Why prospective landlords must invest with their eyes open

Financing, regulation, legislation, timescale and taxation ​​are among the issues to be considered, writes David J Alexander.

There were many reasons why people became landlords in the past, but circumstances have changed dramatically in recent years, and prospective investors need to ensure they fully understand what is required before entering the market.

Historically, most landlords were individuals who sought an investment for their future, often to fund their retirement and provide a boost for their pension. There remain 71 per cent of landlords with one property and a further 14 per cent owning two but these groups are shrinking as the individuals reach retirement age and leave the sector.

Therefore, a new generation of landlords needs to be encouraged to enter the market if enough properties are to remain to meet the existing and future demand in the sector. It remains a great sector to invest in, but an individual or company interested in getting involved needs to do so with their eyes open.

There are many issues which need to be considered prior to investing in the private rented sector (PRS) not least financing, regulation, legislation, timescale and taxation.

Location, as in all property considerations, is key. Edinburgh remains one of the rental hotspots of Scotland due to the broad demographic of people coming to the city to work, to study, and to live and with the population having grown by 8.4 per cent over the last decade the assumption is that this growth will continue in the next ten years.

The capital, and Scotland as a whole, continues to experience higher price inflation for buyers than the rest of the UK. What this means for the investor is that there is strong rental demand producing higher rents but also healthy capital growth over at least the next five to ten-year period. So, for investors good income in the immediate term and high capital growth for the future.

Properties also rent quickly in the Central Belt so there are few empty periods, resulting in a steady, regular income. For those seeking revenue to cover the mortgage while wanting a retirement pot for the future there is little doubt that the PRS in many areas of Scotland offers an excellent return.

But be in no doubt that this is a sector that requires a professional approach. Many existing landlords are finding the dramatic increase in legislation and regulation difficult to keep up with and the strains of managing the maintenance of a property alongside the changing needs of tenants can prove cumbersome.

There are, of course, other considerations which prospective and existing landlords and investors need to be aware of. There is, rightly, much greater regulation of properties which landlords must adhere to including registering with local councils to meet strict safety and management standards on issues such as fire, electric and gas. There can be high maintenance costs, the tax regime may change over the investment period, and there may be the imposition of rent controls at some time in the future. But there are always issues which impact upon any business investment.

Perhaps the clearest message is that landlords and property investors must treat this as a business which needs active management rather than one which can be left to tick over without much engagement. It remains an attractive investment for those willing to get involved over the medium to long term but needs due consideration.