How to Invest in Property in the UK – The Ultimate Guide

No investment portfolio would be considered complete if it did not include property. It is the most stable secure investment choice you can make in the UK regardless of the Brexit outcome. Even when the economy took a hit due to the COVID-19 pandemic, property market prices remained largely unchanged.

How to Invest in Property in the UK

Nonetheless, as much of a “sure-thing” it may be, there’s a lot that goes into making the right investment decision. Before you go ahead and spend your life savings on what appears to be a prime piece of property, there’s a method to the madness. A secret formula of sorts, if you will, that if applied correctly is guaranteed to generate long term wealth.

It’s probably why you’re looking into property investment in the first place. We’ve put together a comprehensive guide on everything you need to know about how to invest in property.

What Not to Do When Investing in Property

Before we dive into the specifics of property investing, there are some common mistakes you want to avoid, especially if you’re a first-time property investor. We’ve listed five of the most common mistakes people make when buying a property in the UK, and how to avoid them.

Mistake #1: Being Led by Emotion

Let’s begin by saying this – property is arguably the most expensive asset you’ll ever own in your life. It’s not the sort of thing you splurge on a whim. You need to take “whim” out of the whole purchase process; otherwise, it’s going to cost you dearly. Emotion and property investment are two elements that don’t mix well.

What does emotion look like when it comes to buying property? We’ve heard them all. From buying a house because “It’s got a nice kitchen!” and “It’s just like the house I grew up in…” to “James and Marie would live right up the street from us!” and “Imagine being next-door-neighbours with Victoria Beckham’s great-aunt?”

Any investment decision you make when it comes to property should be based on cold hard facts. It needs to be driven by getting the highest possible return on investment, and whether or not it fits your budget.

Mistake #2: Poor Financial Planning

Speaking of ROI, it’s not just about picking a property that’s projected to deliver a monumental amount of income in X-number of years. There’s a lot more that goes into deciding what qualifies a good property investment. Otherwise, you might sign up to the wrong mortgage, which could have a spiralling effect on your ability to build a solid investment portfolio in the future.

The most common mistakes investors make when putting their money towards purchasing a property include:

  • Failing to consider the structure in which they’re buying the properties
  • Not knowing how the lender feels about you adding more properties to your portfolio
  • Not taking the interest rate into account
  • Not thinking about how long they’re tied in for

To avoid making these mistakes, you need to stress test different scenarios to see how well your investment holds up under pressure. For instance, if you don’t restructure your mortgage, will the cumulative rent you receive from your tenants be enough to cover your payments if the interest rate was to go up? Are there any penalties for early repayment?

It’s always a good idea to have a mortgage broker act as a buffer between you and the lending institution to ensure you get a host of different products to choose from. That way, you can make an informed decision.

Mistake #3: Not Doing the Necessary Due Diligence

This is especially true for investors buying a property through an investment company. To reiterate, investing in property is the most expensive undertaking you’ll make in your life, so why would you rely solely on the information you get from the property investment company? Wouldn’t it make sense to conduct some due diligence of your own to ensure you have all the facts you need to make a sound decision?

The marker of a good investment company is one that presents you with a fully-structured investment opportunity, complete with valuations, comparable data from similar investments, rental letters, and a whole lot of information to make sure you’re getting into the deal with your eyes wide open.

Nevertheless, you should always countercheck this information by checking with different sources. This may involve talking to local agents or doing online research. You’ll be surprised by how much information is available on the internet. If the developer isn’t well-known, do a background check on them to establish if they’re legit.

Mistake #4: Not Having Enough Equity in the Property

Let’s face it. Most investors prefer to put in as little of their own money as possible towards an investment. After all, with such low-interest rates, why even bother when you can leverage it and put your money into “better” use? Here’s why this approach may not be the best long-term.

You need to look at your property’s occupancy rates and factor in void periods. The sweet spot is usually somewhere in the realm of 85% occupancy. The question you need to be asking is – Will my rental income be enough to cover void periods?

