Want to invest in property but unsure where to start? Here are some tips on direct property investment for beginners.
We’ve all heard about Buy-to-Let, but how do you get started? What are the do’s and don’ts?
Our property investment advice will help you get going, explaining critical areas you need to take into account when looking for those all-important opportunities.
Could you be a property investor?
The UK is fascinated with property investment. Bricks and mortar are often seen as a great way to provide income, as well as offering a potential change in career.
But, like any form of investment, it doesn’t come without its risks. These should be weighed up carefully to decide if this path is for you.
Ways to invest in property
For some, a direct, or hands-on, approach is preferred. But, for others, indirect investment in property is more suitable, especially if you are time-poor.
Ultimately the route you choose will be based on your personal situation and resources you have available.
Buying an investment property
Before jumping in consider very carefully what kind of property investor you would like to be.
To break this down, a direct investment involves buying a property to:
- Rent out, known as buy-to-let,
- Or to refurbish and sell, also known as ‘flipping’
Property investment tips: buy-to-let
When you embark on a buy-to-let, you purchase a property that you rent out and manage. Over time, the property should deliver you a net cash flow each month, known as your ‘rental yield’.
In addition to rental income, you can also benefit from the capital growth of the property if you hold on to it long enough.
With the average house price in the UK at around £230,000, getting on the property ladder can be difficult. This means there’s more of us are choosing to rent which can present an opportunity to fill the need.
Building a buy-to-let portfolio is no mean feat and should be seen as a long-term plan with the aim of providing cash flow over a period of years. But, like any property purchase there are upfront costs to consider – such as a survey, solicitor and stamp duty tax.
Margins may be tight especially when you first start, so you’ll need to be patient and build your portfolio before you start to see a meaningful return. But if this is a route you’re considering, always remember your tenant is your customer and you’ll need to treat them as such.
Extra costs involved
After buying a rental property, there are maintenance costs such as repairs and buildings or home insurance. If you opt to have a letting agent manage the property, they will charge a monthly fee so compare costs and make sure you get the best deal.
Generating a steady income
You will be required to comply with over 140 government regulations and look at your personal tax situation.
A buy-to-let investment isn’t a short-term option to make a quick return. It takes time and commitment and one you need to handle professionally.
Property investment ideas – renovating and selling
The second direct property investment route is what is often referred to as ‘ ‘flipping’ property. The idea is that you buy a property that needs some work, improve it to add value and sell for a profit.
Typically, the property remains empty until the sale completes – but remember, the longer you hold on to the property the more it will eat into your profit.
This approach is very hands-on, and you’ll need to factor in the additional costs of buying and selling the property too – all of which impact profit. You will be taxed on any gain each time you sell – so always seek professional advice.
How to make money out of property renovation
Becoming a successful property developer involves finding the right property and securing it at a reasonable price. After that, you need to manage all renovation work to a timeline and within budget to maximise your profit.
Flipping can potentially provide a quicker return on investment, as you can earn potentially large sums of money when you sell the property.
How to invest in property
If you decide that investing directly in property is for you, there remains further considerations such as:
How will you finance your investments?
- What are the tax considerations and implications?
- What is your appetite for risk? How will you manage any downsides?
- What type of property do you want to invest in and where?
- Who do you know that could potentially help or support you?
Where and what to invest in?
If you’re new to property investment, it’s a good idea to start as close to home as possible.
If you’re based in London or the Southeast, property prices may be a barrier. If this is the case, indirect investment opportunities may be the only option. Here are some top tips:
- Research property market prices for your chosen area
- Research what that rents well. Plenty of websites will give you an idea of asking prices
- Talking to local estate agents will provide some good local knowledge
- Auction houses can also be useful for information on potential investment properties too. If you’re organised, committed and understand the general process, you may even bag a bargain when buying a property at auction
Assemble a team to support your property investing
Having a group of reliable property professionals on call can be a big help. This may include a mortgage broker, estate agent and solicitor.
How to make money from property – deposits
Once you know the type of the property you want to invest in and you’re sure of your budget, you will need to have the initial deposit ready before you start making offers.
Property investment basics
The minimum deposit needed for a buy-to-let mortgage is usually 25% of the property’s purchase price. Lenders tend to ask for a larger deposit because buy-to-let investments present them with a greater risk.
A good credit rating and regular income are going to help you get the best possible mortgage deal, so can the projected rental of the property. With so many mortgage options available, it can be confusing, so get a quote from a professional adviser.
Making money from property
When it comes to affordability, as a rule, lenders look for the rental income to cover at least 130% of the monthly mortgage payment.
If you’re going to flip the property, speak to your mortgage advisor, as there may be different ways to fund your purchase. Or, you may even look at a joint venture with a silent partner who puts up the money while you do the work.
Additional costs to think about
While similar to purchasing your own home, there are some significant differences to consider:
- The difference between what you paid for the property and what you sell it for is taxable (Capital Gains Tax). It applies to both buy-to-let and flipping properties
- Recent changes in Stamp Duty Liability Tax (SDLT), mean a 3% tax on all second homes costing over £40,000
- Section 24 tax (the Tenant Tax) means that landlords can only claim basic rate tax relief on their BTL mortgage payments, not the higher rate tax relief as before
- Government changes mean many investors have decided to set up limited companies for their buy-to-let properties. This is probably only worth considering if you are a higher or additional rate taxpayer
Is direct property investment for you?
Both buy-to-let and property flipping require plenty of due diligence before getting started as well as hard work, organisation and an appetite to risk.
Make sure you know what you are getting into, as the financial commitments are significant. That said, the rewards – financial and otherwise – can be good if managed correctly.
There’s no point buying a one-bed flat if the local market prefers family homes. Be sure to do your research, it will be worth it and could save you from a costly mistake.
Struggling to find all the information you need? For a detailed review of a property, as well as its surrounding area, get your own property report!
Last Updated: August 13th, 2021