Property Investment For Beginners UK
Many of the investors we speak to are starting out their buy-to-let property investment journey. Understanding whether or not property is the best way to invest your money can seem like a challenging task but it doesn't have to be. You just need to know where to begin and embrace the excitement of starting your property portfolio.
Making money from property in the UK is becoming increasingly popular, with many Brits choosing to invest their hard earned cash in to bricks and mortar. For many years property investment in the UK has been seen as a relatively low-risk investment especially when compared to stocks, shares, and more recently cryptocurrencies. There has been a knock on confidence due to Brexit but now is a good a time as any to begin building a property portfolio.
For the average person, owning a buy-to-let investment property is often seen as a huge personal achievement, but many would-be landlords are put off by the idea because they do not know where to start when searching for a suitable property to invest in. It's not necessarily the geographical location but the areas that require consideration and the path to go down.
After reading this blog you will be better equipped with some of the key questions you need to ask yourself which will help nudge you in the right direction.
Why Do You Want To Invest in Property?
Is the first question you need to ask yourself so that you can begin to plan and create an investment strategy in order to maximise your chances of achieving your investment goals.
Sure, you want to make money from investing, but why? Is it to subsidise your income and improve your lifestyle? Or do you want to save your rental income to help fund your retirement? Maybe you want to pay for your child's higher education or pay for an annual cruise around the Mediterranean! Whatever your reasons are for investing in property, taking a moment to fully understand what you want to get from your investment will certainly help you.
Some additional early questions you should consider
2)Am I in a financial position NOW to buy a property? If not then when will I be?
3)If you need to release capital, how long will this take?
4)Frequency - Would annual or quarterly rental returns work for you or would you require a monthly income?
5)Are you open to buying a property that is currently under construction (off-plan)?
6)Who will be investing with you and what will their level of involvement be?
Once you have established your reasons and motivations for investing in property you need to consider your financial means.
Cash Investment vs Buy-To-Let Mortgage
My personal preference has always been to go down the mortgage route and invest more of the banks money than my own, especially while interest rates are low. There are arguments either way on this but lets for now assume we are basing the decision on the cash you have available (how liquid you are) and a buy-to-let mortgage is therefore right for you.
Generally speaking, most mortgage providers are prepared to lend up to 75% to 80% of the value of a property (Loan To Value):
"The loan to value (LTV) is essentially the size of mortgage a lender is prepared to offer you in relation to the value of the property you are buying or remortgaging. It is expressed as a percentage. So, for example, if a lender offers a mortgage deal which has a maximum 80% LTV, that means they will lend you up to 80% of the property value." landc.co.uk
What you need to establish is the exact amount you can afford and are comfortable to invest in to a property. Never stretch yourself too thin, always keep an amount aside as a contingency. After-all this is an investment and although seen as "low-risk", there is still a risk nonetheless.
You can expect your mortgage broker to spend some time over the phone discussing and establishing your current financial means so that they can calculate or at least give you an idea of what borrowing options you are likely to have and the associated rates. Equally, there are a range of buy-to-let mortgage comparison websites such as Compare the Market and Money Supermarket that will allow you to do this online. Do factor in the mortgage fees and the broker fees when calculating the associated mortgage costs.
Most investors opt for an "interest only" mortgage over a "repayment" mortgage as it will allow you to receive the maximum income. The flip-side to this is that the payments are not reducing the overall value of the debt. When the property is eventually sold, the proceeds are generally used to clear the balance and you keep the equity.
Interest Only Mortgage - Your monthly mortgage payment pays only the interest charges on your loan, not any of the original capital borrowed
Repayment Mortgage - You pay back a small part of the loan and the interest each month. Assuming you make all your payments, you’re guaranteed to pay off the whole loan at the end of the term.
Now that you have a better understanding of your investment goals and financial means, you can start your search for a property. If you have a buy to let mortgage deposit of £30k and a 7% return on investment (ROI) expectation, don't waste your time looking to buy property in Central London where the average purchase price is close to £500k and the average rental yield is less than 3%. In this case, the north of England could be a good place to start looking for your initial property.
A quick Google search will produce many reports on the UK property market, designed to help you establish where best to invest your money. Companies such as Hometrack.co.uk and Jones Lang LaSalle regularly publish market reports on various locations around the country and are often quoted by industry professionals. What you are looking to get from this is an understanding of where in the country you can expect to achieve your desired yield and capital growth, which town or city has a strong demand for rental property but doesn't have sufficient supply and where you can afford to buy.
The research can be a very time consuming part of the process because of the sheer volume of information out there. Many choose to contact an investment property consultancy (such as Develop Investments!) to use their specialist expertise and experience to recommend a suitable location, asset class and development.
Always be realistic with yourself at this stage and try not to be drawn in by gimmicks or any opportunity that seems too good to be true, as it usually is!
At Develop Investments we provide a professional consultation to our clients so that together we can understand what the desired outcomes are and whether we have a suitable opportunity that is going to fulfil the necessary criteria.
House of Multiple Occupancy (HMO) - Residential property, shared by more than one household, with communal areas.
Purpose Built Student Accommodation (PBSA): Property that has been specifically developed to home students
Build To Rent - A residential development that is carefully designed and constructed to meet the requirements of a specific tenant demographic such as young professionals in a city centre.
Each of the above will need to be broken down and understood further so they can be either ruled in or out depending on their suitability. Some opportunities require greater levels of personal involvement when it comes to managing the day to day running of the investment. If you are going to treat your investment as a passive income, be sure to look for a local rental management company that will take care of this for you. You can expect to pay an annual fee to a rental management company typically from 6% - 8% of the annual rent.
After selling investment property all over the world, I am forever grateful for the legal processes we have in place here in the UK. Often a developer will point you in the direction of a recommended panel of solicitors that will act on your behalf, but you can also use your own that you have found or used before. This is a necessary part of the buying process and is designed to protect all parties involved, from a legal standpoint.
There are solicitor fees to pay so again you will need to factor these in when looking at the total cash required.
Additional associated costs will also vary depending on the investment you choose to go for but here is a quick list, so you have an idea of what these are:
- Stamp Duty
- Agent fee
- Rental management fee
- Furniture packs
- Service fees
- Ground rent
- Mortgage fees
- Legal fees
- Income tax
As you reach each stage of the buying process you will realise that the above is more of a guide and not a complete step by step breakdown. If you would like to discuss this in more detail be sure to speak with one of our property consultants whether you are a first-time investor or an experienced buyer.