How to Invest in Property

Read on to find out more about property investment.

Updated: April 3, 2024
Rebecca Goodman

Written By

Rebecca Goodman

 

If you think you know the property market, and it could be a good investment, there are lots of opportunities for you to make a potential return.

You don’t need to be an expert, but at the same time you’ll need more than a few episodes of Location Location Location to hand. Property investing can mean many things, from buying and selling homes to investing in property companies on the stock market.

But with any type of investment, there is risk involved and you should never invest anything you can’t afford to lose. 

In this guide I look at how property investing works, the pros and cons, the risks, and explain everything you need to get started. 

Why should you invest in property?

Investing in property can be profitable and there are many reasons to do it, including:

  • House price growth: As property prices grow, you are more likely to get a return on your investment.
  • Regular income: If you’re going into buy-to-let you could get a steady income from renting out a property.
  • Seen as a safe investment: It’s relatively easy to understand as property is a physical asset.
  • Diversification: Property investment is a good way to lower your risks and diversify an investment portfolio.
  • Health returns are possible: A good target for property investment is around 5 to 7%.

The property market changes all the time but at the moment the amount being charged for rent has been steadily rising, with the average buy-to-let yield in the UK for the last quarter of 2023 at 6.74%, a rise from 5.85% the previous year, according to UK Finance.

The different types of property investment 

There are lots of options when it comes to property investment, from buying a home to putting money into a property fund. Whatever type you decide to go for, you’ll want to carefully consider the risks as well as the rewards. 

Here I’ll look at them in a little more detail:

  • Buy-to-let investment: Buy a property and renting it out to tenants is a good way to create a regular income. You’ll need a buy-to-let mortgage and things like landlord’s insurance to do this. You will also need to decide how you manage the property, and if you pay a company to do this for you. 
  • Property development: The idea here is you buy a property and refurbish it and then sell it on at a profit. The process can be quick and rewarding but it can also be costly and time consuming. It’s not something to go without thorough research first. 
  • Property investment trusts and funds: You can also invest in property indirectly, through a real estate investment trust (REIT), for example. You put money in to buy shares in a fund, and they are traded on the stock market, along with other investors’ cash. It can then go up or down and you can decide when to sell the share. There are also property unit trusts, investment trusts, bonds and open-end investment companies (OEICs) you could invest in. 
  • Investing in property abroad: There are ample opportunities for investing in property abroad, either to sell on or to rent out to holidaymakers, for example. You’ll need to make sure you fully understand the local housing laws and taxes before venturing into this type of investment.  
  • Peer-to-peer lending: If you put money into a peer-to-peer (P2P) company, you can choose to invest in UK property companies. The returns are usually a lot higher than you would get with a standard savings account (although they’re not guaranteed) and this type of property investing takes a lot less commitment and effort than starting out in buy to let, for example.

How much do you need to start investing in property?  

How much you need depends on the type of property investment you are looking at. If we take buy-to-let, for example, you will need the money to pay for a deposit on a house, usually of around 20% of the property price. 

You will also pay 3% stamp duty land tax and for extras such as legal costs, estate agent fees, mortgage costs, and valuation fees. It’s also a good idea to have a savings pot to pay out for general maintenance of the property along with unexpected expenses — such as broken boilers or cookers. 

The pros and cons of property investments

There are positives and negatives of any type of investment, with buy to let the following are worth keeping in mind:

Pros:

✔️ Regular monthly income through rental payments.

✔️ You could make a profit when you sell the property.

✔️ Insurance can cover things like lost rent or legal costs.

Cons:

❌️ If you can’t find tenants, you’ll have to cover the mortgage costs. 

❌️ The property price could go down.

❌️ If there is a problem with tenants this can be financially and emotionally stressful.

❌️ You’ll pay a 3% stamp duty tax on BTL properties.

What are the risks of property investment? 

While investing in property generally isn’t seen as high risk, it is riskier than choosing a ‘safe’ investment such as a government bond, for example.

It’s also not a short-term investment, and however you choose to invest in property it’s recommended you stick with it for the long term to increase your chances of a profitable return.

When it comes to buy to let investing, there are some specific risks to be aware of, including the following:

  • Demand for rental properties can change quickly. 
  • It can cost a lot to look after a property, especially if there is something wrong with it — such as subsidence or cladding — or you have an issue with your tenants — such as if they aren’t able to pay the rent.

How to get started with buy-to-let investing

Buying a rental property or one to sell on after you’ve refurbished, takes time and you want to get it right. That’s because your ultimate goal is to make money on the home, as an investment. 

Here’s a step-by-step brief guide to how to get started with buy-to-let:

  1. Budget: Calculate how much you can afford, both for a deposit and for the monthly repayments if you’re taking out a buy-to-let mortgage.
  2. Rental income: You’ll need to tell a mortgage provider how much rental income you’re likely to receive through your BTL property. Speaking to a local estate agent is a good start to finding out the potential rent you could charge as well as looking at online rental listings. 
  3. Compare mortgages: Decide what type of mortgage you would like, depending on the size of your deposit, and compare prices and deals. You’ll also need to factor in extra fees which could be applied.
  4. Find a property: The right property in the right area will be key to making your investment profitable. Think about who you want to rent to, whether that’s families or students, for example, and where you want to buy. If you’re near local schools, shops, or a station this can increase the amount of rent you can charge. 
  5. Make an offer and complete: It’s time to make an offer on the property and if it’s accepted you can complete the purchase. Next, it’s time to sort out finding tenants, arrange things like landlord insurance and property management, and once your tenants have moved in you’ll start receiving your income. 

The best alternatives to buy-to-let

If you don’t want the job of taking out a second mortgage and finding and buying a BTL property, investing in a property via the stock market is an alternative. There are lots of options here that each come with their own levels of risk. 

However, investing in this way is easier to get into (and out of) and involves less ‘hands on’ work. While there’s no way to predict what will happen in the stock market, you can look at past performance data which can give you an idea of how an investment might perform.

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