A high loan-to-value mortgage means that if you ever needed refinancing, that might not work if you’ve already borrowed to your limit. The same thing applies if your lender hikes the interest rates, but your rental income remains the same. You can already see you’ll be at a deficit.

Focus on the long term. Put in as much equity as you can to leave room for refinancing in the future, should you ever need it. When planning for the long term, you need to factor in your living expenses – not just in the present. You’ll need to project what they’ll look like in the future taking inflation into account. If you have a 5-, 10-, 15-, or even 20-year mortgage, make sure you stick to it.

Mistake #5: Not Having a Clear Long-Term Strategy

While the idea of buying, refurbishing and selling properties for a quick short-term profit may sound appealing, there are a lot of moving parts involved. It’s not as straightforward as it appears to be and is best left to experienced investors. If you don’t fall into this category of individuals, your best bet would be to look at a long-term endeavour.

This means you need to have an ironclad business plan in place with clear goals and deliverables.

Some of the questions it needs to address include:

  • Are you investing in property to add to your retirement portfolio or to replace your pension entirely?
  • Have you factored in:
    • The running costs?
    • The interest rate increments?
    • The maintenance and refurbishment costs required every few years?
  • If you plan to leave your investment to your children, is it in an efficient tax structure? Have you consulted with a tax specialist?
  • How long will it take you to repay the mortgage? Does this period factor in void periods?
Invest in Property in the UK – Available Options for Investors

Factors to Consider When Choosing a Property to Invest In

Now that you understand what not to do when investing in property, here’s what you need to think about before you purchase a piece of property. There are generally four key considerations to keep in mind.

1. Location, Location, Location

Choosing a property in the right location will have a significant impact on the returns it generates. The next logical question would be – What is considered a “good” location for a property?

Here’s what you need to look out for:

  • Proximity to schools, universities, and offices
  • Proximity to public facilities like parks, the post office, and hospitals
  • Transportation facilities in and around the location
  • The presence of recreational and lifestyle amenities like dine-in and fast-food restaurants, coffee shops, shopping malls, shopping centres, supermarkets, banks, pubs, etc.
  • Whether the area is in a residential, commercial, or industrial setting

These are just a few of the location considerations you need to have in mind when choosing a property to invest in. The more amenities there are in a particular area, the higher the value of the properties within the locality will be.

2. Potential Demand

The next thing you need to consider is what the property outlook in the area is for the coming years. You want to identify a property that’s in high demand by people looking to rent or buy it, both in the present and future.

Is there a major infrastructure project going on in the area? If there is, then you know there will likely be an influx of people moving there at some point. This will, in turn, increase the demand for housing in the area, which will likely drive up the property prices.

If you’d like to invest in a property off-plan while it is still under development, it’s always a good idea to do a bit of homework on the developer, to get information on their financing ability, the quality of their past projects, and whether or not they’ll finish the development on time based on their experience.

If they check all the boxes, then you can go ahead and purchase it. This is a significantly cheaper option compared to purchasing a property that’s already complete.

3. Potential Returns

Buying the wrong property – for any number of reasons – could either mean getting a rental income that’s far below the monthly expenses it takes to cover your recurring property maintenance costs or a capital growth rate that is significantly below the market average.

To properly assess the potential returns a piece of property is likely to generate in the future, you need to do a substantial amount of research. Look at how much money you’ll spend sprucing it up, how much profit you’ll be making every month – including void periods and all other risk factors considered, and how much you need to invest to create a reasonable income stream.

Once those three elements are clear, you’ll have a pretty good idea of the kind of returns to expect.

4. Capital Gains

Consistently high demand for housing in an area, and short supply of said property, is the driving force behind capital gains. If the population in a particular locality is growing at an exponential rate, while the supply for housing is unable to meet this demand, the property prices in the area will continue to increase with each passing year.

You want to keep an eye (and ear) out for upcoming infrastructure developments like a new train station, train line, or highway that links the area to other major cities. All these are bound to drive up the property value in the area, which in turn increases the potential capital gains you’ll derive from it if you ever decide to sell it in the future.

