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How to invest in property

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Got designs on property investment? Find out if it’s a realistic dream and how to make it happen with our guide.
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Investing in property doesn’t necessarily mean buying buildings. There are lots of ways you can invest in property, either directly or indirectly. 

If investing in property is something you’re keen to explore, either on its own or as part of a wider investment portfolio to spread the risk, you’ll need to do your research, assess your finances and take the right steps. Follow our guide to property investment to boost your chances of success. 

Make the most of your tax-free ISA.

Research your options for investing in property

Property investment can be done in a variety of ways. You might decide to buy a home or commercial property directly, or you could put money in a property investment fund. It’s worth taking the time to explore your options and decide which type of property investment suits your circumstances and needs.

The types of property investment you could go for include:

  • Buy-to-let 

  • Property development

  • Buying a new build to sell on

  • Investing in property abroad

  • Real estate investment trusts and other property investment funds

You can read more on these below.

Whichever type you go for, remember that investing in property can be rewarding but it is also risky, so it’s best not to invest more than you can afford to lose should the worst happen. Before investing, you should also make sure you’ve paid off any non-mortgage debts and you have an emergency fund that could cover at least three months of living costs in case something unexpected happens, such as losing your job.

Buy-to-let 

You might decide to invest in a residential property that you'll let to tenants. If you’re thinking of doing this, read our guide to investing in buy-to-let property.

Property development

If you fancy yourself as a property developer, when you buy a property to refurbish or renovate and sell on, you need to know the risks as well as the potential rewards. Read our guide to the pros and cons of property development.

Buying a new build to sell on

Buying a new build off plan, which means before it’s been completed by the builder, could make you money if its value has gone up from the price agreed at the outset by the time it’s finished. You can then sell it to make a profit. Plus, you may be able to add value to the property by decorating it.

This can be risky, however. You haven’t seen the finished property so it might not end up how you expected. The developer could even go bust.

You could run into problems selling the property and be stuck paying the mortgage until you do. The area it’s built in might also not end up being the kind of neighbourhood you hoped it would.

Investing in property abroad

If UK property investing doesn’t appeal to you, buying abroad could be worth considering. You may be able to make money by letting it to holidaymakers while also having a place to go for your own holidays when it’s not being rented out. And if the property goes up in value, you could make a profit when you sell it too.

Before you decide to go ahead, read our guide to the pros and cons of investing in property abroad.

Real estate investment trusts

Real estate investment trusts (REITs) are companies that invest in property. They make most of their money from rental income.

You buy shares in them that can be traded on the stock market and your money is pooled with other investors to invest in property. As with any other type of share, you make money from the share price going up if you sell them (although it can also go down) and dividends. 

REITs have to pay out 90% of their income to shareholders and get tax benefits in return – they don’t have to pay corporation tax or capital gains tax – which can mean bigger payouts. 

Other benefits are that they’re easier to invest in than buying physical property and easier to get out of because you can just sell your shares. You can also invest small amounts rather than spending tens of thousands on buying property.  

Other indirect ways of investing in property include:

  • Property unit trusts

  • Property open-ended investment companies (OEICs)

  • Property investment trusts

  • Property bonds and loan notes

  • Shares in listed property companies

  • Property ISAs (these let you invest in property without paying tax on your returns)

  • Peer-to-peer lending

Ways to invest in property at a glance

Here are all the main options you can choose from in one handy table.

Direct property investmentIndirect property investment
Buy-to-letReal estate investment trusts (REITs)
Property developmentProperty unit trusts
Buying a new build to sell onProperty open-ended investment companies (OEICs)
Investing in property abroadProperty investment trusts
Property bonds and loan notes
Shares in listed property companies
Property ISAs
Peer-to-peer lending

Factor in the expenses you can expect to pay

If you decide to buy a property this comes with a range of costs, including:

  • Solicitor’s fees

  • Estate agency fees

  • Land Registry fees

  • Surveys

  • Mortgage fees

  • Stamp duty (land and building transaction tax in Scotland; land transaction tax in Wales) – you’ll pay an extra 3% or 4% when buying an ‘additional’ property depending on where you are in the UK

  • Insurance

If you’re thinking about investing by buying property, make sure you look closely at the costs involved to decide whether it’s worth it.

