The Property Investment Guide

Introduction

Real estate is, by value, the largest asset class in the world. Property investment is one of the most common ways of returning capital to investors with a solid return, particularly in the UK where we are fortunate enough to have a stable and thriving property market, backed by a secure currency. It is no coincidence that the UK is the destination of choice for foreign capital from all over the world. Despite rising property prices and the level of competition, there is still capacity for smaller investors to turn a healthy profit, although we understand that it can seem daunting to get started! For this reason, we've put together a comprehensive guide to investing in property in various forms in the UK.If you're interested in getting started with property investment, then this guide is for you. We'll be covering everything from the different ways you can enter the market, how to choose a property, the basics of the investment process and more advanced strategies for your next properties. It's vitally important to make sure that you have done ample research and have a detailed understanding of what this represents as an undertaking before deploying any of your hard earned cash, so take your time and do the requisite research. That rental income can wait an extra few months if it has to! Whether you're a beginner or a seasoned investor, there's something for everyone here. So let's get started!

What is an investment property

Let's start right at the beginning. An investment property is a piece of real estate that you purchase in order to make a profit, either by selling it or renting it out. This can be done in a number of ways, through renting the property, flipping it for a profit, or using it as collateral for other investments. Given that you are likely to pay close to a fair value for your property, you will potentially need to add value, through renovations or changes, to realise some gain on your investment.As the old adage goes, the money in real estate is in the buying, not the selling!

You will likely be starting with one of two paths:

Buy-to-let

Rental properties, particularly in the thriving UK rental market, represent a lucrative avenue for buy-to-let investments, offering the potential for consistent rental income that can cover mortgage and maintenance costs while also generating profit. As the name suggests, this involves buying a residential property with the intention of letting it to would-be tenants. The Return on Investment (ROI) comes from the regular rental income you receive from your rental property. For you to make a profit, this rental income will need to exceed the cost of servicing the property and making the mortgage payments if the property is financed by debt. The bigger this differential is, the more money you’ll make. You will need to estimate this beforehand in order to calculate whether the return you will make is worth the trouble you will be going to.

As the name suggests, this involves buying a residential property with the intention of letting it to would-be tenants. The Return on Investment (ROI) comes from the regular rental income you receive. For you to make a profit, this will need to exceed the cost of servicing the property and making the mortgage payments if the property is financed by debt. The bigger this differential is, the more money you'll make. You will need to estimate this beforehand in order to calculate whether the return you will make is worth the trouble you will be going to.

Buy-to-sell

Buy to sell investing, or flipping, involves buying a residential property with the intention of selling it at a later date, at a profit. So where do you add the value? Well, unless you're able to get it at a steal, you will likely need to add value yourself, through either renovating it, extending it or separating it into multiple properties which can be let out individually. When this is done, you sell it on at a profit (hopefully!). Of course, for this to be successful, you need the value of the property to grow by more than The first step in investing in property is to determine your goals and budget. Do you want to make a quick profit, or are you looking for long-term income? Are you able to invest in a down payment, or will you use financing? Knowing the answers to these questions before you start searching for an investment property will save time and money.

What are your goals? Why are you interested in investing in property and what are you hoping to achieve?

As you start looking at potential properties, think about how they fit into your overall goals. Why do people invest in property in the UK? To make money, right? Well, that's part of it. Buy-to-let investing is a form of investment that generates income, as opposed to investing in assets whose capital gains you will only realise on sale of the asset. This means that it is much easier to live off investments made in property than it is to live off investments made in, say, the stock market or in hard assets like gold.

People like referring to property investment as "passive income," but as we will quickly discover, there is very little that is passive about it. Rental income can, however, supplement your existing income or even replace it if you are particularly successful in your endeavours.

Different types of property investing - which one is right for you?

