Investing in property is no longer the realm of the rich and privileged. With proper preparation and planning, many people are getting involved with property investment, regardless of their background, experience or financial resources.
Why Should I Invest in Property?
If you are a complete beginner in property investment, you may wonder if it is the right path for you. Before we investigate the process of property investment let’s first look at some of the reasons people invest in property to help you decide if it is the right path for you.
Create an income
Investing in property can provide you with a part or full-time income, depending on how you manage it. You can buy-to-let, or buy to develop and sell; whatever your plan, it is important to check your finances when purchasing if you are looking to make a good return on investment, so that your property purchase can provide a decent income.
If you are unhappy with your current pension plan, investing in property can make a big difference. Buying property now at the right price and selling when you retire could create a good return that you might be able to comfortably live on for many years, dependent on the market values and fluctuations.
Property investment allows lots of flexibility in how you manage your business. You can invest big or small, you can be the project manager or employ someone to oversee it, you can develop and convert to suit you; basically, you have control. Property is not like other investments such as stock and shares which can be out of your control to a certain extent, as they rely more heavily on market trends.
If you are investing in property as a business, you can offset some of the costs against tax. Interest on loan payments may be tax deductible, depending on how the loan is used (although by 2020 landlords won’t be able to claim mortgage interest against tax). You can also claim the costs of repairs, maintenance, travel and admin costs associated with the property, legal fees, ‘wear and tear’ expenditure on furnished lettings, and rental losses.
Stocks, shares or property – what would you put your savings into? There are no 100% guarantees but property has a good track record of being a safe investment. At the time of writing, average house prices in the UK remain stable, making them a secure investment solution.
If you are looking to borrow, property can be used as security against your loan. Lenders usually offer favourable terms against property, which can open up further investment opportunities. Lenders see property as a secure asset and therefore any finance loaned against the property is considered less risky to the lender.
Now we have considered the reasons for investing in property, let’s look at the process in more detail.
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
However, 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 who 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 lease office space
- Rent-to-rent – renting a whole house then renting out as HMO
How Do I Start Investing In Real Estate?
As with any new venture, you first need to make a plan. The plan will be dependent on your reasons for getting into property investment; for example, if you are looking to make a full-time business out of it, you will need to make a detailed business plan, including cash forecast and timescales.
You need to learn as much as you can about property investment. You can either do your own research, reading as much as you can (both in print and online) and talk to as many people in the industry as you can or alternatively you could enrol in a property investment course.
Managing finance is one of the most important aspects of property investment. You need to first calculate your expenses and then work out how to secure your down payment for your property investment. Work out how much you need to borrow based on the cost and renovations of the property. You should also have a rough idea of how much you will either be making on letting terms or through a sale. Like any forecast, in reality, this may change but it helps to keep you on track and would allow you to have a reasonable idea of future profits.
What Do I Need To Know Before Buying An Investment Property?
Before making that first purchase there are a few things you need to consider if you want to protect your investment.
- Keep a business head. Try not to fall in love with a property as you will end up paying more for it
- Start with a clean slate. Clear all other debts before starting on your property investment journey – it will make it easier to get finance
- Consider all investment loan opportunities. The options include mortgage or remortgaging, joint venture funding, self-build loan, development loan, mezzanine finance or bridging loans
- Start small. Your first investment property should be something that is not going to either break the bank or you. If you buy something that needs too much work at this early stage, it can be demotivating.
- Buy your first property in an area you know. Local knowledge will help with your forecasts. If you know how much properties are selling/renting for, or which areas are expanding or up-and-coming, it will help the success of your project.
What are Buy To Let Property Investments?
Buy-to-let is basically what it says; buying a property to let it, rather than live in it yourself or sell. When you buy-to-let you become a landlord with legal responsibilities.
Depending on your expenses, buy-to-let can provide a good income as well as act as an investment for the future. However, you will be expected to maintain the property in good condition. The property will effectively ‘belong’ to your tenants for the period of time they are renting it, so you can’t just wander through the property as you see fit. The tenant can grant access for maintenance and repair, but you must respect your tenants’ privacy, and realise this is their home.
What Deposit Is Required For An Investment Property?
The usual minimum deposit for buy-to-let loans is 25% of the value of the property, although it can be as high as 40%. Normal residential mortgage deposits are generally lower than this and can be as low as 5% (although 10% is more common). The higher deposit reflects the higher risk involved – most landlords plan to pay the monthly costs with rental income but there may be times when this rent is not forthcoming, which puts loan repayments at a higher risk.
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 on its own set of circumstances and decisions made accordingly.
Can I Get Mortgage For An Investment Property?
If you already own property you could re-mortgage it to finance your property investment. Alternatively, you can consider buy-to-sell mortgages, buy-to-let mortgages, refurbishing mortgages or bridging loans. These tend to be available from specialists lenders, rather than high street brands. If high street branches do offer these products, the fees can be higher, so it is worth shopping around.
Standard traditional mortgages are not generally the best option if you are looking to sell on quickly as normally they will not allow you to sell within 6 months of purchase. There are often fees incurred for redeeming mortgages early as well. But if you are happy to keep the property for a couple of years or so, a standard mortgage may be suitable.
The Lending Rules For Investment Properties
As a business, investing in property has certain rules you will have to adhere to, depending on the 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. E.g., are you a first-time buyer, or an experienced landlord?
- Location of residence – generally you need to be living in the UK
- Credit history – a poor credit history can make it difficult to get a mortgage, but this depends on how recent your issues were, and how severe your financial problems were
- Securing against property – this can affect the type of loan you are provided with
- Limited companies – putting a loan through a limited company can be good news for borrowers as their credit rating is not affected if things go wrong, but some lenders see this as a higher risk of issues occurring. This then can affect the likelihood of getting a loan. You may have to provide a personal guarantee
- The property – type, price, deposit, affordability, location, construction and usage will have an impact on the type of loan you can obtain
- Type of tenant – from students to professionals or families can also have an impact on the loan
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.
The Best Places To Buy Investment Property In The UK
When buying property for investment, you need to look for areas where house prices are increasing with the trend likely to continue. If you have local knowledge of up-and-coming areas where housing prices are likely to improve, this is a good place to start your property investment portfolio.
Typical areas to investigate are London commuter towns – anywhere that young professionals are looking to live with their families within easy reach of London and all it has to offer. These presently include areas such as Slough and Stevenage. Further afield Milton Keynes, Manchester and Birmingham, as well as Nottingham and Glasgow, are proving to be great investment areas. Rental yields here are high and employment opportunities are strong, as is the student population. Regeneration of these areas is also on the up.
What If You’re Turned Down For A Buy To Let Loan or Mortgage?
Lenders have been becoming stricter with their lending criteria, which is making it more difficult to secure a buy-to-let loan or mortgage. Reasons you may have been turned down include age, poor credit history, type of property, not enough deposit available, not enough income or rent forecast, or not 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 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 we look at all aspects and assets to ensure we 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 and potential profitable process. It 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 method of earning a living.