We’ve all heard the property investment mantra: location, location, location. Perhaps one of the most powerful cliches to take hold of the sector, for good reason. Because, of course, where a property is situated is one of the biggest drivers of its return on investment. (From both a rental income point of view, and a capital growth point of view.) But – and it’s a big but – things aren’t quite as simple for most landlords as just buying where the best opportunities are.
Read on for all you need to consider when you think about investing locally or expanding into new territory.
Where do landlords in the UK prefer to invest?
In our experience, it is common to hear from landlords that they prefer to buy their properties locally, but many might prefer to venture further away to expand their portfolio. Looking at the data, it appears that this decision is also correlated with the segment of the market that landlords operate in, and the size of their portfolio.
A recent paper from the University of York (2021) reports that 60% of landlords in the lower end of the private rented sector (PRS) in England own local properties, while 40% own properties in other areas. The study also found that landlords who own local properties are more likely to be small-scale landlords, with fewer than five properties. Landlords who own properties in other areas are more likely to be larger-scale landlords, with more than five properties.
A study by the London School of Economics (2012), on the other hand, found that landlords at the higher end of the PRS in England are more likely to buy properties in other areas than landlords at the lower end of the PRS. The study found that this is because landlords at the higher end of the market are more likely to be motivated by investment returns, and they are more likely to be able to afford to buy properties in areas with higher property prices.
The fact is, buying in a location that’s far from where you live comes with complications and risks. However, there seems to be a growing trend towards the purchase of properties in other areas than where the landlords reside.
According to a report by Hamptons (2023), the number of landlords buying properties outside of their local area has increased by 20% in the past five years. The report also found that the average distance that landlords are willing to travel to buy a property has increased from 25 miles to 50 miles. The findings of this report are consistent with a growing trend of landlords expanding the radius of their investment:
- In 2022, 30% of landlords in the UK owned properties in other areas.
- The average landlord who owns properties in other areas owns 3.5 properties.
- The most popular areas for landlords to buy properties in other places are:
- The North of England
- The Midlands
- The South West of England
Is investing in local properties right for you, or should you expand?
If you’re new to being a landlord or simply don’t like the idea of managing property that’s far from where you live, there are plenty of good reasons to invest locally. There are some drawbacks to think about though, mainly around the fact that there may be better investment opportunities elsewhere. Having said that, while diversifying your portfolio into new areas can deliver great returns, there are challenges and risks to consider here, too. Let’s take a closer look:
Opportunities of investing in local properties
- Knowledge: Nothing beats a local’s knowledge. When you invest in the area where you live, you’re giving yourself the upper hand in being familiar with the area. This can help you when it comes to negotiating terms and knowing how much rent to charge. You are also more likely to be aware of which areas are the most in-demand and what new events or developments may make some locations more likely to grow in value. And it means it’s probably going to be easier to manage the property thanks to the fact you’ll be more familiar with the local tradesperson network. The same applies to other professionals in your area too – for example, it might be easier to know which are the most reputable lettings agents in the area if you live there.
- Access & convenience: Living close to the properties you let means you can take a much more hands-on approach when it comes to managing things. From repairs to inspections and screening new tenants, it’s likely you’ll feel more in control of your rental properties than if they were a few hours drive away. This is a big plus point for those who struggle with delegating or who simply prefer to build a relationship with their tenants, rather than leaving things to an agent.
- Networking: Having your feet on the ground in the area where your rental properties are might give you better networking opportunities. For example, you might mix with other local landlords, who can offer you insightful tips and advice, or even help you find better deals. You may even occasionally find new tenants this way – through knowing someone who knows someone who’s looking for a rental, for example.
In terms of the challenges involved in investing locally – it’s best simply to look at the opportunities for expanding that may be missed out on.
Opportunities of expanding into new areas
- Potential for higher returns: Investing in rental properties based on their potential rather than the fact they’re in your local area means you can chase more lucrative opportunities. You can look for properties in areas where the rental yields are high or rising (London rents have risen by 25% over the past two years, for example, but yields can be much higher in other areas of the UK). Likewise, you can focus on capital growth and look to invest in areas where house prices are rising quickly. For example, in 2022, York saw house prices grow by 23.1% whereas London prices increased at a slower pace with a 7.2% rise in the same year.
Tip: our guide to rental yields explains all you need to know about working out the potential return on investment a property will get in terms of rental income.
- Emerging markets: Property investors are often on the lookout for niche opportunities that haven’t yet been spotted by the masses. Looking for potential in affordable areas that are showing promising signs of growth can be an effective way to get a higher than usual return on investment. There’s risk involved, though, so if you’re an inexperienced investor this strategy might be best avoided – otherwise it’d be important to seek advice from an expert.
- Diversification: When you invest across different areas and regions, you lower the overall risk you take on as a landlord. If some areas take a dip in tenant demand or rental yields, for example, you may have properties in other areas that are thriving, helping to ease the burden.
Challenges of expanding into new areas
While the prospect of chasing the best investment opportunities is exciting, there are some challenges to be aware of too:
- Costs: It’s generally more expensive to manage rental properties from a distance, as you might need to pay for property managers – and there are travel expenses to consider too.
- Risk: Investing in areas where you’re not familiar with the local market could open you to more risks. It’s crucial to do your research and make sure you’re fully aware of these before making any big decisions.
- Management: Being separated from your rental properties by distance can be daunting, and may not suit every landlord. You’ll have to be comfortable with the fact you won’t be able to reach your property quickly if an emergency occurs. There are measures you can put in place to mitigate these factors though – like relying on reputable property managers, building a trusted network of contractors and emergency contacts, and carrying out tenant screening over video call.
- Regulations: Regulations around rental properties vary across the country, depending on the local authority. So it can be challenging to make sure you’re fully up to speed about the rules and regulations that affect your buy-to-lets when they’re further afield. If you’re unsure about anything, you should always consult an attorney or property management company before making any decisions.
Expanding into new areas or staying local – closing thoughts
Whether or not it’s best to stay local with your investments or expand into new areas will depend on your own unique circumstances and risk tolerance. There are pros and cons to each strategy – although there’s no doubt that expanding into new areas is one of the most effective ways to get higher returns and reduce the risk you take on as a landlord. It’s crucial to recognise that doing so requires a certain amount of knowledge, though. So brand new landlords may be better off investing locally to begin with. That way, they can learn the ropes and build experience before eventually diversifying into new areas.
Those who do decide to invest in new areas should do plenty of research and consult the appropriate professionals before sealing any deals.
Hammock takes the stress out of managing rental income and expenses
Hammock is the accounting platform for landlords. It lets you seamlessly manage all your property income and expenses in one place. Whether you own one local rental property or dozens across the country, our platform enables you to oversee all your rental income and business expenses, monitor your investments, and see accurate property tax statements so you’re always prepared.
Try Hammock for free for 30 days