There are numerous methods used when valuing a rented property. The determining factors are mainly:
1. Type of tenancy
The main types of tenancies are; AST, life, assured, regulated, licences (mainly HMO’s)
A calculation will need to be commissioned to calculate the yield based on rent/purchase price. You can study local yields to understand what yield a property should generate based on the regional market demand.
Typically in cities such as Liverpool, investors demand yields in excess of 8%, whereby in London investors might settle for a yield of 4%.
The yield required to an investor is subjective which is why you will need to research the local market demand by speaking to a range of estate agents or surveyors.
How to calculate the yield?
To calculate, take the 'Annual rental income (Weekly rent x 52 weeks)' and divide by the 'Purchase price'. Then multiply this number by 100. Example: Property value £100,000 and expected rent £100 a week.
3. Length of tenancy
The tenancy term will be stated on the tenancy agreement. Typically a tenancy will run for a period of 12 months, however some tenancies will be fixed for various periods such as 24, 36 or 48 months.
In a government consultation, the government claimed some 80 per cent of tenants currently had contracts of six or 12 months - and that many wanted longer tenancies.
In terms of the valuation, typically the longer the fixed term tenancy the larger investment discount to Market Value required due to the reduced flexibility for the landlord. Moreover it will be dependent on rent review clauses throughout the term too to ensure that inflation does not erode the starting rents.
Typically mortgage lenders will only accept tenancies of 12 months or less too and therefore this will need to be investigated with a suitably qualified mortgage broker.
4. Security of tenure ie a life or rent act tenancy
If the property has a life or rent act tenancy, the valuation will be determined by:
- The age of the tenants and using national life expectancy graphs
- Whether rent is paid or not. If no rent is paid, you will need to use a term and reversion calculation and roll up the notional interest based on the life expectancy
- A percentage discount to Market Value using local and national comparables for rent act tenancies
5. Condition of property
If the property is in disrepair, the landlord would be required to ensure that the property meets the Homes (Fitness for Human Habitation) Act 2018
Matters or circumstances determining if unfit
Determining whether a house is unfit or not is found in section 10 Landlord and Tenant Act 1985 which has also been amended by the Act which adds “in relation to a dwelling in England, any prescribed hazard” (more on this in a moment).
Section 10(1) reads (including amendments from 20 March 2019):
In determining … whether a house or dwelling is unfit for human habitation, regard shall be had to its condition in respect of the following matters—
freedom from damp,
drainage and sanitary conveniences,
facilities for preparation and cooking of food and for the disposal of waste water;
in relation to a dwelling in England, any prescribed hazard;
and the house or dwelling shall be regarded as unfit for human habitation if, and only if, it is so far defective in one or more of those matters that it is not reasonably suitable for occupation in that condition.
6. EPC rating
7. Age of tenants (if the tenancy is for life or secure)
When Open Property Group know the answers to the above we can calculate a valuation based on any type of tenancy.
Open Property Group are professional landlords and direct cash buyers of all types of property, throughout England.
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