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A Guide to Property Investment for Beginners

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There are several different investment options for anyone looking to invest their money, from stocks and bonds to bricks and mortar. The latter is perhaps the most-trusted investment type in the UK: there are more than 2.5-million landlords in the United Kingdom. 

Investing in property differs from other types of investments as it’s a tangible commodity, so more people are cottoning onto this and now, property investment for beginners is a thriving trade. While stocks and bonds sit in an account, a property is a physical asset that has an actual use and many people feel more comfortable putting their money into a buy-to-let investment.

What is an Investment Property?

Buy-to-let properties offer two primary ways of returning income – through rent received and house price appreciation. Over the last 15 years, house prices have soared. In 2005 the average UK home was worth £150k, while today the average property price is £232k. Most people who invested in property saw their asset increase in value. 

However, a slower uptick in house prices, combined with a change to tax and stamp duty regulations, has reduced the speed of the buy-to-let market to some extent. Yet, even with the changes, rental demand is set to increase over the years, and buy-to-let can still be a profitable venture for long-term investors. 

If you’re new to the world of buy-to-let and wondering how to get into property investment, you’re in the right place. So, read on, and learn everything there is to know about investment properties:

  • How do you profit from buy-to-let?
  • Requirements for investing
  • Choosing a buy-to-let hotspot
  • Landlord budgets
  • Different types of investment properties

How do you profit from buy-to-let?

The first thing you probably want to know if you’re thinking of investing is how much profit can you make? Investing in a property to rent earns its money through rental yield and capital growth, with the former providing short-term gains and the latter increasing over the long term. Bear in mind that making money from property is not always easy – or guaranteed.

Yields

Your investment property will receive regular rental income once it’s rented out. How much you achieve in rent compared to its value is known as the yield. In layman’s terms, rental yield measures how much cash your assets produces each year in comparison to its value. 

Example: If a property is purchased for £350,000 and achieves £19,250 per year in rent (£1,604 per month), it’s yield will be 5.5%. 

Capital Growth

Capital growth is how much a property’s value increases over time. That’s why buy-to-let investors who keep their property, in the long run, are more likely to make a profit, as house price growth should be higher over a five to 10-year span than it would over one to two years. Bear in mind you will have to pay capital gains tax.

Example: Let’s say you bought your home for 350,000, capital growth would occur as soon as its value increased, even if it’s a seemingly small amount like £5,000. The higher the capital growth, the more profit the investor stands to make. 

How to Invest In Property

Requirements for Investing

Buying an investment property requires you to go through different stages, and there are many aspects that you need to consider before buying a property to rent. Below are some of the primary requirements for purchasing an investment home. 

Deposit

The minimum deposit for an investment property is typically between 20 and 40% of its overall value, though most mortgage-lenders look for a figure of around 25%. If you wanted to buy somewhere valued at £350,000, it’s safe to assume that you would need £87,500 for a deposit. 

Stamp Duty

Investors buying a buy-to-let are technically purchasing a second home, which means they need to pay an extra  3% on stamp duty. This means you will need to pay  3% more than if you were moving from one home to another.

Getting a Second Mortgage for an Investment Property

Mortgage lenders take the estimated rental income into account when deciding how much you can borrow, with your salary playing a secondary role. Loan to value is usually 75%, with you paying the remaining 25%. 

Higher Interest Rates

Investment property mortgages tend to come with higher interest rates as they are deemed more of a risk to lenders than a traditional mortgage. The majority of buy-to-let mortgages are interest-only, meaning you will only pay back the interest and you will have lower monthly repayments. 

Why are Buy-to-Let Mortgages Interest-Only?

There is no set rule about whether you take out a regular mortgage or interest-only when you’re borrowing. However, financially, it will make more sense to get an interest-only mortgage. That’s why capital appreciation plays such a vital role in buy-to-let.  

If you purchase an investment property for £350,000 with a mortgage of £262,500, you will owe that amount at the end of the term (usually 20-plus years). If you sell the property for £500,000, you pay back the entire mortgage amount, making a profit of £150,000 plus your initial deposit of £87,500. 

