Is buying rental property worth it?

Buying rental property can be a good way to make money over time with relatively little effort. Aspiring real estate investors can do this by buying property in popular markets where the average rental fees tend to increase. They can also choose to purchase vacation homes near famous tourist spots in the United Kingdom. Either way, you can generate income from renting out properties while maintaining ownership. 

The success of buying rental property often depends on its location. You must look for areas with strong rental demand, good transport links, and amenities that attract tenants. Knowing how much the usual rent in a specific location is will allow you to adjust your prices and stay ahead of the competition.  

In this article, Mortgage Introducer will detail everything you need to know about buying rental properties in the UK. We will highlight some of the most common types of rental property and what a good return on investment (ROI) is. We will also cover the advantages and disadvantages of this real estate venture. 

To our usual pool of readers who are mortgage and real estate professionals, this is part of our client education series. If you have clients who are interested in buying rental property, be sure to share this with them! 

Buying rental property as a real estate investment 

Investing in real estate is when you purchase, lease, rent, or sell real estate properties for a profit. In turn, buying rental property is one form of real estate investment in the UK. This is best for property investors who also want to become landlords. 

Earning money from buying rental property and renting it out is not limited to clients who are looking for residential properties. They can also purchase commercial property, like office spaces or warehouses, and lease them to businesses. 

As for attracting tenants, it is helpful to assess the local economy and employment rates within the area where you want to purchase. These factors can have influence on the demand for rental housing. You should also consider the supply of rental housing within the area. Less competition does not immediately equate to higher demand—but it is possible.  

Undecided about whether to buy rental property or not? Watch this video about buying rental properties for beginners: 

When buying rental properties as a newbie in the real estate investing sector, it is best to consult with the experts. Hire real estate agents and mortgage brokers to help set up your investment. Find the right people to talk to on our Best in Mortgage page. 

Types of rental property to buy in the UK 

In the UK, there are several types of rental properties that investors can consider. Here’s an overview of the main types: 

1. residential properties
    
2. commercial properties
      
3. Buy to Let properties
     
4. holiday lets
     
5. student accommodation
     
6. HMOs 

Let's discuss each type of rental property: 

1. Residential properties 

This is the most common type of rental property. Real estate investors buy residential properties to earn profit from their tenants’ rental fees. These real estate investors are also called landlords. Here are some examples of rental properties for residential purposes: 

• flats
   
• maisonettes
   
• multi-unit buildings
   
• single-family homes 

2. Commercial properties 

There are many kinds of commercial properties to choose from. You can buy a rental property and rent it out as: 

• office spaces
   
• retail units
   
• warehouses
   
• properties for hospitality (restaurants, bars, and hotels) 

Compared with rental units for residential purposes, commercial properties usually have longer lease terms and may offer a more stable income. Rental earnings generated from commercial properties also tend to be higher due to the property size and type of tenants (businesses). 

3. Buy to Let properties 

Buy to Let properties are bought by real estate investors specifically for rental purposes. If you want to buy one, you can secure a Buy to Let mortgage with a commercial bank or property loan provider. You must show proof of intention to generate rental income from said property instead of residing in it.  

To know the latest changes about the UK’s Buy to Let mortgage rates, bookmark or favourite this guide. 

4. Holiday lets 

Holiday lets are properties rented out for short stays, often in tourist locations. Buying this type of rental property can provide higher income during peak seasons. However, it might require more management and marketing efforts to attract guests. 

5. Student accommodation 

Another common rental property is purpose-built student accommodation. These can be flats or residential units that are near universities or colleges. Their main purpose is to cater to students who want to live near their schools.  

Buying rental properties like student accommodation requires good management since they must be designed to meet the needs of student living.  

Learn why you should invest in student accommodation when you watch this video: 

Learn all about investing in student accommodation in this article. 

6. HMOs 

For the last rental property type, we will look at Houses in Multiple Occupation or HMOs. These are properties rented by multiple tenants who share communal areas, such as kitchens and bathrooms. Buying HMOs is a lucrative investment since these houses usually offer higher rental yields. However, this requires compliance with specific regulations and licensing. 

Read this article if you wish to know the challenges faced by landlords in buying HMOs. 

What is a good ROI for rental property? 

The average gross rental yield in the UK is currently 5.60%. As such, you can have a good Return on Investment (ROI) for rental property if you earn above that bracket. This is based on the average home value of Buy to Let properties which cost £261,897 and the country’s average rent of £1,223. 

Check out this comparative table on the top ten UK cities with the highest average rental yields: 

The figures above are sourced from Zoopla’s latest report. 

Advantages of buying rental property 

There are many perks for real estate investors who want to buy rental properties. Some of them include: 

Steady cash flow 

Buying rental property can provide a consistent source of income through monthly rent payments. This steady cash flow can help cover your other expenses like: 

• mortgage payments
   
• property taxes 
   
• maintenance costs 

Property appreciation 

Over time, real estate properties appreciate in value. This means that the rental property you buy today could be worth more in the future. If you grow tired of managing your rental property directly, you can sell it once its price skyrockets. 

Inflation hedge 

Having real estate investments often acts as a hedge against inflation. As inflation rises, property values and rents typically increase. This will help maintain the purchasing power of your investment. 

Disadvantages of buying rental property 

There are also disadvantages associated with buying rental property. We have listed some of them below: 

Management responsibilities 

Buying rental property involves lots of responsibilities. Once you purchase the property, you have to market it to attract guests. After striking deals with renters, your management responsibilities will increase. 

Aside from handling maintenance and repairs, you need to deal with any tenant issues that may arise. You might also have experience managing difficult tenants. This can be time-consuming and stressful. 

What should you do if you have tenants who refuse to pay rent? Watch this video: 

Market volatility and illiquidity 

The UK real estate market can be volatile. Property values and rental fees can fluctuate because of changes in the economy, market conditions, or even local factors. When push comes to shove, you might need to sell your rental property during an economic downturn. Unfortunately, this can lead to major losses. 

Having rental properties as investments is not as liquid as stocks or bonds. You might not be able to access your investment quickly if you need cash since rental payments from tenants are collected monthly. 

Unexpected costs 

Owning rental property will always come with the risk of having unexpected expenses. You must allot your resources for sudden major repairs and legal fees. You should also prepare for periods of vacancy when no rent is coming in as this can affect your financial health. 

Is renting out property worth it in the UK? 

While buying rental property can be challenging especially for new landlords and inexperienced real estate investors, it is worth it. When you buy a rental property, you must engage in managing it directly for profit. You should learn how to deal with tenants and market your rental property to attract them. 

Obviously, this type of real estate investment is active. So, if you are into passive investments, renting out property might not be for you. 

Buying rental property can be a good investment 

For many real estate investors, buying rental property in the UK is a good investment. However, it is important to consider several factors before making your purchases. You must evaluate your finances and goals first before making a move. 

Ask yourself: do you have the resources to purchase rental property? Is your credit score enough to secure a mortgage? Your answers must be in the positive to conclude that buying rental property can be beneficial for you. 

Also, what are your goals? If you invest in rental properties, your ROI will not be instant. You might even face challenges along the way. With this, you must align your expectations with your objectives. Good things come to those who wait so learn from your journey and manage your property well. Play your cards right to achieve your expected returns. 

What do you think about buying rental properties in the UK? Would you try investing in this real estate venture? Feel free to comment your insights on the space provided below.