Allowing landlords to start earning rent income immediately
A sitting tenant can provide a valuable opportunity for buy-to-let investors, particularly those new to the sector. This scenario offers a ready-made investment, allowing investors to hit the ground running with an immediate rental income. However, it remains crucial to conduct thorough due diligence, particularly concerning the tenant, to ensure they maintain their rental payments and that no other issues have been raised.
Choosing a tenanted property managed by an agent can facilitate this process. Agents typically vet tenants initially and, having managed the property professionally, will likely possess a more comprehensive tenant history. This can provide added peace of mind to investors.
Market realities and potential savings
While properties with sitting tenants might allow landlords to start earning rent immediately, research indicates that such opportunities are relatively scarce. These properties account for just 2.8% of total market listings. However, those who manage to find a suitable investment could benefit significantly, saving up to 25% on the market value of their investment.
A buy-to-let investment can be expensive, with numerous costs associated with preparing a rental property before even starting the tenant search. Acquiring a property with a sitting tenant is one way to invest in the rental market with minimal hassle.
Benefits of immediate rental income
The primary advantage of purchasing a property with a sitting tenant is the guaranteed rental income from the outset. This setup ensures that investors secure a steady income stream without the initial void period that can occur when finding a new tenant for an empty property.
Moreover, the presence of a sitting tenant can indicate a well-maintained property, especially if managed by a reputable agent. This can save new landlords from unexpected maintenance costs and tenant-related issues, making the investment more predictable and less risky.
A viable strategy for new investors
Investing in a property with a sitting tenant can be a strategic move for those entering the buy-to-let market. It simplifies the initial phase of property ownership, providing immediate returns and reducing the administrative burden. Nevertheless, investors should remain vigilant and ensure all legal and financial checks are thoroughly completed.
Investing in a property with a sitting tenant offers peace of mind, as a letting agent has already vetted these tenants. Additionally, the previous landlord will have addressed many administrative tasks associated with rental properties, such as compliance certificates, gas safety checks, and licensing requirements in the case of Houses in Multiple Occupation (HMOs). This can significantly reduce the burden on new investors.
Scarcity of tenanted properties
However, research suggests that the benefits of investing in a rental property with a sitting tenant may take more work, depending on the location of the investment. Properties with sitting tenants make up just 2.8% of all homes listed for sale. The figures indicate that, currently, there are approximately 12,423 investment opportunities available with a tenant in situ across Britain.
In London, properties with sitting tenants account for as little as 0.3% of total market listings. Even in Yorkshire, which has the highest proportion of properties with sitting tenants, such opportunities still only constitute 6.3% of the total market stock. These statistics underscore the scarcity of this type of investment opportunity.
Financial benefits and market value
The figures show that those locating such an investment opportunity could benefit from more than immediate rental income. A sitting tenant can often devalue a property because any potential buyer inherits the responsibility of the tenancy agreement with the existing tenant.
This scenario can deter average buyers who intend to use the property for their own use, as they may only be able to move in once the tenancy ends or the eviction process is completed. For buy-to-let investors, however, the potential reduction in the market value of a property with a sitting tenant only increases the yield on their investment.
Discounted prices and increased yields
The figures demonstrate that the average asking price for a property with a tenant in situ currently stands at £149,124 across Britain, around 15% less than comparable market values. This discount can be as high as 24.6% in Scotland.
Even in the East of England, where the reduction in the value of a property with a sitting tenant is at its lowest, investors can still benefit from an average discount of 10.8% compared to wider market values.
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Please note: this is a long term investment which you hope will generate rental income along the way and a profit when you sell the property, but bear in mind that if you need access to some cash, a property can take time to sell or remortgage. If house prices fall, you might not be able to sell for as much as you had hoped. You would have to make up the difference if the property sold for less than you owe – a risk that increases, the higher the percentage you borrow. If you sell for a profit, you may have to pay capital gains tax. Don’t forget that with a variable rate mortgage, your costs will rise if interest rates go up. This would eat into, or even wipe out, your income and profit. It is recommended that you also maintain access to emergency funds to cover your mortgage payments during ‘void periods’ that may arise whilst you have no tenant and the property is not let.
