Investing in rental properties has become increasingly popular in the UK. This is because the recent economic turmoil in the UK has shown us that properties are one of the few tangible assets that perform well during periods of economic uncertainty. For investors, it can be both a rewarding and profitable income stream, whatever your background. In this article, we will look at how to invest in property as a beginner, why it makes good sense to become a property investor in 2022, and cover some of the critical considerations everyone needs to make before buying their first investment property.
Why should I invest in property in 2022
It’s no secret that we are living in a period of economic uncertainty. Interest rates on savings accounts and any other type of financial investment are generally very low. Stocks and share prices have also proved to be volatile in uncertain times, but one thing that has remained constant is property investment. Of course, property investment is not without risk, but it is considered one of the safest investment choices for a good few reasons.
It provides a regular income
Depending on how you decide to invest, it can provide you with a full-time or part-time income. Throughout 2022, rental properties have been in high demand, with more renters looking for properties than rentals available. It provides a predictable income stream that acts as a great safety net for the self-employed or retired investor.
Benefit from rising property prices
Property prices tend to rise steadily over time. This is because even during periods of economic uncertainty, the market has experienced capital growth. In the last decade, property prices have increased by an average of 53%. For investors looking to hold onto their properties for many years, this means they stand to make a profit from the property when they do choose to sell.
Provides a retirement income
If you are looking to boost your retirement income, then property is one of the safest investment choices out there. Buying a property now at a favourable price and then selling it as you reach retirement could create a good return you can live off for many years, depending on market pricing and fluctuations.
Tax advantages
If property investment becomes your business, you may be able to offset some of the costs against tax. You are allowed to claim for allowable expenses, such as maintenance and repairs but excluding home improvements, letting agent fees, and landlord’s insurance.
Flexible business model
Property investors come in all shapes and sizes. Whether you choose to invest in one rental property alongside your regular 9-5 or 10 properties as your primary income source, property investment has something to offer everyone.
Is property still a good investment?
There is always a demand for rental properties, and on top of that, property prices will generally continue to increase over time. For these reasons, property investment is still considered one of the best ways to earn a passive income in the UK. Especially when compared to more volatile income streams such as stocks and shares.
We mentioned earlier that property prices have increased by over 50% in the last ten years, and the same is true for rental prices. Average prices of rentals in the UK have risen more than 20% in some areas over the last 12 months.
You can still earn a good return by investing in a rental property in 2022. However, it does have some downsides to consider that need to be accounted for:
- Extra tax and cost of insurance.
- Maintenance costs
- Cost of running during void periods (when the rental is empty).
- The stress and effort involved in the management of a property.
There is no doubt that property is still a good investment in 2022. With the demand for rentals continuing to outstrip the current supply and the ongoing demand for homes in the UK, prices look set to continue to rise. It’s worth remembering that property is a long term investment that could provide you with a steady income for years to come.
Things to consider when buying an investment property
Investing in a rental property can be a lucrative way to bring in an extra income stream, but there is a lot to consider as a new investor. Location, property type, and rental yield are key when weighing up your investment options. One of the most common questions new property investors ponder is where to invest. Knowing where to invest can be confusing if you are unfamiliar with the metrics an investor should focus on when buying a property.
Here are some of the key points to consider when assessing if a location is a good one to invest in property:
- Are property prices affordable and expected to climb over time?
- Is there a demand for tenants in the area with price growth expected?
- Is the area up and coming, or is it likely to become less appealing to tenants in the future?
- Are you local enough to the area to visit it as needed, or do you have a plan in place for how the property will be managed from afar?
If you are looking for some location inspiration and are wondering where to invest, check out our article on the seven best places to buy an investment property in the UK.
Once you have nailed down your ideal location, working out the rental yield before investing in a property is one of the best ways to understand if an investment property will turn a worthwhile profit or not. A yield shows the return on property investment as a percentage.
If you want to do a quick rental yield calculation, you simply need to divide your rental income by the property value and then multiply that figure by 100. This will give you your property yield as a percentage. A rental yield between 5-8% is typically considered good.
What is the best type of property to invest in?
When considering a rental property, there are typically two reasons why people choose private rental investments:
- Buying and selling it later on for a profit.
- Buying to let out a property to provide a rental income.
However, within these two categories, an investor has several choices regarding how they want to let out their property and to who:
- Private lets – to working individuals or families.
- HMOs – house shares or renting out room-by-room.
- Student lets – similar to HMOs 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, for example, Airbnb.
- 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.
How to get started as a property investor in 2022?
