Property investment is also one of the most primary means of bringing in additional and passive income. Although costly, this method of investment can return you with a hefty profit. When it comes to allocating money for returns, most investors shy away from property investment, as it is deemed as an exclusive investment exercise.
Additionally, many investors are unaware of the technicalities involved in making an investment. The lack of information about the real estate market can also be a contributing factor that prevents individuals from placing their financial assets into the property market.
Taking that into account, the following guide elaborates comprehensively on the art of investing in property for beginners in the UK. It discusses the key factors that you need to consider before investing in the real estate market, along with the decisions and plans that are required in order to attain a successful outcome from investing in a property. Additionally, the following guide can inform you of the necessary financial and legal requirements that must be considered before dipping your toes in the money market.
Property investment for beginners is a profitable business. It can reward you with the opportunity to meet all your financial goals, quickly and appropriately. However, the following factors must be comprehensively considered, before you enter the business of property investment.
Creating an Investment Plan
Like all other investment opportunities, property investment requires you to take on a methodological approach. Despite that, the returns from acquired real estate opportunities take some time.
For beginners, creating a real estate investment business plan functions as a road map, which enables you to execute proper measures to ensure success.
As an investor, you are required to create a strategy that includes a variety of features. Essentially, investing in real estate should be given the same consideration as any other business opportunity. The elements that should be considered are the future objectives for the investment, the financing strategies, as well as your commitment to the investment. Moreover, you would also need to consider whether you are choosing to buy property for the purpose of selling or to fulfill the need to rent it out.
While creating a business plan, you must take the following factors into consideration.
- What are the objectives of the investment?
- What are the goals of the investment (for instance, are you willing to buy-to-sell or buy-to-rent)?
- How long are you willing to invest?
- What is the strategy for making an investment?
- What is your overall budget?
- What location are you considering purchasing a property?
- What are the contingencies and back-up plans?
Considering the aforementioned, you need to create a strategy that provides a solution for each of the preceding questions. Once you find an answer, you can move onto the next stage.
Factors to Consider
While planning before property investment is essential, it is important to not get wrapped up in the stage to the point that you forget to take the final step. Considering this, it is important to note that investing in this venture does not require time, as much as it requires a research and investment strategy.
With a proper plan in place, you may even bear the fruits of your investments in a short time frame. When you are creating an investment plan, take the following factors into consideration.
Understand the capital you are willing to invest in
The first thing that you need to consider is the capital you hold, which could then be used for the purpose of investing. For instance, most individuals utilize their life’s savings to carry out their investment venture, whereas others procure loans/mortgages to get a kick start into the real estate investment opportunities. However, in the case of the latter, it is imperative for you to have a steady source of employment, so you do not end up in debt. Moreover, you are also required to have a good credit rating, in order to get a loan at a lesser rate of interest.
Type of investment you wish to acquire
Another factor that you need to consider is the type of investor you wish to become. In the cases of real estate, you have two different opportunities for making an investment. These include buy-to-let and buy-to-sell properties. That said, you can opt for both the investment opportunities, however, as a beginner investor, it is recommended to take it one step at a time.
At this stage of planning, the factors that need to be considered are:
- What are the goals for your investment?
- What is the expected income/cash flow from the investment?
- What kind of income do you wish to receive (capital gain or rental)?
- Are you committed to the venture on a full-time or part-time basis?
- When do you need to access the initial capital?
- How much money can you afford to invest?
Financial Advisor for Mortgages
In the real estate business, you would have to deal with various mortgage loans, as well as financial models. If you are uninformed about the financial jargon, it is essential to consider taking assistance from a financial advisor. This individual would assist you in identifying the right mortgage plan that aligns with your investment goals. Essentially, if you lack the knowledge about taking out a mortgage, you may end up taking out a long-term mortgage, which can land you in financial turmoil. Additionally, a financial advisor can offer guidance and help you procure a pre-approval for a specific mortgage, which can offer some security in the long run.
Creating a Monthly and Yearly Budget
An investment is only successful if you stick to a budget. Therefore, before getting yourself involved in the risky venture of property investment, it is imperative to make sure that a proficient financial plan is developed for your monthly and yearly spending. Your budgeting strategy should be focused on the rent you will receive, minus any loans and upkeeping costs. In the unfortunate case that you are unable to return your dues, debt would become inevitable. As a result, your credit score would suffer the consequences, which could significantly hinder your investment plan.
