In an uncertain world like today, it’s natural for individuals to seek the best long-term financial prospects – but with investment comes risk.
Some companies on the FTSE-250 London stock market index, for example, lost 75% of their share value within a week in the early days of the Coronavirus crisis, demonstrating that investments can, of course, go down as well as up.
However, while there are no guarantees in investment, residential property has a strong record of holding its value in short term crises, and of increasing value over the long term, BUT, only if you do it right so seek professional property investment advice prior to making such a commitment.
Two Types of Return from Residential Property Investment
Firstly an investor receives rent paid by a tenant, and secondly, there is the possible capital appreciation as the value of your home increases over time.
A property’s rental income is called ‘yield’ and is measured as the proportion of the purchase price of property recovered each year in rent. So if a property cost £100,000 and the rent for one year is £5,000 that is 5% yield.
Properties also go up in value for most years – this is capital appreciation, which in recent years has been around 2% annually.
Different Types of Residential Property Investment
Beginners to property investment should be aware there are several types of investment types. It’s important to research carefully to find which one suits your budget and abilities, and which property type is most appropriate to the investment you prefer and the returns you hope for.
1. Buy To Let
This is the most common kind of property investment and is when a house or flat is bought to let to renters on assured long-term tenancies lasting up to six months or more.
Government figures show 19% of UK households now privately renting; in London, the figure is 39%. The rental sector is growing, too, but with an insufficient supply of properties, the prospect of a strong yield year-on-year is a tempting one for investors.
The type of home you buy, and where it is located, will depend on the target tenant. So for students, choose a house with several bedrooms and shared communal facilities located near a university or college; if you want young professional renters, you should buy a higher-specification apartment or house close to transport and employment centres.
A buy to let mortgage is typically more expensive than a mortgage for an owner-occupied home, and the best deals are usually found through mortgage brokers.
Many buy to let investors instruct a lettings agent to manage their rental properties; the agents find tenants, collect the rent, and ensure the property is managed safely.
There are several scores of pieces of legislation and regulation surrounding buy to let, including health and safety, protecting the deposit put down by tenants, ensuring the property is fit for human habitation and so on, a lettings agent can prove valuable for removing this burden from the landlord.
2. Holiday Lets
Holidaymakers booking long weekends, full weeks or even lengthier periods in attractive properties in tourist locations can provide a major source of income to a property investor.
The number of people booking self-catering holidays in England alone jumped from 6.2m to 8.1m between 2015 and 2019 according to tourist body Visit England and many holiday homes are booked for 20 to 40 weeks a year – allowing some for yourself between renters.
As with buy to let, the key is to research the market but the good news is that following the introduction of new taxes on buy to let, holiday lets are seen as frequently offering the highest yields to investors.
If you are after long weekend renters and perhaps Airbnb tenants, a city location can be popular; flats are typically the best kind of property, located close to major transport and the most popular sights such as museums, leisure facilities and landmarks.
If your target audience is a group of active friends or a multi-generation family renting for a week or a fortnight, then a house near a beach or in the countryside or in a pretty village is most appropriate, with plenty of parking and storage space.
As with buy to let, the mortgage will be more expensive than a mainstream owner-occupier mortgage but this cost is tax-deductible. Again, instructing a professional agent with local expertise in advertising and managing holiday properties will probably pay dividends with little hassle for the owner.
3. Property Development
This is buying a property that requires work, renovating it yourself – or getting in professionals to do the work – and then selling it as a refurbished home. This is regarded as hard work but with good returns – if investors get it right.
Research is vital but it is wise to recruit a friendly builder and instruct a surveyor early on, so you have expert guidance when you view property in poor condition: these experts will advise you on the possible cost of renovation, and an estate agent can then give you an approximate asking price that the completed ‘good-as-new’ property could attract.
Unlike other forms of property investment, you may need to give substantial time to the renovation project yourself; the tasks would be sourcing materials, managing suppliers, getting the correct skilled builders on-site at the right time, and sticking to timescales to ensure the project, and its funding, do not over-run.
Whether you need help on approaching property investment, what are your mortgage options for investment properties or just looking for an insight into what your responsibilities as a landlord might be; we have many expert guides to help ease you into property investment.