-time buyers will go well over their initial home improvement budget but there are reasons why you need to be careful.

Rental ceilings

Wherever you acquire a buy-to-let property, whether it is in London or Newcastle, there will be an effective ceiling on the rent which people are prepared to pay in the area. You may buy a property which is well placed, has a good catchment area and has potential for significant home improvement. However, it is debatable as to whether you will be able to achieve the full rental yield on a higher priced property compared to average rental properties in the area.

This is something which many people seem to overlook in the early days of their buy to let careers and it can be very expensive lesson. Just because there is a yield of for example 7% on rental properties in the area, with a ballpark value figure of £100,000 per property, does not mean there will be people in the area willing to pay 7% on an improved property worth in excess of £200,000.

Focus your initial investment

Once the basics have been covered in your property it is then time to look at investing additional cash available, while keeping one eye on the rental ceiling, in areas which potential tenants can see as soon as they view the property. It does not take an awful lot of investment to redecorate a property from top to toe but the impact this can have on a potential viewing tenant is often underestimated.

While it can sometimes be difficult to keep one eye on your budget and one eye on the potential income available in the area it is essential that you do this from day one. In many ways it would be better to underspend on improving a property as you can rectify this at a later stage rather than overspending, because once the money is gone there is no going back.

Do your research

You need to be fully aware of the local rental market before buying a property and if there is an acceptable yield available with little or no additional investment, as opposed to a relatively small uplift for a significant investment, consider all your options. The fact is the quicker you have a tenant in your property, even on a lower rental in the early days, the shorter the investment repayment period on your purchase.

In a perfect world we would all like to see buy to let properties upgraded to the highest standards but if this is not reflected in the possible rental yield then it is potentially dead money. True, there may be additional returns as and when the property is sold but this is more of a long-term consideration.