There are several different types of property investing, each with its own advantages and disadvantages. Flipping properties is one of the most common types of investing, as it allows for quick profits in a relatively short period of time. However, this strategy does require a significant amount of capital up front, as well as knowledge of the local market and good negotiation skills.

Renting out a property can be another good way to earn income, as long as you're able to find reliable tenants. While it's not as fast or profitable as flipping, it can still generate positive cash flow over the long term. You'll also need knowledge of local rental laws and regulations in order to ensure compliance with these rules.

Finally, investing in commercial property can be a great way to increase your ROI. This type of investment often requires more capital up front than residential investments and involves more risk, but it can also generate much higher returns over the long term.

Aren't there more ways of investing in property? Well, yes, but it is highly likely that you will start with one of these. The alternatives include buying stocks or investing directly in a property fund or real estate investment trusts (REITs), which are more of a passive investment comparable to the stock market, or investing in commercial property. This includes office space, hospitality space etc. and aside from requiring much more capital, is also more advanced, given its scale. If you're going to be doing that, you probably don't need our guide!

Choosing a Property

You most certainly shouldn't rush the process of choosing an investment property. The extra time you take at this stage could make or break the project, and it goes without saying that you should not go ahead with a project unless you feel confident in its chances of success after having done your research, and comfortable with the level of risk you will be taking. Do you have the capacity to bear unforseen difficulties in the project? Skip ahead to our risks and FAQs section to get an idea of what these might be.

It has never been easier to collect data or make an informed decision, and finding comparable properties that are being let out on the same street or in the same district should be pretty straightforward.

Once you've set your investment strategy and have identified a property that fits into it, the next step is to research the local market. Look at comparable home prices in the area and determine if the property is priced correctly for its location and condition. Consider the potential for appreciation and the cost of any repairs or renovations that may be necessary. Bear in mind that past performance is not an indicator of how well a property might appreciate in the coming years.

Next, you'll need to understand the legal aspects of investing in property. Research local zoning laws, taxes, and other regulations that may affect your decision. Make sure that all contracts are written in plain language and contain all relevant details about the investment property.

Once you've determined your budget and goals, it's time to start searching for properties. Look at listings online or talk with a real estate agent who specialises in investment properties. You'll want to find the right neighborhood, avoid expensive repairs, and consider potential rental rates. Be sure to get a home inspection to ensure the property is in good condition.

Once you've found a suitable investment property, it's time to make an offer. Research market values and comparable properties to get a rough estimate of what the home may be worth. If you're financing, calculate how much you'll be able to borrow from lenders. Finally, make an offer that you feel comfortable with and negotiate from there.

Getting financing in place

If you are lucky enough to be able to purchase your property outright, this will be a simple step! However this is unusual, and it can actually be more favourable to use borrowed money in order to free up the remainder of your cash for liquidity or for other projects. This will allow you to expand your portfolio much more quickly.

Obtaining financing for your investment can be a complicated process, but it's essential for maximising your return on investment. Be sure to shop around for the best rates and terms before committing to any lender, and you might want to consider overpaying with any surplus each month. We're using Sprive for this.

Consider buy to let mortgage products carefully

This is a well trodden path, and although it may seem daunting, is not actually dramatically complicated. Buy to let mortgages (BTL) tend to be the most common, and all big banks will have options for this. The rules are pretty similar to those for regular mortgages, with a couple of key differences:

• Interest rates and fees tend to be higher
• The majority are interest-only, meaning that you will repay only interest on your loan, rather than the principal. At the end of the term, you would technically be liable for the full amount
• The minimum deposit is always higher. It is often around 25% of the property value, but can range from 20-40% depending on the lender and your risk profile
• Most BTL lending is not subject to Financial Conduct Authority (FCA) regulation. There are a few exceptions, but this is generally the case

Point number 3 is important - this will determine how much capital you need to get started!

There are also a few requirements for you as a borrower. You will likely need to be a property owner already, either with an existing mortgage or as an outright owner. You understand the risks of property investment, you earn at least £25,000 a year with a good credit score and you have the appetite and capacity for the risks involved with becoming a property investor.