Yield vs. Capital Growth in Property Investment – What’s the Difference

Most property investors are often torn between a long-term or short-term approach when trying to decide on the most appropriate investment option to take. A long-term approach targets strong capital growth, while a short-term approach focuses on a high rental yield.

What if we told you that you don’t necessarily have to choose one over the other? That you can have the best of both worlds?

As a general rule, when it comes to investing in most major cities in the UK, as the growth rate slows down, the rental yield increases. Fast-growing cities, on the other hand, have lower rental yields. The good news is – there’s a sweet spot that lies somewhere in between. You just need to know where to look. North England would be a great option to consider.

Depending, of course, on your investment goals and the type of property you’re investing in, there are times when the rental yield is as important as capital growth. However, if your long-term goal is to build wealth, then capital growth is what you should be focusing on.

Factors to Consider When Choosing a Property to Invest In

How to Invest in Property in the UK – Available Options for Investors

So far, we’ve seen what not to do when investing in property, what to look for in a prime piece of property, and whether or not you should be in it for the short or long term. In this section, we explore the different ways to invest in property.

1. Direct Investment

This is the traditional approach to investing in property. You get in touch with an estate agent, you discuss the type of property you’re looking for, as well as the budget you’re working with, they show you the available properties for sale based on your criteria, and if you like what you see, you buy the one(s) you like.

This investment option allows you to use a buy-to-let mortgage to finance up to 75-80 per cent of the price of the property, although you can buy it with cash if you have the money upfront.

2. Shares in Listed Property Companies

This involves owning shares in a property developer or home building company, as opposed to owning the actual property. The main advantage of this approach is the fact that these companies generate higher profits when the property prices rise. This means higher capital growth and/or dividends for you.

There’s also the fact that liquidation is easy when you need the money. Selling shares on the fly to free up your cash is a lot easier than selling your property on short notice to access equity.

3. Collective Investment Schemes

In this method, you and other investors pool your finds to jointly invest in properties. There are different options available to investors.

Property Crowdfunding

Crowdfunding relies on an online platform that serves as an investment vehicle to bring several investors together to pool resources, and collectively buy and let real properties. Investors are awarded a specific number of shares based on their investment, which then generates a stream of rental income. This appears in their account as dividends from the company.

Property Unit and Investment Trusts

Property unit trusts require that you invest a minimum amount of money into the fund. The fund manager then pools this amount with funds from other investors and channels it towards a wide range of properties.

These may include commercial property, buy-to-lets, student accommodation, etc. Property unit and investment trusts don’t usually require a big initial investment, and many are ISA compatible.

Property Authorised Investment Funds (PAIFs)

These are similar to unit trusts, except for the fact that they come with special tax privileges that you don’t get with other types of investments. If they meet the criteria set by HMRC, PAIFs aren’t subject to any tax whatsoever. Investing in property using this approach means that you get all the gross proceeds of your investment, tax-free.

Insurance Company Property Funds

Certain life insurance products like unit-linked bonds may include property investments as well. While some of them may be tax-free, they do come with strings attached. For instance, to be tax-exempt, you’ll need to hold the investment for at least 7.5 years.

Real Estate Investment Trusts (REITs)

A REIT refers to a listed company, which runs a buy-to-let property portfolio, or a property development. The great thing about REITs is that they give investors a combination of capital growth and rental yield, so they deliver a regular investment income.

A World of Endless Possibilities

Now that you understand how to invest in property, what to do, and what to avoid, here’s what you need to keep in mind. The real value in investing in property lies in holding the asset for the long haul to enjoy the capital gains you’ll reap in the end.

Whether you’re looking to add a property to your pension portfolio, finance that new home, or simply invest for your kids’ future, property investment, when done properly, can help you achieve both your short and long-term goals.

Want to know how to buy low and rent high? Check out our blog to learn how to choose a place for investment.

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