Assess whether to go ahead with investing in property

Property investment is a big decision. It can drain you of your money as easily as it can give you returns. Make sure you won’t be overstretching yourself by doing it and that you won’t be struggling if something goes wrong with the property or its finances.

You should also consider other types of investment, such as shares and pooled funds. These can also allow you to invest in property indirectly with a lower initial outlay.

You’ll need to be in property for the long term to increase your chances of making money, especially if you’re thinking of buying rental property. Don’t expect to be able to get your money out of this type of investment in a hurry.

Consider the risks of investing in property

The housing market is constantly changing. Property prices go up and down, and the demand for rentals can fluctuate.

And as well as market trends, there can be problems with specific homes - especially important if you’re investing directly in a single property. The cladding crisis means many homes have fallen in value over the past couple of years even as the market has soared, for example.

All that means if you’re investing in property, you have to see it as a long-term investment of at least 10 years. That way, you should be able to ride out any storms, and perhaps sell when the market is good again.

If you overstretch yourself and then the market dips, you might struggle financially.

The best way to protect yourself is to spread the risk by having a mixture of investments including property. Do your research thoroughly before making any decisions and consider getting independent financial advice. 

Work out whether you can afford to invest in property

You’ll need spare cash that you can afford to lose if you’re going to invest in property.

Calculate your income and expenditure

To make sure you can afford the costs of investing in property, you'll need to calculate your income and outgoings in an average month to see how much you have to spare.

For tips on how to do this read our guide to how to write a budget.

Calculate how much capital is available to you

As well as working out your disposable income, you’ll also need to look at what other money you have available to invest. This will include any savings accounts, ISAs, premium bonds and investments like shares, bonds and unit trusts.

Look at precisely how much you have and find out what interest or returns they're paying. Also check if there are any restrictions on when you can withdraw funds.

Before you decide whether to use any of this money to invest in property, carefully consider whether you’re likely to grow your money more by doing this rather than keeping the money where it is. It’s best to have a range of investments so you don’t put all your eggs in one basket.

If you would need to take out a mortgage to invest in property, bear in mind that you’d need to use some of your cash for a deposit. While you can get a buy-to-let mortgage for up to 85% of the property’s value, you’ll get the cheapest deals with a deposit of 40% or more.

Here’s how to save up a mortgage deposit if you don’t have enough.

Compare mortgage deals

Once you’ve decided you’re going to buy property to let as an investment and know how much you would be able to pay as a deposit (although make sure you keep enough money aside for all the other costs involved), you can start looking into what lenders might be prepared to lend you and how much the mortgage repayments would be each month.

You can work out what the loan to value (LTV) would be if you bought properties at different prices. This is the percentage of the property’s value you are borrowing, so if you were buying a £200,000 property with a £150,000 mortgage and a £50,000 deposit your LTV would be 75%. 

Then use mortgage comparison sites to see the deals that would be available to you and how much they would cost in interest each month – buy-to-let mortgages are usually taken out on an interest-only basis. Make sure you factor in set-up fees as well as interest rates when you’re comparing deals by looking at the total cost over the deal period.  

How much rental income you’ll need

To get a buy-to-let mortgage, lenders will want to know that the rental income of the property will cover your mortgage interest payments by 125% to 145%. So, if your mortgage payments would be £1,000 a month, you’d need to get £1,250-£1,450 a month in rent depending on the lender.

To see whether you could realistically get that kind of income from the property you’re planning to buy, speak to rental agents in the area to find out the going rate.

It's hard to predict if a property will make a profit in the long term. That’s because the amount you’ll be able to sell it for in the future depends on many factors. These include the health of the property market and how desirable the area becomes. That’s why investing in property can be a risk.