Monthly repayments will be significantly lower on an interest-only mortgage than a traditional one, meaning you will earn more in rental income. Though it’s important to keep in mind that income tax is normally due on any profits made from the rent that you receive.  

Choosing a Buy-to-Let Hotspot

Finding the perfect investment property for sale is always tricky as there are many variables and investment dos-and-donts to consider. The location of your buy-to-let is paramount to achieving its expected rental income and proving to be a good investment. There are many particulars to take into account when choosing the best area to purchase a buy-to-let property, but the primary one will be driven by price. 

Price

Yields and property prices vary all over the country, with property investment in London considered to be the hottest of all hotspots. Throughout the years, however, increasingly high property values (the average is £640,600) have priced many would-be property investors out of the capital. Yields are also smaller in London, and if you’re taking out a sizable mortgage, it might be worth considering areas where house prices are low, but yields are higher. 

It’s worth researching housing markets on portals like Rightmove and Zoopla and researching different postcodes to get a better idea of house values in regions around the UK. You can also check the house price index, which displays current property values. 

Follow the Yield

Yields tend to be the driving factor behind buy-to-let purchases, as landlords can see instant returns compared to capital appreciation, which is sustained over the long term. A £350,000 rental property might achieve £1,300 per month, but a £150,000 property could easily achieve £750-900 per month, and sometimes it works out better to do the latter deal – especially if you’re borrowing 75% of the property’s value. 

You can keep up to date with live yield maps, which display current yields around the UK. Below is a small overview of the best places to invest in property in the UK at the minute and their yields: 

  1. Scotland, 5.7%
  2. North East, 4.9%
  3. North West, 4.8%
  4. Yorkshire and the Humber, 4.5%
  5. South East, 4.5%
  6. West Midlands, 4.4%
  7. Wales, 4.4%
  8. East, 4.4%
  9. East Midlands, 4.4%
  10. London, 4.4%

Your Location

Most people tend to buy locally, as they feel comfortable with a location they’re already familiar with. Yet, casting your net further afield can offer plenty of different options in the property markets – some of which might be more profitable in the long run. 

Where you buy an investment property could come down to how hands-on you want to be as a landlord. Some prefer to hire a property management company to maintain the investment while it’s tenanted and is happy to pay around 15-20% of the annual income for the service. 

Others might be more hands-on, deciding to save on paying a management company and manage it themselves. If you’re a hands-on landlord, buying an investment nearby your home might seem more favourable as you can easily maintain it. Landlords who use a property management company, however, may be more relaxed about its location. 

Check out our in-depth overview of the best places to invest in property. 

How Much Do You Need to Invest in Property? – Landlord Budgets

When investing in property, many would-be investors think about the price of the buy-to-let without giving much thought to other costs. It’s good to budget ahead, but it’s even more important to understand your budgets associated with an investment property. Think carefully when buying a second home, it’s no small undertaking.

Cost of Property

The initial cost of the property is the largest financial outlay in your budget. As mentioned earlier, investors typically need to put down a minimum deposit of 25% and usually borrow the rest on a second mortgage. Of course, you can pay more on the initial deposit, which will decrease your mortgage and monthly payments. 

Estimated Cost: £87,500 based on a 25% deposit on a property worth £350,000

Investment Property Stamp Duty

Stamp duty costs an extra 3% for residential property investments and must be paid at the time of completion. Use this handy stamp duty calculator that tell you how much extra you need to pay on buy-to-let properties.

Estimated Cost: £18,000 based on an additional property worth £350,000

Stamp Duty Calculator

Investment Mortgage Fees

Some mortgages have fees, which can often be added to the amount you borrow. A surveyor will also be required to visit the property to determine its sale and rental value. Some mortgage lenders offer this service for free, while others charge a fee. 

Estimated Cost: £999 – £2,000 for mortgage fees if they can’t be added to your overall loan and £750 for a property survey if your mortgage lender doesn’t offer the service for free

Mortgage Quotes

Monthly Mortgage Repayments

Mortgage payments are due whether the property is tenanted or not, and you need to keep up with them monthly. How much you pay will depend on the amount borrowed and your interest rate. 