In addition to this, the other financial factors that you need to consider are the costs associated with the investment venture. These include the legal fee, the charges made by the real estate agent, stamp duty, the cost of renovation and refurbishing, and the price of advertising. The aggregate sum of these charges can drastically affect your pricing strategy.
Researching the market
As stated earlier, investing in the property market required strategy. One of the decisions you need to take is to decide on the region where you wish to invest in. Most investors make the mistake of buying a property in their hometown. This investment, although profitable, may not yield the same amount of income as some other areas in the country which may be nearby your hometown. Taking this into consideration, it is imperative to carry out research to examine the property values in different areas of the United Kingdom. Additionally, you must also take the population into consideration, when you are investing in the property market. This factor is important, as the money you put into the property would be determined by your target audience. For instance, if your goal is to target couples and families, a larger suburban property, with proper renovations, would be the most ideal.
On the other hand, if you wish to make an investment in student accommodations, you wouldn’t have to invest that much in renovations, however, the risks involved with this type of investment would be relatively higher.
Another factor that needs to be examined is the tax restrictions. You are required to evaluate the market trends, along with their tax implications.
Level of Commitment
The final, yet equally important, stage of property investment planning is gauging an idea about the level of commitment. Like all investments, property investment opportunities also return a high reward, if the money is invested for a longer duration of time. Considering this, it is important to counter all the setbacks and make sure that you stick to your initial investment plan.
Monetizing the property
Prior to entering the real estate market, you need to understand ways through which you can make money out of it. Typically, there are three ways to monetize your property. These include buy-to-let properties, buy-to-sell properties, and capital appreciation.
Evident by the name, buy-to-let properties are those that return you with a regular income after you have rented it out to a reliable tenant. In the case of buy-to-let properties, you are able to earn a return on your investment on a monthly basis. Taking that into account, it is essential to charge rent by considering the mortgage and other costs, as well as the profit you desire to make.
With that said, there are certain restrictions in place for the amount of rent you can charge your tenants. Essentially, if you overcharge, your property would become unattractive to potential tenants. On the other hand, if you undercharge, the cost of the mortgage and other renovations would not be covered, thus landing you in debt.
Taking this into consideration, you are required to consider three things:
- The general rent in the area
- The amount you need to cover other costs (e.g. landlord’s insurance)
- The profit you desire to attain.
With a buy-to-let property, you can augment your portfolio of more real estate investments with time. Depending on your requirement, these buildings can be purchased or sold over time, when the market encourages it.
Additionally, it is important to evaluate the rental yield for the area. The rental yield is the amount that you expect to achieve in a year, which is often demonstrated as a percentage of the property’s overall price. For instance, a £10,000 rental income from a £200,000 house would by 5% yield p.a. (yearly rent divided by the total cost of property).
You can also discover other locations that offer a much better yield. For instance, if you invest in a city where a university or good schools are located nearby, you can benefit from a hefty 8 to 10% yield.
While the income from properties can be promising, buy-to-let properties also have certain drawbacks. For instance, you would be required to find tenants, maintain properties, and employ a letting agent to help you with the intricacies of the process.
The buy-to-sell property approach is about investing in a property that you can sell at a later date. The value of the property is increased via the renovations and the work that you put into it. In this scenario, you have two options. If you have the experience, you can work on the property yourself, or you can hire contractors to handle it for you. These renovations can significantly increase the value of the home. As a result, you can sell the property for a much higher price. The profit you make off if this property can then be reinvested into the next property project.
Additionally, the cost of the renovations would not be that high. You can opt for a more cosmetic renovation, which can include a paint-job, adding new furniture, cleaning up the home, or adding a garden.
However, the intensity of the renovation depends upon the location, as well as the expected increase in price after the renovation is completed. Therefore, if you are renovating in an elite neighborhood, your budget for refurbishing would have to increase.
You can earn a decent profit using this approach. With that said, there would not be a regular flow of income, rather, the profit would be realized after an extended period of time, in the form of sale proceeds of the property. As a result, this factor can play a significant role in assessing whether you choose buy-to-let or buy-to-sell.
It is imperative to think this decision through, as it can have a major impact on all your financial assets.
Another approach to earn from property investment is via capital appreciation. Capital appreciation refers to the idea of buying a property at market value and selling it at a later stage when the area or the neighborhood improves. This approach is quite similar to buy-to-sell properties, however, instead of fixing up the area, you wait for the neighborhood to improve in value.
