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Landlords should tread carefully when diversifying

Ian Boden, Sales Director, LendInvest

There’s little question that the shape of the landlord market is changing. The various regulation and taxation changes introduced over the last few years have seen the make-up of the nation’s landlords move away from the dinner party landlords with one or two properties to those with much more comprehensive investment portfolios.

With that change has come a change in attitude, viewing property in more classical investment terms. And that means looking at ways to diversify.

When it comes to investing, no matter whether you are putting your money into stocks and shares or bricks and mortar, diversification is a fundamental strategy.

Spreading the risk across different investment properties is a smart move; even if you encounter issues with one property, the performance of the other properties in the portfolio can help to limit the effects, and leave you in a stronger position overall than putting all of your eggs into just one or two baskets.

From the professional landlords we deal with, we have seen these diversification strategies take a couple of different forms.

The first is simply a geographical one; landlords are well aware that there are significantly higher yields in certain areas outside of London and the South East. As the latest LendInvest Buy-to-Let Index shows, cities like Leicester, Birmingham and Manchester are all delivering terrific returns to wily landlords.

The other tactic has been to look to other asset classes within property, for example by investing in HMOs and semi-commercial properties.

With semi-commercial investors have been particularly attracted by the fact that they can avoid the additional 3% stamp duty surcharge normally levied on investment properties, while HMOs have won favour because of the higher rental yields often available from these properties.

Looking beyond traditional residential properties is a good idea for many investors. Permitted development rights have made it more straightforward to turn disused commercial properties into residential ones, homes that are badly needed to meet demand, while the economics of HMOs will always catch the eye.

However, diversification is not as simple as merely buying a property in Manchester or snapping up a nice-looking HMO that happens to be available.

With geographical diversification, landlords need to think long and hard about the logistics. Who is going to handle the management of that property? It’s one thing to take a hands-on role if you have a cluster of local properties, but once you become a cross-country landlord you then need to place your faith in others to maintain the standards you have set.

Similarly, finding the right property will take detailed research. Yes, Leicester may be performing well on the whole, but there’s more to it than that. Which particular areas in the city are delivering the strongest and most reliable returns, and why?

The process is even more involved when it comes to diversifying into different property asset classes.

HMOs for example are a much different proposition to a vanilla rental property, even though you are still only looking for typical residential tenants.

Landlords need to organise a licence for example, while the fact that different regions have their own rules covering the expectations that a landlord must live up to means that investors will need to put time aside to discuss those rules with the local authority’s HMO officer. Getting those wrong can prove costly.

Similarly, while investing in a semi-commercial property may have certain tax benefits compared to a traditional rental home, it isn’t short of additional logistical hurdles, not least how to go about finding an appropriate commercial tenants.

Diversification will remain a crucial strategy for landlords, and moving beyond purely vanilla residential investment properties can be a sound and lucrative method for doing so. But it remains vital that investors and their advisers look beyond the talk of large yields and tax benefits to truly get to grips with what they are investing in from the outset.

 LendInvest offers Buy-to-Let mortgages to portfolio landlords. Got a case in mind? Find out more here.

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