As more and more people across the UK are renting, the Build to Rent model is one that is becoming increasingly popular with property investors. This sub-market within the larger market for residential properties is geared towards taking advantage of the fact that in large urban conurbations like London, as much as 30% of the population are either choosing to or are being forced to rent.
In this blog we look at the advantages of building a property that’s specifically designed to be rented out once it’s completed. Does it represent a sound investment? By the end, we aim to make this much clearer.
6 Pros and Cons of Employing the Build to Rent Model in UK Property Investment Market:
1. Huge Potential For Rental Property
This particular niche within the residential property investment sector is expected to grow significantly in the coming years. We live in an era that has been dubbed as “Generation Rent” - which refers to young adults who aren’t able to own their own home due to the relative high cost of doing so- which means that wherever you live in the country, there’s a good chance that demand will be high.
For this reason, the build to rent market is expected to more than double over the next 5 years, meaning there is a huge potential for meaningful yields for anyone with the means to invest.
2. Government Backed Incentives
The housing crisis is unfortunately still alive and kicking in the UK, which is why the government currently offers tax incentives to developers getting involved in the build to rent scheme - another indication that there is considerable scope for profit in this investment niche.
3. Residual Income and Capital Growth
The build to rent model offers a mixture of financial advantages to an investor, as it provides a residual income, as well as the capital growth you get from owning a property. Of course, this is something that can be achieved by going down the standard buy to let route, but with small houses in particular costing less to build than to buy, the financial gains on offer are that much higher.
4. Longer Tenancies
A build to rent project can be a costly one, which means that you’ll most likely be offering longer tenancy agreements to provide security to your investment. Whilst this might not seem like much of a disadvantage, it could make finding tenants willing to commit for as much as three years or more, a little more difficult.
5. Requires Significant Capital
This path will usually require the investor to have a significant amount of capital to invest in this type of project. Whilst getting funding from a lender for a build to rent property isn’t impossible, it’s certainly going to be more tricky than getting approved to for a standard buy to let mortgage.
6. Delayed Returns
Whilst there is a significant amount of profit to be made in the long term from a build to rent property, you’re not going to see much of your investment come back to you for quite a while. The residual income will begin from the moment your tenants move in for sure, but if you’re funding the project with a mortgage, much of those earnings are going to be earmarked to cover your mortgage payments.
In order to release the bulk of the capital tied in your property, you’re going to need to sell it, which as we mentioned earlier, won’t happen for at least 3-5 years.
All things considered, if you’re in a position to be able to commit to a build to let property, the long-term yields on offer make it an attractive proposition. However, what you shouldn’t do is expect a quick return on your money. This is what you would call a slow burner,which is ideally suited to investors who have the luxury of being able to sit tight and wait for their long-term profit to be realised.
When it comes to deciding whether it’s right for you or not, the answer will largely depend on your own personal circumstances and the location in which you’re planning to build. Factors that you’d consider with a standard buy-to-let property investment, like local rental demand and amenities, will also need to be considered, as you’ll need to understand how difficult getting tenants of any description is going to be once your property is ready.
We would also always recommend doing extensive research into the local area when investing in any sort of property anyway, but as the costs involved in building a house from scratch can often go over the agreed budget, this counts double for build to let projects. We’d also recommend to attend one of our courses (more info here) or talking to a local property expert, as well as a financial advisor with so many variables in play, as miscalculating even the smallest detail can cost you dear.