Thinking of Buying an Investment Property? Here's What You Need to Know
12 April 2022
Purchasing an investment property can give you both an excellent income and help build a legacy for the future. However, property investment when you’re a beginner can be daunting – and with so much money involved, investing in property is certainly not without risk.
In this article we’ll look at:
- Looking at property as an investment
- Key things to consider before investing in property
Is property a good investment?
Property will always remain a good investment, whether you’re looking for a regular source of income or looking to make money over time through capital growth.
How do you start investing in property?
Investing in property requires time, research and, of course, money. This is why it is important to speak to your estate agent to make sure it’s right for you and it’s a good idea.
1.Your investment strategy
Before investing in property, think about the direction you want to go in and what outcome you want to achieve.
Property investment comes in several different forms:
A buy-to-let strategy means you will be buying a property with the sole purpose of renting it out to tenants.
Buy-to-let can provide a steady income for as long as you need, while a long term buy-to-let strategy can offer capital growth opportunities.
However, you need to think about managing your property and complying with private rented sector regulations, which are complicated.
If your aims for property investment are more short term, you could consider property development.
By finding a property in need of renovation, you can add value through the work you carry out before selling the property on or for profit.
However, the profit you make will depend on:
- How much you buy the property for
- How much renovations cost
- If the work is completed quickly
- Your ongoing costs while work is carried out
- Buyer demand when you sell
Flipping is a risky property investment strategy, but also one of the most passive.
Flipping would see you purchase a new-build property off-plan before selling it out for a profit once the build is complete
The risks with flipping occur when:
- There is a current falling property market with low demand
- Builds are delayed and the market changes
- The property’s value depreciates in the early stages of ownership
The area you choose when investing in property can make a huge difference to how successful the outcome is.
If you’re thinking of purchasing a buy-to-let, you’ll need to research:
- Rent demand and prices in the area
- Amenities and transport links where you want to buy
- Local schools/catchment area if you are renting to families
- Universities in the area if you are renting to students
Meanwhile, if you’re thinking of developing a property, think about:
- Price growth in the area
- Buyer demand in the area you’re considering
- Ceiling prices in the area
- Potential planning restrictions in the area
3.Type of property
With buy-to-let investment, it’s key to purchase the kind of property that tenants want to rent.
For example, if the area you plan to invest in is full of young, single professionals, a buy-to-let flat would probably be a more successful investment compared to a three-bedroom house.
Researching the area can also give you an idea of how successful the property type could potentially be. For example, investigate whether modern-properties are popular or if something older with more character is what people tend to look for.
4.The importance of purchase price and yields
The price you pay for an investment property can have an immediate effect on your rental returns if you are purchasing a buy-to-let. If you’re buying a property to develop, the purchase price is key to the amount of profit you will make when you sell.
For a buy-to-let, your property’s rental yield will give you an indication of how well it is performing and give you an idea of the return you’re getting on your original investment.
Before investing, work out the potential gross yield you could achieve from each property you’re considering.
Along with location, you should know the type of tenants you want to attract to your rental property.
Do you aim to attract single young professionals or couples? Will they be commuting to and from another town for work? If so, an apartment or flat close to transport links and amenities might be a good option for your investment property.
Whereas, if your target tenant is a young family, a larger property with a garden and catchment area will be a priority.
6.Budget, funding and cashflow
Before investing, think about how you will fund it.
If you are purchasing a buy-to-let, this may be through a buy-to-let mortgage.
Buy-to-let mortgages tend to come with stricter lending criteria compared with standard residential mortgages, including:
- Being an existing property owner
- Minimum income requirements – often £25,000 per year
- Rental income that covers your monthly mortgage payments by at least 123%
- Maximum loan-to-value ratios – usually 75%, meaning a deposit of 25%
- Property development
If you’re buying a property to develop then sell on, you will only be able to fund this through a mortgage if the property is habitable. For properties that a lender considers ‘unhabitable’, you may have to consider either a bridging loan or development finance.
7.Management and maintenance
When purchasing a buy-to-let property, you will need to think about ongoing maintenance and property management.
The most passive approach is to use a letting agent who will:
- Ensure your property complies with more than 160 pieces of legislation across operations and health and safety
- Advertise your property to potential lenders in the best way
- Conduct viewings with potential tenants
- Produce and manage paperwork related to tenancies
- Deal with emergencies and maintenance
- Collect rent and chase missed payments
- Perform check-ins and check-out inventories
- Deal with your tenant’s deposit and potential disputes
- Renew tenancies
When becoming a buy-to-let landlord, you are required to know about the various taxes that could impact you.
- Income tax on your rental income
- Additional stamp duty
- Capital gains tax if you sell your buy-to-let property