The market value for a neighborhood or area increases with small changes, such as the reconstruction of roads, integration of better schools, and revamping of new, in-demand businesses. Additionally, the introduction of different means of transport can also have an effect on capital appreciation.
That said, it is relatively difficult to judge the success of these kinds of investment opportunities. The most important factors in this situation are timing, as well as the area you select to purchase a property.
Additionally, capital appreciation is the only approach in which you do not have to spend more money on the property, once the amount has already been invested. The only downside is that you may have to wait a few years before the value increases. Taking that into account, the liquidity of your financial assets would decrease, and you would be prevented from accessing your money.
Property Investing Applications
The advent of technology has given rise to various applications that empower landlords to manage and maintain their properties, without having to give up on their day jobs. There are various property investor apps that you can benefit from, such as the following.
1. Find Properties with Zoopla, Prime Location, and Rightmove
The preceding applications allow you to discover properties at any location in the UK. With these platforms, you can find homes and flats of a particular price, size, and location. The database of the application is quite vast. In fact, the applications are inclusive of more than one million properties combined. Moreover, as the database is regularly updated on the industry news and legislation, you can remain informed at all times.
2. Discover Contractors with Checkatrade
Checkatrade is another platform that enables you to find urgent and non-urgent contractors, who are willing to offer their services online. Essentially, each individual on the platform can be judged on the basis of a fair rating system. You can find plumbers, electricians, construction workers, and more individuals on the platform.
3. Check Rental Yield with Rental Yield Calc
One of the most beneficial apps for individuals in the search for buy-to-let property investment is Rental Yield Calc. With this application, you can add your income and expenses on a weekly, monthly, or yearly basis to discover the attractiveness of a rental property. Moreover, you can also assess the required yield.
4. Renovate a Property with Ideas from Houzz
If you are interested in renovating your property yourself, you can take ideas on interior design by using Houzz as a platform. This service includes a variety of images and mood boards, which can be used as an inspiration to give your property a cosmetic renovation. Houzz is the perfect platform for investors who have chosen the buy-to-sell option.
All investment opportunities come with legal and financial responsibilities. However, in the case of property investments, there are several other factors that play a role, such as conveyancing, contracts, land surveys, mortgage arrangements, and more.
Once the property is purchased, the first stage of the process is to get the title deed in your name. This step transfers the legal responsibility of the building to you. After this process is completed, the legal and financial responsibilities can vary, depending on the type of investment you make. Unless you are legally competent to do it yourself, you must use a solicitor or a conveyancer for this process.
Buy-to-let landlord responsibilities
As stated earlier, becoming a buy-to-let landlord comes with a plethora of responsibilities. From managing the building maintenance to providing welfare facilities, you would have to cater to all the duties of the landlord.
Moreover, you would also be required to curate a contract that highlights the amount of rent agreed upon, total term of the tenancy as well as property inventory. Once the contract is signed and legally binding, you would lose the legal right to change rent or evict the tenant, without giving a notice period. Additionally, you would not be able to move forward with eviction in the absence of the court order.
You are also required to acquire the energy performance certificate, prior to listing it for rent. It is also important to ensure that a tenant holds the ‘right to rent’ in the UK.
Stamp duty is relevant for all properties that exceed the amount of £125,000. However, in the case of non-residential properties, stamp duty is only valid for properties that cost more than £150,000. This obligation is valid for all properties that are purchased via cash, savings, or through a mortgage. With that said, the stamp duty experiences an increase of 3%, if the property is your second home and/or buy to let. The stamp duty information is subject to change so please check gov.uk for the latest stamp duty thresholds.
If you invest in a buy-to-let property, you are required to pay an income tax on rental income after deducting deductible allowable expenses, which includes the agent costs, council tax, and building insurance.
Capital Gains Tax
In both buy-to-let and buy-to-sell property cases, you are legally mandated to pay capital gains tax, in the case you made a profit on the sale of the property.
Unlike other cases of making an investment, you are not covered by consumer protection when you allocate your money to a property. Taking that into account, it is recommended to seek legal and financial advice at every stage of the process. In doing so, you can avoid making wrong decisions, which can protect you from making the wrong financial decisions.
Property investment is one of the lucrative forms of allocating money. When you invest in real estate, you can either buy-to-let or buy-to-sell. Choose the right option for yourself by considering the aforementioned information.