Investing in rental properties has always been a strong strategy to achieving long-term wealth. With 35.7% of the UK population now renting and private rents rising by 8.6% in the last year alone, the investment case for rental properties is more relevant than ever. Here is a roundup of the benefits of investing in rental properties and where to begin as an investor.
Quick Tip: One of the best strategies to capitalise on the benefits of rental properties is by investing off-plan. With very little room to build, simple supply and demand ensures growth for years to come. They also bring advantages such as unbeatable payment plans, warranties, amenities and increased tenant demand but most importantly by buying off-plan you’re likely to get below market value opportunities in the biggest regeneration areas and your pick of the best units leading to maximised growth of your capital.
Scroll down to the bottom of the article to download our FREE guide to Off-Plan investing.
The Current Rental Property Market
The demand for rental properties is particularly high in large cities such as London, Leeds, Birmingham, Manchester and Liverpool, and their surrounding areas. But why is the UK rental demand the highest it’s ever been?
Firstly, since 2022 higher mortgage rates have made it harder for first time buyers to purchase homes, keeping many within the rental sector. 2023-2024 saw 20% fewer purchases by first-time buyers. Coupling this with rising living costs, it is becoming increasingly difficult for people to transition out of the rental sector. The cost-of-living crisis has not only increased the number of people renting, but it has also increased the value of rents which have risen faster than wage growth; a trend that is predicted to continue throughout 2024. Private rents in the past 12 months have risen by 8.6%.
Furthermore, a growing population, and increasing urbanisation, have aided the surge in rental demand. The most prominent cause of the current high rental demand is a shortage of new property developments, and particularly a lack of affordable housing. As of 2022, this has kept 35.7% of the UK population in the rental sector.
Appreciation and Capital Growth
Whilst many investors are keen to focus on the short-term benefits, investing in rental properties can provide exceptional long-term returns through appreciation and capital growth.
In the UK, property has historically appreciated in value. In recent years, UK property values have seen significant appreciation, with house prices increasing by an average of 20% between 2016 and 2021.
However, market fluctuations such as Brexit and the COVID-19 pandemic have introduced new dynamics. While Brexit initially slowed growth, the post-pandemic surge in demand for housing, coupled with a limited supply of new developments, has driven property values even higher, particularly in regional cities like Manchester and Birmingham.
This upward trend is likely to occur in the future also, due to urban development, population growth and inflation. For investors, this can result in the value of their assets increasing significantly. Therefore, once an investor decides it is time to sell or remortgage, they can make a profit on their investment. This profit, the difference between their purchase price and the selling price, is known as the capital gain, which adds another layer of returns to combine with the returns from renting.
Passive Income
A goal for many property investors is to create a form of passive income. Investing in rental properties can make this goal achievable. This isn’t to say that investing in rental property is without time and effort, but investing with the right partners can make it a lot easier.
If investors can acquire quality rental properties in growing, economically strong areas with a good rental managing agent, then earning a high, passive income can be achieved. This is a healthy benefit, because it allows investors to earn an income, whilst also having the time to focus on other jobs or investment ventures should they wish.
Rental properties can also be a way of creating a legacy through a gradual accumulation of wealth which can be used to provide financial security for future generations.
Control Over Investments
Another great benefit to investing in property, is that there is a significant proportion of control over this type of investment compared to others such as stocks and shares. Depending on the property type, investors can have control over decisions regarding property management, tenant selection and rental pricing. Not to mention, selling or remortgaging a property. This level of control is a key benefit of owning rental properties.
Inflation Hedging
Rental properties act as a hedge against inflation, as property values and rental income tend to increase in line with or outperform inflation, preserving the purchasing power of investors capital over time.
This makes rental properties a particularly attractive option during periods of economic uncertainty when inflation can erode the value of other types of investments and cash in the bank. By investing in property, you can protect your capital from inflationary pressures while continuing to generate income and build wealth.
Things to Look Out For
When investing in rental property, it’s important to weigh up several factors to ensure a successful investment. Rental yield is one consideration; this is calculated as a percentage of your annual rental income relative to the property’s purchase price. Location is another essential factor. For example, properties near universities, businesses or transport hubs, tend to attract a steady stream of tenants and offer long-term capital appreciation.
Property type also matters. For example, one-bedroom apartments in city centres often appeal to young professionals, while three-bedroom houses in commuter towns can attract families looking for more space.
Additionally, consider your financing options carefully — whether you’re opting for a buy-to-let mortgage or using cash, interest rates and repayment terms can significantly impact your cash flow. For instance, even a small rate increase on a £200,000 mortgage could add hundreds to your monthly payments. Don’t overlook maintenance costs either, setting aside around 10% of your rental income for ongoing repairs is a good rule of thumb.
Thorough tenant vetting is a must to avoid costly issues such as late payments or property damage. Background checks, references, and credit reports can help ensure you’re renting to reliable tenants.
Finally, when investing in rental properties, it’s essential to ensure you meet all legal obligations as a landlord. This includes obtaining the necessary landlord insurance, conducting regular gas and electrical safety checks, and ensuring the property meets Energy Performance Certificate (EPC) standards. You’ll also need to protect tenant deposits in a government-approved tenancy deposit scheme and ensure the property complies with any local licensing requirements. Staying compliant with these regulations helps avoid fines and legal issues while ensuring a safe living environment for tenants
Next steps
Investing in rental property can be a difficult decision to manoeuvre but here at E.R.E Property, we are here to help. If you interested in investing in the UK, call us on +44 (0) 113 380 8930 and speak to one of our investment consultants who’d be happy to help.
Sources : Gov.uk, Statista, ONS, The Guardian, Finder
