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How to invest in property

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Written by Dan Base, Financial Content Writer

27 December 2018

If you have grand designs on property investment, you'll need to get your finances into gear. We show you how to work out if property development is a realistic dream and how to make it happen.

Agent showing property to new couple

Research your options

How can you invest in property?

You can invest in property in a variety of ways, whether you decide to buy a home or commercial property directly or invest in another way.

If you prefer not to stump up enough cash to buy a property, you can invest in Real-Estate Investment Trusts (Reits) which are investment funds that solely invest in property.

They are easier to invest in and easier to get out of, because as a pooled fund, the money of a number of investors is used to buy property that the fund then owns, and you are paid returns based on how the investments are doing, and the level of rental income generated by the properties within the trust.

If these trusts aren't what you're looking for, you'll need to consider one of the following:

Buy-to-let investments

If you decide to invest in a residential property that you'll then let out to someone else, read our guide: What Are The Pros and Cons of Investing In a Buy-to-Let Property?

Investing in property development

If you fancy yourself as a property developer, you'll need to know the risks as well as the potential rewards. Read our guide: What Are The Pros And Cons Of Property Development?

Buying a new build to sell on

Buying a new build off plan can be a risk, as the property might not end up how you expected or the developer could even go bust. You might struggle to sell it once it's finished, meaning you'll be stuck paying the mortgage, and you won't know what the area it's built in will end up like.

However, they can be cheap investments that you can sell on at a profit, and you can add value to the property by decorating or furnishing it.

Investing in property abroad

If you think property abroad could offer better returns than in the UK, make sure you read our guide: What Are The Pros & Cons of Investing in Property Abroad?

What expenses come with property investment?

Investing in property will come with a variety of costs. These include solicitor fees, estate agency fees, Land Registry fees, surveys, mortgage fees, Stamp Duty and setting up insurance.

Should you invest in property?

Property can drain money as easily as it can give you returns. Make sure that you are not overstretching yourself to such an extent that you are going to struggle if something goes wrong with the property or its finances.

You should look at other investments, such as shares, pooled funds and pensions, to be sure you are making the right decision.

You also need to be in property for the long term, especially rental property, and do not expect to be able to get your money out of this type of investment in a hurry.

Can you afford to invest in property?

Work out your income and expenditure

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

To calculate your incomings, outgoings and how much you have to spare, read out guide: How to Write a Budget.

What capital is available to you?

As well as working out your income, you will also need to look at what money you have available to invest.

This will include any savings accounts, ISAs, premium bonds and investments like shares, bonds and unit trusts.

As well as looking into precisely how much you have, you should also find out what interest or returns they're paying and if there are any restrictions on when you can withdraw funds.

If you'll be taking out a mortgage to invest in property, you'll need to decide how much you can afford to put down as a deposit. Many lenders require at least 25% of the property's value, but some can accept just 15% deposits.

Here is how to save up a mortgage deposit if you find you do not have enough cash saved up.

Can you afford a mortgage?

Once you know how much you have for a deposit, you can start looking into what mortgage companies would be prepared to lend you.

You'll be able to work out the loan to value (LTV) applicable for properties of different values. You can then use mortgage lenders' calculators to work out how much a mortgage would cost per month.

If you've already worked out your monthly budget, you'll know how much spare cash you have to put towards paying a mortgage.

How much could you make or lose?

If your mortgage payments were going to be £1,000 a month, generally the lenders will expect you to get between 120 and 125 per cent of the monthly mortgage payment as rent. On this basis, you need to get £1,200 to £1,250 a month in rent on this property.

You need to work out whether you could realistically get that kind of income from the property. 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, as the amount you can sell it for in the future will depend on so many factors such as the property market in general or how desirable the area becomes.

You can at least work out if the property is likely to make you a profit or a loss each month. Don't forget that you'll need to take any refurbishments, repairs and agency fees into account.

Find the right property

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

Being near to large employers, good schools or 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 investments that might fit the bill. You can also use the internet to read more about each area you might buy in.

It's also worth taking to local estate agents, as they'll have knowledge of the area as well as expert advice and an idea of which areas are up and coming because of local development plans.

Choose a property

When you've found several properties you're interested in, ask the estate agents to show you round them. Make sure you arrange further viewings for any you're seriously considering.

Look out for any problems and decide if they're something you're happy to fix yourself. You could use this to help push down the price, if so.

Get an offer accepted

Making sure your offer is accepted while getting the lowest possible price can be a fine art. Read out guide, How to Haggle Down a House Price, for some tips.

Complete the sale

Arrange a mortgage

For help in picking the right buy to let mortgage, read our guide: How Do Buy to Let Mortgages Work?

Arrange surveys

You can have a variety of surveys done on your property.

A Homebuyers' Report is the least detailed, while a full structural survey is the most comprehensive. For the latter, you could be paying as much as £800 for a property worth more than £100,000.

You'll also need to choose a solicitor if you don't already have one. Word of mouth can often be the best way to find a solicitor, so ask friends, family and colleagues who have recently bought property for their recommendations.

Exchange contracts

If you're happy with the results of the survey, you can agree a final sale price through your solicitor, who will also look into precisely what's included with the sale.

You can then complete and exchange contracts, pay your deposit and agree a final completion date.

Complete the sale

Completing the sale will involve transferring the funds to the seller's solicitors, collecting the keys and then arranging buildings insurance.

Make your investment profitable

Should you sell or rent out the property?

Once you have completed any renovation work that needs doing on your property you will need to decide whether it's going to be more profitable to sell it at once, or to rent it out.

There are a number of things that you will need to consider including:

  • How much you would get for the sale of your property

  • How much you would make if you rented out your property

  • How much you have spent on your property

  • Your other financial commitments

You will need to look at how much you have spent on the property so far and compare this to the amount you would 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 or even a landlord insurance policy that covers 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 always get the cheapest mortgage you can. Read our guide, 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.

Compare mortgages

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  • What are the pros and cons of property development?
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