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Buy-to-let investors increasingly targeting tenanted properties

• Existing tenants mean buy-to-let investment performs from day one
   

Buy-to-let investors are increasingly targeting properties with an existing tenant, according to ludlowthompson, London’s Letting Agent.

Stephen Ludlow, Director at ludlowthompson, comments: “Traditionally, most landlords prefer to buy properties with vacant possession so they can make improvements before letting it for the highest rent possible. However a growing minority are attracted to the hassle free alternative: buying a tenanted buy-to-let property which generates income from day one.”

According to ludlowthompson, investors are targeting tenanted properties because they are attracted by:
• Proven rent payment history from the tenants
• No void period, as there would be when finding new tenants
• Regulatory burdens have already been taken care of (e.g. gas safety etc)
• Low capital outlay because established tenants do not normally ask for major improvement works

ludlowthompson points out that investors buying tenanted properties tend to target a gross yield of at least 7% and benefit from a narrower gap between gross yield and net yield.   

Stephen Ludlow explains: “Tenanted properties can generate high net yields because they produce rental income from day one.  It is also quite unusual for established tenants to ask for expensive improvements to the property, because they will normally have been dealt with before they moved in.”

“These factors mean that the gap between a property’s gross yield and the net yield that the landlord will pocket is often much lower than with vacant buy-to-let investments.”

“The main advantage of an existing tenant is that they have shown that they pay the rent and that they pay it on time.”

Properties with tenants on long contracts most attractive
Says Stephen Ludlow: “Tenanted properties are particularly attractive to investors when the tenant is from a professional background and has signed up for a two or three year rental agreement.  If that is the case, the investment is more like a commercial property deal, where investors often make the purchase based on the quality of the tenant.”

Mature buy-to-let market means there is demand for tenanted and untenanted properties
ludlowthompson says that the maturity of the buy-to-let market means that there is appetite for both tenanted and untenanted properties.

Stephen Ludlow explains: “The traditional investor prefers properties with vacant possession because they figure they can achieve a higher rent by putting in new tenants.  The buy-to-let market is very mature now, so there are also investors who like to pick up a tenanted property to hold for a few years with the established tenants before deciding whether to improve it or not.”

“There has been a really big growth in London’s buy-to-let market since the credit crunch, as investors look for alternatives to underperforming and volatile pension funds and share portfolios.  That means there are more investors using a greater variety of investment strategies than ever before.”

Certainty of tenanted buy-to-let investments attract foreign investors
Stephen Ludlow comments: “International investors targeting buy-to-let in London tend to find tenanted properties attractive.  Attracted by rising rents, a lack of alternatives and the relative weakness of the pound, foreign investors have been flocking into London buy-to-let.”

“Often these international investors from places like Asia and South Africa like to buy new build flats off-plan.  But tenanted properties are also attractive to them because they know exactly what they’re getting from their investment.”

Properties at the Wembley City development were recently sold successfully to foreign investors with tenants in place by Quintain, the listed property company.

Paul Hogarth, Head of Residential at Quintain, comments: “Quintain established Wembley City as an emerging residential destination and deliberately targeted the professional tenant as the first occupiers bringing life and activity to the scheme.”

“We recognized the requirements from overseas landlords and the need for an on site dedicated rental service. With this service up and running, we have been able to offer the international investor a fully integrated and professional lettings service which limits the void period and attracts over 30% above the wider Wembley lettings market.”

Important steps for investors in tenanted properties
ludlowthompson says that an assured shorthold tenancy, the normal type of contract between landlords and tenants, will transfer to the new property owner automatically. 

Stephen Ludlow explains: “While it is not strictly necessary, many lawyers recommend re-signing the tenancy under the new landlord’s name to avoid confusion.”

“To ensure that the new landlord can make deductions from the deposit in the event of damage, the deposit must be re-registered in the new landlord’s name.”

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