Investing in property is a rewarding way to generate a monthly income. If you are looking into starting your journey as a property investor, you probably have many questions. For example, how do beginners get into property? What type of property is best for a beginner? Is it a worthwhile investment choice in today’s economy? In this article, we aim to answer all these questions and more.
We believe property investment is perfect for anyone prepared to do the research and plan and also has the ambition to succeed. Property investment is no longer a venture only for the rich and privileged. So read on to find out how to get started with property investing.
WHAT IS PROPERTY INVESTMENT, AND WHY SHOULD I INVEST?
Property investment means buying a property to make a financial return on that investment. Buying a property to live in is not considered an investment. Although you may benefit financially when you come to sell the property if the value has increased.
Property investors in the UK tend to buy a property that they then let out to tenants to create a monthly income. Other investors choose to buy a property cheaply and then renovate or flip the property and sell it for a profit. All have the same end goal, to make a profit on their initial investment.
WHY INVEST IN PROPERTY?
It’s natural to wonder if property investment is the right venture for you. For many who choose the property investment path, it’s seen as a reliable way to make an income, either as a full-time job or as a passive second income. It is considered low risk compared to asset classes like stocks and shares. This is because there is always a demand for rental properties in the UK. People will always need homes. In 2022, that demand has reached record highs.
During Q2 and Q3 of this year, the number of viewing requests per rental property increased by 25% from 9 to 14 viewings on average. Many prospective tenants even offer rent over the asking prices to secure a rental. The average rent in the UK now sits at £1,175 PCM which is an increase of over 11% in the last 12 months alone. Now is certainly a lucrative time to consider entering the buy-to-let market. Let’s look at some of the key reasons why property investment is so popular.
CREATE AN INCOME
It’s possible to earn a part-time or even full-time income as a property investor, depending on how you manage it. You can choose to buy-to-let one or more properties. Or, you might decide to try your hand at buying a property to renovate and sell. Whatever path you choose, it’s important to run the numbers to ensure you will make a good return on your investment.
Investing in property means you can secure leverage, which could be in the form of a loan or a mortgage. Lenders offer more favourable terms against a property. This can open the door to future investment opportunities. Property is considered a secure investment, far less risky than other asset classes such as stocks or shares.
Given a choice between stocks, shares or property, where would you feel most comfortable putting your savings? Nothing comes without risk. But if you are looking for an investment that keeps your savings safe, property has one of the best track records. Over the last decade, the UK has seen property prices rocket by over 53% increasing the average house price from £222,989 to £341,019. Of course, the market can change. At the time of writing, property is one of the most secure investment classes you can choose to keep your savings safe for the long term.
FLEXIBLE BUSINESS MODEL
Whether you invest big or small, property is one of the most flexible investment opportunities out there. Whether you choose to project manage your house renovation project or pay someone else to do it, you are in complete control of how you choose to manage your investment.
If you turn your property investment into a business venture, you can claim back some of the running costs against tax. You can claim against the cost of rental losses, repairs, maintenance, travel and any admin costs associated with the property. Additionally, you can claim for legal fees as well as wear and tear expenditure on any furnished lettings.
So now that we’ve covered some of the main benefits of property investing, let’s look at how a newbie can get started.
How do beginners get into property?
To get started as a property investor, you’ll need to make a plan and define what your end goal is. For example, it could be to make a full-time business out of it or it could be part of your pension plan or to make a passive income on the side. If you plan to make it your full-time business, you will need to create a business plan, including cash forecasts and timescales.
When you are in the planning stage of buying your first buy-to-let property, you’ll need to have your finances in order. For example:
- You’ll need to have saved a large deposit. Most lenders prefer between 20-25% of the property’s value. Some lenders may accept deposits as low as 10%, but these are harder to come by, and you are likely to pay a higher interest rate as a result.
- You’ll need to pay an extra 3% stamp duty on top of the current rates.
- You’ll need some extra cash to cover things like maintenance, and legal fees. Additionally, you’ll need enough to cover your mortgage payments if your property is vacant.
Managing your finances is key to the success of any property investment. You’ll need to carefully calculate your projected expenses and work out how you will secure your deposit on the property. When working out how much you need to borrow, don’t forget to include the costs of any renovation work to bring the property up to a good standard.
Be clear on how much you can expect to make through either letting the property or through a sale. Of course, a forecast can change over time, but it can help you keep on track and will give you an idea of your projected returns over time.
It’s also advisable to research as much as you can about property investment. There is a lot of information that can be found online as well as a number of highly regarded books on the subject from property experts. If you can, talk to industry experts or other property investors in your area for advice.
WHAT TYPES OF INVESTMENT PROPERTY ARE AVAILABLE?
There are two basic types of property investment:
- Buying to sell for profit.
- Buying to let out to provide a regular income.
Within these categories there are several variations, which could include:
- Single lets – to working individuals or families.
- HMO’s – house shares, or renting out room-by-room.
- Student lets – similar to HMO’s but often on a joint contract for a set period.
- Tenants on benefits – tenants whose housing is paid via the local authority.
- Holiday lets – letting a property for short periods holidaymakers.