Finally, you will also need approximately a 25% deposit - required capital down is much higher for property investments than it is for domestic properties.

What are the risks?

Like any type of investing, there are risks involved in investing in property investment. Market conditions can fluctuate and property prices can decrease, making it difficult to generate profits. You may also face unexpected costs for repairs or renovations. Furthermore, tenants may not pay their rent on time or damage the property, costing you money in the long run. The main risks:

• Interest rate risk
• Property market risk
• Project timeline risk - overruning can lead to extension of bridge financing which is incredibly expensive
• Planning permission risk
• Tenancy risk - occupation rate

Managing the property

Now, the process isn't finished when you've bought and investment property. Being a buy to let property investor is not a passive role! You will be responsible for ensuring that the standards of your properties are upheld and the tenants always have working heating, water, gas, electricity and more. Now, you can certainly outsource this but it will eat into your rental income, and therefore your profit.

Do I need an external property management company?

Once you've obtained financing and purchased the property, it's time to manage it. You'll want to ensure that your tenants pay their rent on time and keep the property in good condition. You'll need to understand local laws regarding tenant rights and make sure you're compliant with these regulations.

You may also need to hire professionals for repairs and maintenance. Make sure to keep detailed records and receipts of all expenses related to the property. This will help you track your overall investment performance and make more informed decisions in the future.

Finally, don't forget about tax considerations. Investing in property can generate substantial tax savings if done properly. Talk with an accountant or financial advisor to understand the best tax strategies for your situation.

Paying tax

Paying taxes on your investment property can be complicated. Depending on the type of property, income and expenses related to it may be subject to different tax rates. Be sure to understand how these taxes may affect your profitability and overall return on investment. You'll also need to ensure that you're in compliance with all applicable laws and regulations, including filing your taxes correctly and on time. ConclusionInvesting in property is a great way to generate passive income and build wealth over the long term. Be sure to do your research, understand the legal aspects of investing, and work with professionals who specialise in this type of investment. With the right planning and preparation, you can increase your chances of success and maximise your return on investment. Good luck!

Reviewing Progress

In order to work out the return on your property investment, you'll want to regularly review the progress of your asset and calculate your return on capital as an investment. It is sensible to be cautious with your predictions and assume a c.90% occupancy rate, allowing for several months in a year, on average, of no tenants, while you switch over.

In the current market this is unlikely, but it makes sense to build upon a base case rather than being too aggressive to begin with, and underperforming. You will also learn that if you can comfortably make your mortgage payments at a base case, and with stagnant growth in property prices, the investment is a sound one and should be able to weather a bear market, as long as you are not over leveraged.

Particularly to begin with, being cautious with your property investment strategy will allow you to stay in the game the longest, which is how large sums of wealth are built!

Progress Calculator

We've also put together a handy Mortgage Repayment Calculator which allows you to keep track of what you own and owe. Give it a try!

Building a property portfolio

Now, soon after getting comfortable with your first property investment, you may soon be looking to build up a property portfolio. You may have read stories of retail investors who did incredibly well during the property boom of the 90s and 00s, who simply bought as much as they could, as quickly as they could.

Although looking back now this may seem like a smart strategy, much of their risk appetite was covered up by a booming property market that allowed them to take on huge amounts of debt as prices continued to increase, without any worry about making their mortgage payments or any shortfalls in rental income. By remortgaging properties at higher values and taking on debt for new ones rather than selling and paying capital gains tax, they could expand even faster.

Now that circumstances are different, would be property investors are no longer able to take advantage of sure fire price increases.

FAQs

What type of property is most suitable?

