Are you a buy-to-let investor and want to know why sitting tenants are becoming popular? Read this.
What is a sitting tenant?
In the UK property market a sitting tenant is a person who rents with the legal right to occupy that specific property for life. Their rights are set out by the Rent Act of 1977 and their tenancies were often created prior to January 1989.
Upon the death of a sitting tenant, tenancy may be transferred to another family member.
How does a sitting tenant affect property investment?
If you buy a property with a sitting tenant you will most likely be responsible for the maintenance of the external appearance and the insurance. Your sitting tenant is obliged to keep internal conditions to a suitable standard and pay you rent.
However, unlike other property investments, wider market value will not determine the rental payments. The Rent Office sets the amount and it is usually much lower than similar properties in the same area.
The rental payments will be reviewed every two years or when major improvements are made to the property, but the Rent Office will still determine the amount.
Finally, you may not evict a sitting tenant. The tenant may move out of the property and the protected tenancy agreement transfers with the tenant, leaving you to let the property as a normal buy-to-let investment.
Given the restrictions, why are landlords buying properties with sitting tenants?
Last month Countrywide announced the proportion of properties bought with a sitting tenant has reached the highest level since 2005. More than one in 10 rental properties bought and sold during 2014 were occupied by a sitting tenant, representing a fourfold increase since 2008.
Sitting tenant sales throughout the UK rose as investors and landlords placed increasing emphasis on immediate and sustained returns.
A traditional buy-to-let investment may allow landlords to achieve higher rents, but the effort involved with marketing, managing and thoroughly maintaining their property – not to mention dealing with void periods – mean total returns can be higher with sitting tenants. Even if this is not always the case financially, some investors like to add sitting tenant properties to their portfolio to create an assured cash flow.
Student property alternative to sitting tenants
Still don’t want to commit to owning a buy-to-let property investment with a sitting tenant? There are alternatives available – particularly student accommodation, which has attracted over £9 billion worth of investment in the past three years.
The sought-after occupancy levels of sitting tenant properties are hard to match, but the student property sector has unprecedented levels of demand driven by record enrolment figures. Indeed, even prior to opening, Vita Student’s Telephone House development in Sheffield is 50% let, meaning many investors will purchase a property with a tenant in place.
Buy-to-let is typically a time-consuming investment. Having a sitting tenant reduces the ongoing maintenance to the exterior of a building, but an investor retains most of the traditional landlord responsibilities should issues arise with the property.
Student property investments are fully managed, removing the investor’s involvement completely and leaving them free to concentrate on other investments within their portfolio.
Both sitting tenant buy-to-lets and student property investments can rarely be used in the wider residential market. They are both bought and sold as investments – and this secondary market is thriving. Investor-to-investor sales have been identified to dramatically reduce likelihood of void periods, as a fresh tenant is not needed to fill a vacant buy-to-let property.
Indeed, if student properties are purchased off-plan and sold with a history of generating high yields, capital growth at exit can be some of the highest seen in the property market.