- Flipping buy-to-sell properties – selling on quickly to make a profit.
- Second home properties – investment over the long term.
- Commercial properties – renting or leasing office space.
- Rent-to-rent – renting a whole house then renting out as HMO.
Buy-to-let investors with four or more properties count as portfolio investors under the Prudential Regulation Authority. Lenders take into account the total income versus borrowing to ensure the landlord can continue to pay off any finance already secured on the other properties.
WHAT TYPE OF PROPERTY INVESTMENT IS BEST FOR BEGINNERS?
Even seasoned property investors can become torn when deciding what type of property to invest in. What it all boils down to is what type of investor you want to be and how hands-on you want to be with your property management. Here are some things you might want to consider when deciding what type of property investment is best for you.
Where do you want to invest?
Deciding on the location of your investment property is one of the most important decisions you will make. You’ll need to research the areas that interest you to understand if you can achieve a good return on your investment. It sounds obvious, but if you are looking at buy-to-let investment opportunities, choose an area where renters want to live or an area that is considered up-and-coming. Higher returns are more likely in areas that are being developed. When looking at an area, you’ll want to consider:
- Transport links.
- What are the schools and universities like in the area?
- Are there shops, cafes and recreational facilities?
- What are the neighbourhoods like? Do they attract your preferred tenant demographic?
Who do you want to rent to?
Would you prefer to rent to single professionals, families or university students? The answer will help you narrow down the best type of investment property that meets your goals. If you rent the property out for short-term lets like Airbnb, consider well-connected areas popular with tourists. To appeal to professionals and families, consider properties near transport links and schools.
The type of property
If you choose an HMO property (Home of multiple occupancies) you’ll likely attract younger tenants between 22-30. If you choose to invest in a three or four-bedroom house, you are more likely to attract a family. Likewise, a city one or two-bedroom apartment is likely to be popular with single or professional couples.
CAN I INVEST IN PROPERTY WITH NO MONEY?
There is a common myth that property investment is only for the wealthy. Whilst those looking to mortgage property will need a decent deposit, other options are available.
For a buy-to-let mortgage, you’ll usually require a deposit of 25% of the property value. The higher the deposit, the lower the risk and the better the rate available. If you want to save money on your first property investment, look for opportunities to buy property below the market value. Alternatively, consider looking at some of the lowest-cost areas in the UK to invest in. The lower the property value, the lower the deposit required to secure finance.
There is also the option to obtain a bridging loan from Novellus. This can be an attractive prospect for those looking to buy and renovate or flip a property in a short time, for example, 12-24 months. Bridging loans usually make up 50-90% of the property value. Depending on your circumstances and exit plan, obtaining a bridging loan with as little as a 10% deposit is possible. Each loan application submitted to Novellus is assessed individually on a case-by-case basis.
THE LENDING RULES FOR INVESTMENT PROPERTIES
If you decide to invest in property, there are certain rules you will have to adhere to, depending on the investment direction you decide to follow.
Here is a summary of the criteria for buy-to-let mortgages in the UK:
- Minimum age – 18, although this may differ per lender.
- Maximum age – Again, depends on the lender. Some companies provide loans to people up to the age of 85.
- Borrower status – Your current borrowing status will affect your loan. For example, are you a first-time buyer or an experienced landlord?
- Location of residence – Generally, you need to be living in the UK.
- Credit history – Poor credit history can make it difficult to get a mortgage. This depends on how recent your issues were and the severity of your financial problems.
- Securing against property – This can affect the type of loan you are provided with.
- Limited companies – Putting a loan through a limited company means their credit rating is not affected if things go wrong. However, some lenders see this as a higher risk. This can then affect the likelihood of getting a loan. You may have to provide a personal guarantee.
- The property – The type, price, deposit, affordability, location, construction and usage will have an impact on the type of loan you can get.
- Type of tenant – From students to professionals or families, the type of tenant can also have an impact on the loan.
WHAT IF YOU’RE TURNED DOWN FOR A BUY-TO-LET LOAN OR MORTGAGE?
Lenders have become stricter with their lending criteria, which is making it more difficult to secure a buy-to-let loan or mortgage. Especially in the current economy, where interest rates are rising, and the country looks set to enter a recession.
Reasons you may have been turned down include age, poor credit history, type of property or not enough deposit available. Also, not having adequate income or rent forecast, or not being a current homeowner.
However, there are other options to consider, such as a bridging loan. Novellus consider each of their loan applications on a case-by-case basis to assess eligibility rather than providing fixed products.
The aim is to decide on the right rates and terms for each application. Novellus look at all the aspects and assets to ensure they match the requirements and provide the best solution.
Just because you have been turned down by one lender, it does not mean you can not get finance elsewhere. You can either complete the research yourself, or you can speak to an advisor or broker who can help you find the best product for your needs.
A FINAL WORD
Investing in property is an exciting venture that can lead to great returns on your investment when done right. Property investment is not a get rich quick scheme and does require hard work and dedication. Prepare and plan, know what you want to achieve, and enter the market with your eyes wide open. If you follow this advice it can be an extremely satisfying and rewarding way of earning a living.