5 Reasons to Buy Tenanted Property
Market conditions are currently challenging and investors who I speak to are struggling to negotiate deals owing to the amount of competition from other investors and first time buyers. In the two areas that I am currently investing in; Carlisle in Cumbria and Bicester in Oxfordshire, I am finding that properties that need a refurbishment are selling for close to what you would expect to pay for a comparable that is ready to let.
An area that I am finding limited competition in is for tenanted housing stock where there is an existing tenant in situ and the property is being sold without vacant possession. Where there is less competition there is opportunity through acting in a contrarian way. I have recently completed on a tenanted property in Bicester and have negotiated a tenanted purchase up in Carlisle. Both enabled me to be paid from day one and were purchased at genuine discounts to fair value. This article will explore the 5 reasons that you should buy tenanted property.
Get paid from day 1. The first reason to buy tenanted property is linked to cash flow and the fact that you will be getting paid from day 1. This is in comparison to a refurbishment project where there will be a void period whilst the works are completed and you or the agent identifies a tenant. This period can take several weeks or even months and can result in you having to pay finance costs without having any income to offset it against. With a tenanted property it is important to know the date that the tenant pays their rent and either exchange close to this date or ensure you inform your solicitor who will be able to adjust the completion statement so that you are reimbursed if there is any rent owed to you on completion. Cash flow is key for any business and therefore buying tenanted property will help derisk you investment by putting money in your pocket from day 1.
No expensive refurbishment. Property investment is capital intensive. In securing the property you will have probably already paid out a 25% deposit, along with frictional costs such as broker and solicitor fees. Why not save on the requirement to also conduct a refurbishment and instead put the money towards your next deal by buying a tenanted property. This is particularly important where it appears that inflation may hit the sector with increasing prices of labour and material. Also with house prices rising at the rate they currently are in May 2021, you might find that there is no requirement to force appreciation as market forces will play their part. For those looking to recycle deposits there will be a requirement to be a bit more patient when buying a tenanted property. If you buy at a discount you will still probably need to wait until the end of the 2 year initial term to remortgage, therefore this is a strategy for the patient investor.
Payment History. Despite the due diligence undertaken upon finding a new tenant, it is always risky entering into a tenancy agreement with someone who has an unproven history of paying you. If done correctly, purchasing a tenanted property can reduce this risk significantly as there could be a tenant who has been in the property for a number of years with a proven record of making payments on time and without default. Here the requirement to conduct due diligence during the purchasing process is key with a need to get the vendor to prove this with rental accounts showing payment history. A long term tenant with a history of making regular payments without default in an asset that will hopefully continue to pay you for a number of more years.
Less Competition. Properties sold with vacant possession can usually be purchased by both investors and owner occupiers. During more normal market conditions it was possible to purchase properties requiring refurbishment with a good discount, however at least in my areas, this appears to be getting more difficult. When buying a tenanted property your competition is only other investors, who are hopefully too focused on looking for refurbishment projects like every other investor. Anecdotal evidence from speaking to agents suggests that other investors are put off by perceived access issues to tenanted properties due to coronavirus. It is true that COVID-19 restrictions do make access more challenging, for viewings and valuations, however the fact that others are put off also provides opportunities to those investors who are good at problem solving.
Discount. Closely linked to the point of less competition and perceived issues with access, there is an opportunity for the contrarian investor who purchases tenanted housing stock to buy at a discount to fair value of the property. On the tenanted property in Bicester I secured what I perceived to be a 15% discount against fair market value and the tenanted property in Carlisle 5%. Purchasing at a discount will magnify your total return on investment and lowers your risk in case there is a market downturn. It will also make it more likely that you are able to refinance some of your money out at the end of the initial mortgage period.
With the purchase of my second tenanted property ongoing I am continuing to see tenanted property that is for sale after sitting on Rightmove for weeks. This points to the fact that there are limited investors looking at tenanted properties which presents opportunities for the rest of us. Ensure you conduct your due diligence on the tenancy and be careful not to overpay. Good luck.
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