However, you can at least work out if the property is likely to make you a profit once you’ve paid your mortgage each month. Don't forget to take the cost of maintenance, repairs and agency fees into account.

Find the right property

Finding the right property is key to buy-to-let success.

Research potential tenants and areas

The type of tenant you're likely to find will depend on what kind of property you buy and where it's located. If you go with a residential buy-to-let, make sure you know the kind of tenant you're looking for.

If you want to rent to students, somewhere near college or university campuses makes sense. If you want professional tenants, go for a property with good transport links.

Being near large employers, good schools, shops and other amenities can also add value to a property.

You should also consider your long-term plans. Think about when you might want to sell the property and who might want to buy it.

Do your research

You can use property websites to find possible investment properties that might fit the bill and read more about the areas you’re interested in online.

It's also worth talking to local estate agents. They'll have knowledge of the area as well as expert advice and an idea of where is up and coming as a result of local development plans and other factors.

Choose a property

When you've found several properties you're interested in, ask the estate agents to show you around. Arrange further viewings for any you're seriously considering.

Look out for any problems and decide if they're things you're happy to pay to fix. If so, this will affect how much you decide to offer for the property. You could also get quotes for the work to help negotiate a lower price later.

Get an offer accepted

Making sure your offer is accepted while getting the lowest possible price can be a fine art. Read our guide to how to haggle down a house price for tips.

Complete the purchase

Once your offer has been accepted, you’ll need to go through the following steps to become the owner of the property and start renting it out.

Arrange surveys

You can have a variety of surveys done on your property to find out about its condition so whether it’s likely to be a good investment. If any issues are uncovered, you may be able to use the survey to negotiate a reduced purchase price.

A RICS (Royal Institution of Chartered Surveyors) Home Survey – Level 1 is the least detailed while a Level 3 or RPSA (Residential Property Surveyors Association) Building Survey is the most comprehensive. You can also get a specific RPSA Buy To Let Survey.

For a Level 3 survey, you could be paying as much as £800 for a property worth more than £100,000.

You'll also need to choose a solicitor or licensed conveyancer if you don't already have one. Word of mouth can often be the best way to find one. Get recommendations from friends, family and colleagues who’ve recently bought a property.

Arrange a mortgage

For help in picking the right buy-to-let mortgage, read our guide to how buy-to-let mortgages work.

Exchange contracts

Once you’ve had the results of the survey, all the legal checks have been carried out by your solicitor and you’ve agreed a final sale price you can pay your deposit, set a final completion date and exchange contracts. You’ll also need to have arranged buildings insurance if you’ve bought the property with a mortgage.

Completion

Completing the sale involves transferring the rest of the funds to the seller's solicitor. You can then collect the keys.

Make your investment profitable

You finally own an investment property. Now you need to get it working as hard as possible for you.

Should you sell the property?

Once you’ve completed any refurbishment or renovation work that needs doing on your property, depending on your goals you may decide to sell it straight away rather than rent it out if this will be more profitable.

Think about:

  • How much you’d get for the sale of your property

  • How much you’d make if you rented out the property

  • How much you’ve spent on your property

  • Your other financial commitments

You’ll need to look at how much you’ve spent on the property so far and compare this to the amount you’d make if you sold it now.

Keep down the cost of financial products

You can improve your profit margin by keeping down the cost of any financial products associated with your investment.

It's worth shopping around for buildings insurance each year. You could get a landlord insurance policy too. They can cover problems caused by your tenants and your liabilities as a landlord, as well as your buildings and your own contents. Use our landlord insurance comparison to find the cheapest policy that covers everything you need. 

It's also worth making sure you get the cheapest mortgage you can once your initial deal period ends. Read our guide on how to get a remortgage for some tips on keeping your mortgage costs as low as possible.

If you're a first time buyer or looking to move house or remortgage, we can help you find the best mortgage deal to suit your needs.

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