Cost: Dependant on the amount borrowed and interest rate

Solicitor and Conveyancing Fees

Much like a traditional house purchase, you will need to hire a solicitor or conveyancer to undertake the required checks before completing your sale on a buy-to-sell or buy-to-let property. 

Estimated Cost: Between £800 and £1,500

Find a Solicitor

Landlords Insurance

Most lenders require landlords to get buildings insurance when they get into property investment. You might also want to consider taking out landlords insurance, which can protect you against unforeseen circumstances – such as tenants failing to pay rent.

Estimated Cost: £150 for buildings insurance

Home Insurance Quotes

Furnishings

Properties are often let either furnished or unfurnished. However, furnished homes tend to be more popular with renters. You will need to account for items like sofas, dining tables and beds if you plan on furnishing the property. 

Estimated Cost: Between £1,000 and £5,000

Letting Agent Fees

The overwhelming majority of landlords use some form of an estate agent to let their property, whether online or on the high street. Using an estate agent is particularly popular for HMO investment properties (house of multiple occupancies). 

Letting agent fees vary, with online models offering lower-priced fees but stripped elements of the service. High-street agents tend to charge on a commission basis, charging between 10-15% of the annual rent achieved.

Estimated Cost: Prices start from around £150 for an online agent and 10% of the annual rent for a high-street agent. 

Property Management 

Property management is popular with overseas landlords and ones based in different parts of the county from their investment. A management company will take care of any tenant requests, meaning you have less responsibility to sort maintenance issues. It’s worth noting, however, that you will still need to pay for the cost of repairs and new furniture/appliances on top of management fees. 

Estimated Cost: 10-15% of annual rental income

Maintenance

There is no set amount for how much you will need to pay on maintenance. That’s why it’s a good idea to keep some money saved in case problems arise around your investment properties. Things like broken boilers, washing machines and dishwashers are some of the malfunction that can happen in a rental home. 

Estimated Cost: Between £100 and  £1,000

Tax

You must pay tax on any profit made on your investment property. Most of the above costs can be claimed as expenses, which will reduce your tax bill. 

Cost: Dependant on your annual rental profits

Different Types of Investment Properties

There are several options when it comes to buying an investment property. The most popular is a standard tenancy, where the renter pays monthly rent on a long-term contract. Others options include short lets, HMO’s and buy-to-sell. 

Standard Buy-to-Let Investment

Typical investment properties are to let the house, apartment or flat to a tenant on a long-term contract, with 12 months being the standard length. The contract is known as an AST (Assured Tenancy Leasehold). Specifics of the contract will be arranged at the time of let and can be done by yourself, a letting agent or a specific company. 

Short Let

A short let tends to be any contract length that is less than six months. The number of short lets has increased dramatically, thanks to companies like Airbnb offering holiday-home services. Short lets tend to command higher rents but increase the risk of void periods as people only stay for a short amount of time. 

HMO Investment Properties (House of Multiple Occupancy)

An HMO is when the landlord lets different rooms in the property to tenants who are not related or living together. For a home to be considered an HMO, it needs to have at least three tenants living there and sharing the toilet, bathroom and kitchen. If your investment property falls under HMO rules, you will need to obtain a license. These are a great addition to your property portfolio in student-heavy areas, or cities where renters are looking for ways to decrease their monthly rental payments, in London, for example. 

Buy-to-Sell

Buy to sell isn’t common in the UK, but it is an available option and often for those looking to get into property development. This real estate investment involves selling the property straight after completion, and you need to have purchased it with a buy-to-sell mortgage, which is a short-term mortgage also known as a bridge loan. 

Property Investment for Beginners

Investing in property is a big decision, and it’s essential to have all the facts to hand before deciding whether it’s the right move for you. If done correctly, you can increase the value of your investment while making passive income on monthly rental received. And that is surely the ambition of any investor purchasing a buy-to-let property.  

Hopefully, our guide to rental property investment has helped to inform your decision and broadened your understanding of how to start investing in property!

Last Updated: July 16th, 2021