Buying an investment property can give you a great income and help build a legacy for the future.
But property investment when you’re a complete beginner can be daunting – and with the amounts of money involved, investing in property is certainly not without risk.
In this complete guide, we’ll be:
- Looking at property as an investment
- Revealing the key things you’ll need to consider before you invest in property
- Showcasing some of the best areas to invest in buy-to-lets in the UK
Is property a good investment?
Property remains a good investment, whether you’re looking for a regular source of income or looking to make money over the long term through capital growth.
“Property is always a good investment, especially in the current market,” says Ellie Hall - Managing Director at Martin & Co.
“Whether you want to invest in buy to let property or are simply looking for a profitable investment opportunity – there are several things to consider.
“If you’re a first-time investor, get in touch with your estate agent to be sure you’re up to date on current legislation and to get the best advice for you!”
How do people start investing in property?
Getting into property investment requires time, research and, of course, money.
You’ll need to think about:
1. Your investment strategy
Before you start to invest in property, think about the direction you want to go in and what you want to achieve.
Property investment comes in several forms:
A buy-to-let strategy means you’ll be buying a property specifically to rent it out to tenants.
Buy-to-let can provide you with a steady income for as long as you need it, while a long-term buy-to-let strategy can also offer capital growth opportunities.
However, you’ll need to think about managing your property and complying with private rented sector regulations, which can be complicated.
If your aims 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 for a profit.
The profit you make, however, will depend on:
- What you pay for the property
- How much you spend on renovations
- How quickly the work is completed
- Your ongoing costs while work is carried out
- Buyer demand when you come to sell
Flipping is one of the riskiest property investment strategies, but also one of the most passive.
In its truest form, flipping would see you purchase a new-build property off-plan before selling it for a profit once the build is complete.
The risks with flipping occur when:
- There’s a falling property market with low demand
- The build is delayed and the market changes
- The property’s value depreciates in the early stages of ownership
2. Investment location
Where you choose to invest in property can make a huge difference to how successful you are.
If you’re thinking of purchasing a buy-to-let, you’ll need to research:
- Rental demand and prices in the area
- Transport links and amenities where you want to buy
- Schools in the area if you’ll be renting to families
- Popular areas close to universities if you’re renting to students
- If you’re thinking of developing a property, meanwhile, think about:
- Price growth in the area you’re considering
- Demand from buyers in the area
- Ceiling prices in the area
- Any potential planning restrictions in the area
3. Which 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 your investment area is full of young, single professionals, a buy-to-let flat would probably be a better investment than a three-bedroom house.
But if there’s high demand from couples or families, that house could be a better investment option.
Are you looking for a modern property, or something older with more character?
Take a look at these pros and cons of different types of investment property:
Investment property type
Often lower purchase cost
Capital growth opportunity through renovation
Higher maintenance costs
Often poorer energy efficiency
Lower maintenance costs
More energy efficient
Higher purchase cost
Depreciation limits short-term capital growth
Flats / apartments
High tenant demand
Good capital growth potential
Service charges and ground rents
Potential for lease to become short
4. The importance of purchase price and yields
The price you pay for an investment property can have an immediate impact on your rental returns if you’re purchasing a buy-to-let.
And if you’re buying a property to develop, your purchase price is key to the amount of profit you’ll make when you come to sell.
For buy-to-let, your property’s rental yield will tell you how well its performing and give you a great idea of the return you’re getting on your original investment.
Before you invest, work out the potential gross yield you could achieve from each property you’re considering.
To do this, take the property’s potential annual rental income and divide this by the purchase price, before multiplying by 100.
This will give you the potential gross yield – the higher the percentage, the better your return.
For example, a two-bedroom flat with a potential annual rent of £9,600 and purchase price of £170,000 would generate a gross yield of 5.6%.
5. Your target tenants
As well as location, you should know the kind of tenants you’re looking to attract to your rental property.
Are you aiming for single young professionals or couples? Will they be commuting to another town or city for work?
If so, a flat or apartment close to amenities and transport links might be a good option for your investment property.
Perhaps your target market is young families looking to put down roots?
If so, a larger property with a garden and in catchment for a good school might work if your budget allows it.
Find out about employment in the area you want to invest in and build up a picture of the kind of people who are renting properties in that location.
6. Your budget, funding, and cashflow
Before investing in property, you’ll need to think about how you’ll fund your investment.
If you’re purchasing a buy-to-let, this might be through a buy-to-let mortgage.
Buy-to-let mortgages often 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 125%
Maximum loan-to-value ratios – usually 75%, meaning a deposit of 25%
If you’re purchasing a property to develop and then sell on, you’ll 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. Maintenance and management
If you’re purchasing a buy-to-let property, you’ll 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 in the best way to potential tenants
- Conduct viewings with potential tenants
- Produce and manage paperwork related to tenancies
- Deal with maintenance and emergencies
- Collect rent and chase missed payments
- Perform check-in and check-out inventories
- Deal with your tenant’s deposit and any potential disputes
- Renew tenancies
8. Landlord taxes
By becoming a buy-to-let landlord, you’ll need to know about the various taxes that could impact you.
- Income tax on your rental income
- Additional stamp duty for buy-to-lets
- Capital gains tax if you sell your buy-to-let property
9. Staying compliant
The most important aspect of being a landlord is keeping your tenants safe by ensuring your rental property is fully compliant.
The list of legal obligations when you’re a landlord is vast and includes:
- EPC and MEES regulations
- Documentation and information
- Gas safety
- Smoke and carbon monoxide alarms
- Tenancy deposit protection
- Furniture and furnishings
- Electrical safety
- Legionella assessment
- Right to Rent checks
- Repairs and maintenance
- Permission to let
- Taxation responsibilities
Again, by using an agent’s full management service, you can ensure all these obligations are taken care of.
The best places to buy investment properties
The UK is full of superb places to buy investment properties – but if you’re considering a buy-to-let, rental yields can vary depending on where you buy.
We’ve looked at rental and purchase price data from DataLoft Inform to find five of the best buy-to-let areas for new investors:
Along with Liverpool, Manchester remains a genuine buy-to-let hotspot with high demand and affordable purchase prices.
Average price (two-bed flat): £185,725
Average rent (two-bed flat): £914
Gross yield: 5.9%
Average price (3+ bedroom house): £323,668
Average rent (3+ bedroom house): £1,233
Gross yield: 4.5%
A bustling city with superb transport links and a vibrant student population, Nottingham is another excellent choice for property investors.
Average price (two bed flat): £136,224
Average rent (two bed flat): £759
Gross yield: 6.6%
Average price (3+ bedroom house): £259,036
Average rent (3+ bedroom house): £1,003
Gross yield: 4.6%
Although rental yields in the South East are generally lower because of higher purchase prices, Chelmsford is within 30 minutes of London by train and sees high demand from young professional renters.
Average price (two bed flat): £213,836
Average rent (two bed flat): £987
Gross yield: 5.5%
Average price (3+ bedroom house): £452,739
Average rent (3+ bedroom house): £1,434
Gross yield: 3.8%
One of the largest cities in the North East, Sunderland offers investors some of the best yields outside of the North West and is a vibrant, popular city.
Average price (two bed flat): £69,188
Average rent (two bed flat): £527
Gross yield: 9.1%
Average price (3+ bedroom house): £143,821
Average rent (3+ bedroom house): £632
Gross yield: 5.27%
England’s Second City, Birmingham benefits from great employment and excellent transport links, with affordable property options for investors and high rental demand.