Well, it depends. You need to look at the % yield available from buying properties that suitable for letting immediately, and decide whether you will need to take on the burden of doing the renovations yourself in order to extract an acceptable yield. In-demand areas like Greater London will usually require you to add value with extensions or renovations that will require planning permission to be approved. Often you can also remortgage property after doing the renovations to take some cash back out for your next property. As always, do your research using comparable property investment opportunities in nearby areas before committing to a large project

Can you get rich from property investment?

You most certainly can get rich from property investment, but it isn't the silver bullet most would have you think. It requires a hurdle rate of capital to get started and is most certainly not passive income, unless you're starting off with real estate investment trusts, which exhibit a closer return profile to the traditional stock market. By sensibly building up a well-leveraged portfolio of buy to let mortgage backed properties over the medium to long term, and only expanding when it is safe to do so, you will certainly build up an asset portfolio that will be able to provide for you and your family in perpetuity.

What type of property is most profitable?

Again, there isn't really a simple answer. This is especially true given that most readers will have limited funds to invest. The most upside though, is probably in overlooked and on-the-rise areas where large residential properties can be bought at reasonable prices and converted into flats that will pay out considerable rental income.

The bonus of buying in these areas is twofold: you get a good price on the way in, and a strong % yield, and you get to enjoy the capital growth that comes from the increase in property prices in your property portfolio.

However, it is of course great in practice, but in reality predicting the property market with any degree of accuracy is very difficult. Remember, if it was easy, everyone would be doing it!

What is the 1% rule for property investment?

The 1% rule of property investment measures the price of the property against the gross income it will generate. Essentially, for a property to adhere to the 1% rule, its monthly rent must be equal to or exceed 1% of the purchase price.

This means that you are bringing in (gross) 12% yield on an outright purchase. It is a well established rule in property investment, but is now largely outdated. Finding property investment that adheres to this rule with any sort of consistency in the UK is incredibly unlikely.

Is property better than stocks?

They are different asset classes, which exhibit different risk and return profiles. In general, stocks are more about capital growth, where the value of the asset rises over time, and property investment is mostly about generating income (although a smart property investment will also exhibit capital growth over time).

A good portfolio will have a balance of both, in a percentage split that is dependent on the investor's idiosyncratic needs and risk-return profile. Even better is if the rental income property investors generate is funnelled into a stock portfolio, in which case you get the best of both! As mentioned, real estate investment trusts are a good balance of both. Remember, all of these can be managed together on the Strabo dashboard! So make sure to sign up in order to manage your portfolio holistically.

How do I invest in my first property?

Hopefully this guide has covered most tenets of property investment and buying your first property. We've been over the requirements, choosing a property, managing the property and how to think about income and capital gains tax and growing your portfolio over time. Of course, you're eager to get out and start earning that rental income, but the best things to do right now are :

1. Start putting together enough funds for a deposit, and make sure you have a salary and are creditworthy
2. Do your research! Start thinking about the areas and type of property investors you are hoping to be, and become an expert on that area and its prices.

How much money do I need to invest in property?

There isn't really a set amount, but the minimum you should probably be aiming towards is between £30,000 and £50,000. This is obviously dependent on area, but will give you enough to be able to put a solid deposit down, do some light renovations and have a small buffer to allow yourself time beforehand to complete planning permission and surveying, and afterwards to wait for tenants to move in. You can then start claiming your rental income! Bear in mind that the vast majority of projects go way over budget and take much longer than expected, so factor in as large a buffer as you can.

So that's it! Your comprehensive guide to becoming property investors! From saving for a deposit and becoming creditworthy, to choosing your investment vehicle, choosing investment properties, collecting rental income and managing the tax and the total yield on your investment, it's all there. The final thing to do is sign up below for the Strabo platform. This will allow you not only to manage the mortgage and live value of your holding, but also the accounts into which the rental income goes, and then what you do with it. Ideally you want to get to the point as quickly as possible at which you are reinvesting rental income, and our platform will help forecast where best to put it, which might actually include further property investments! Let us know how you manage your portfolio and where you are in your property investing journey!

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