If you are interested in getting started as a property investor, either as a part-time passive income stream or as part of a broader investment portfolio, you will need to conduct your research and assess your finances. Take the time to consider what type of property investment suits your circumstances and requirements.
Investing in property can certainly be rewarding, but as with any investment, it isn’t without risk. Long-term property investors stand to make better returns than those with a short-term outlook, so it’s essential to understand your money will be tied into the property for a long time in order to make a good profit.
Things to consider before investing in rental property
Here are some things you need to consider before investing in a rental property.
Stamp duty and national gains tax
If you already own a property and want to invest in another, you will need to pay a 3% stamp duty surcharge. Additionally, when it comes to selling an investment property, you will need to pay capital gains tax. You can read all about stamp duty charges in our guide about stamp duty for buy-to-let properties.
What do you need to spend on the property before it can be rented out?
Before you can move your first tenants in, you might have to spend some money getting it up to a decent standard. It’s essential to consider how much it will cost you as this could affect rental yield. Any property let to tenants needs to meet the government’s decent home standards. Also, if you choose to invest in a property in an area that doesn’t have a high demand for rentals, you may need to spend more to make the property stand out from the crowd so tenants see the benefits of renting yours over others that are available in the same locality.
What type of tenants do you want to attract?
For example, older properties typically have more bedrooms but can be less energy efficient, which could cost you and your tenants more in the long run. These types of houses might be more suitable for HMO investors (homes of multiple occupancies). These often require a licence and have rules such as minimum bedroom size that must be adhered to. In contrast, a new build may have fewer bedrooms but be more energy efficient and ideal for the private rental market to attract professionals and families.
Is your investment in an up-and-coming area?
If you truly want the best return on your investment, it’s worth considering and researching the up-and-coming areas during your search for the ideal investment. Whilst they might not provide the best returns in the early days, the prices could rapidly increase as the region grows in popularity.
How do I get started with buy-to-let investment in 2022?
Becoming a landlord or a property investor is not a decision to be taken lightly. If you are considering getting started as a property investor in 2022, you’ll need to do your research to find the best investment opportunities and find the best mortgage deals.
The majority of first-time investors choose to take out a mortgage. However, getting accepted for a buy-to-let mortgage isn’t always easy. There are some key differences between these and standard homeowner financing.
Can I get a mortgage on investment property, and what deposit will I need?
It is entirely possible to get a mortgage on an investment property. The type of mortgage available will depend on how you want to let it out in the longer term. If you already own property, it’s possible to remortgage the first property to fund your purchase.
Alternatively, you might consider taking out a buy-to-let mortgage, a refurbishing mortgage if the property is not in a habitable state, or even a bridging loan whilst you carry out the refurbishment before switching to a more traditional mortgage product.
For a buy-to-let mortgage, the minimum deposit required is 25%. Some lenders may ask for as much as 40% of the loan’s value. You can secure a property with as little as a 5-10% deposit for residential mortgages. It’s worth bearing in mind that the higher the deposit you have to put down upfront, the more favourable your mortgage rates are likely to be. Lenders will take into account factors such as your age, financial circumstances, occupation, and credit history when making their decision.
There is also the option to take out a bridging loan with Novellus. Loans are usually made on a 50-70% loan-to-value basis, but in some circumstances, it is possible to get a loan with a 10% deposit. Each loan application is considered individually based on its circumstances, and decisions are made accordingly.
What if you’re turned down for a buy-to-let loan or mortgage?
Lenders are becoming stricter with their lending criteria, making it more challenging to secure a buy-to-let loan or mortgage for some investors. Reasons you may have been turned down include age, poor credit history, type of property, insufficient deposit available, not enough income or rent forecast, or not being a current homeowner.
However, other options exist, such as a bridging loan. Novellus consider each loan application on a case-by-case basis and make decisions on eligibility individually, rather than providing fixed products. The aim is to decide on the right rates and terms for each application, so they look at all aspects and assets to ensure they match the requirements and provide the best solution.
Just because one lender has turned you down, it does not mean you can not get finance elsewhere. You can either complete the research yourself or speak to an advisor or broker who can help you find the best product for your needs.
Final word
Investing in rental properties can certainly be an exciting and rewarding experience. It’s considered one of the safest investment types and a good option for many individuals, whether looking for a second income stream or full-time income. However, to become a successful property investor, you’ll need to do your research, have a plan, and enter the market with your eyes wide open.
Even with the economic turmoil the UK has experienced over the last couple of years, property is still a great investment option in 2022. UK house prices have risen at their fastest rate in over seven years and are set to continue to rise.
