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How to invest in property

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Image of Michelle Monck

Michelle Monck

Consumer Finance Expert

At a glance

  • Property investment can involve buying property directly or investing in a fund with property in its portfolio
  • Property investment can be expensive – check the costs before you dive in
  • Although ‘bricks and mortar’ are often seen as safe, remember that the value of property or an investment can rise and fall

 

What is property investment?

Property investment is about generating a return either by investing in funds focussed on the property sector or by the physical act of buying, selling and developing property. Those investing in physical properties can generate a regular income through rental properties or redevelop properties to increase their resale value. Some investors will buy property in the hope that this will grow in value over time.

How to finance a property for investment

Buying a property for rent can be done through a buy-to-let mortgage or commercial mortgage or with a bridging or property development loan if you need to access funds more quickly. You may also decide to remortgage or place a second charge mortgage against your existing property to help fund the purchase of another.


Your choice of property investment lender will depend on whether you need a commercial or residential mortgage. This choice is dependent on the purpose of the building you intend to buy. You will need to check for any restrictions on your buy-to-let or commercial mortgage for example, there is often a maximum number of properties you can own to qualify for a standard buy-to-let mortgage and some commercial lenders may not accept specific geographical areas or allow sub-letting.

 

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What types of property investment are there?

There are several differing forms of property investment. These include:

Investing in Buy to Let

This involves buying one or more properties and then renting these out to someone else, either as a residential home or as a business. You will need to be confident of achieving the rental you need to make the investment profitable and worthwhile – our buy-to-let yield calculator can help you to see what your return might be.


If you don’t have the capital to buy a property outright then you’ll have to look into getting a buy-to-let mortgage or a commercial mortgage. If you need a buy-to-let mortgage you will need to make sure your rental yield is sufficient enough to quality. The market for buy-to-let is becoming more professional as more landlords choose to operate as limited companies. Operating as a limited company does have the benefits of tax and limited liability. Our guide How to create a buy-to-let limited company has more information about the benefits of using a limited company for a buy-to-let portfolio and the steps to set this up. You can find more helpful information in our Five steps to becoming a buy to let landlord guide.

 

Get help to find a buy-to-let mortgage today

Our preferred mortgage broker, Mortgage Advice Bureau, can help to find you a buy-to-let mortgage deal.

 

Investing in property development

Investing in a property to refurbish it to a better standard or to divide into smaller units are ways to make money from property developments. Some investors choose to buy properties at auction, with the aim of buying these at less than the market value and thereby improving their potential margin. Buying at auction does require you to have funds available quickly as the auction house will have a deadline or the sale will not complete. A bridging loan, while more expensive than most other forms of property finance, can be made available more quickly than a traditional mortgage allowing you to complete the sale quickly. After this you can then refinance the bridging loan to a lower cost of finance.

Investing in new build properties

Those investing in new builds need to make sure the yield they can generate will be enough to cover their costs, especially if they intend to use a mortgage to buy one. Generally new builds attract lower rental yields, so it is important that you maximise any discount from the sale price, check if the areas have potential for growth in the future and the level of rental demand. Over the longer term a newly built property may become more profitable than an older property, through reduced maintenance costs and increases in property value. However, this is not guaranteed and furthermore, delays during construction may result in unanticipated delays to the final completion date of the property. If you are buying off plan you need to make sure you can afford to wait if the property is delayed and be able to address any potential snagging issues.

REITs (Real Estate Investment Trusts)

REITS are a type of investment fund that only invests in property. These funds consist of property companies that generate a profit from their property portfolios on the behalf of shareholders/investors. Because these companies are a REIT they do not pay corporation tax on their profits generated from rented property. REITS do need to comply with certain rules from HMRC to qualify for this status. Those buying shares in the REIT earn a dividend based on the performance of the property portfolio. The earnings form REITS can be transferred into ISAs making these very tax efficient investments.

Read more about how to invest in REITs. 

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Foreign property investment

You may decide to invest in a holiday let abroad with the potential of using this as a holiday home too. If you are intending to buy abroad you may find our guide to overseas mortgages helpful.

What are the expenses of property investment?

Some of the direct costs of buying an investment property include:

  • Auction fees
  • Mortgage interest costs
  • Mortgage fees
  • Valuation and/or surveyor fees
  • Land registry fees
  • Legal fees
  • Stamp duty (including an extra 3% if you buy an additional property or buy to let)
  • Buy-to-let insurance

In addition, on-going costs of a property investment could include:

  • Rental management company fees
  • Maintenance and repair costs
  • Council tax or business rates if not paid by the renter
  • Ground rent if leasehold and not paid by the renter
  • Corporation tax on any profits generated
  • Buy-to-let insurance
  • Deep cleaning in between tenants

And when you sell your property the costs include:

  • Capital gains tax
  • Estate agent fees
  • Legal costs

What are the landlord’s responsibilities of a residential buy-to-let property?

Landlords have many legal responsibilities. These include responsibility for ensuring that the property is habitable and safe for people to live in and adheres to the required standards of health and safety. Health and safety requirements include working smoke alarms on each floor of the property, carbon monoxide detectors where they are coal or wood burning fires, gas safety certificates for all appliances, electrical devices must be safe for use and water to the property must be protected from the risk of Legionella. Landlords must also have an Energy Performance Certificate for their properties and risk a fine of thousands if this is not done.
Another significant requirement of landlords is to make sure that their tenants are legally allowed to reside in the UK, failure to make the necessary checks can result in imprisonment. Landlords must also protect their tenants’ deposits and give their tenants their contact details or that of the letting agent.
This is not a full list of requirements and landlords should consult with a legal adviser or their rental management company to make sure their responsibilities are fully met.

What are the possible risks of buying a property investment?

Buying a property as an investment carries the usual risk of returns not performing as expected or even the potential of a loss. Unexpected repairs could turn a margin into a deficit. In addition to the potential of lower returns, investing in property is a big commitment, requiring you to place potentially a significant proportion of your wealth into a single asset type. If your property investments go wrong, you ideally want other investment classes that will help to smooth out the loss across your whole investment portfolio. Timing is also an issue with property because accessing your investment quickly is usually not possible.

Property investment: three steps to better investing

Here are three things to consider before investing in property:

1. Research your market and rental yield

Get to know the area where you want to buy and invest in. Look at the local jobs market, the profile of the population, the local employers and economy, the availability and performance of local schools and for commercial property the availability of commercial rental space in your area by industry classification. What are the local rental values and prices, are they accelerating or declining? Calculate your buy-to-let yield to make sure this is strong enough to fund your investment and make sure that if you need a buy to let mortgage rental income will meet their requirements. 

2. Have an exit strategy ready

You need to think about how you would manage your property investment should your circumstances change. Exit strategies can include sale of the property on the market or at auction (but remember capital gains tax would apply), refinancing across your portfolio and retaining all your properties or a combination of the two.

3. Negotiate the lowest property price

Finding new properties at a good price is critical to a longer-term property investment strategy and if you need mortgage finance this could also help to reduce our loan-to-value and increase the number of lenders you can choose from.

Moneyfacts tip

Moneyfacts tip Image of Michelle Monck

Before embarking on any property investment venture be sure to check that you can afford all the costs involved. Be realistic about your income during fallow periods and have a plan on how you intend to fund or exit your investment if the market slows.

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