Homebuying

A beginner’s guide to investing in property

01 November 2021 | Posted by Claro Money
Living room with grey sofa

Property is one of the most expensive things you can invest in, but it can also be very profitable. If you’re thinking about investing in property, follow these steps to set you up for success.

Start by researching your options

First off, you’ll need to do some homework around your options.

What kind of property do you want to invest in? There are a number of different routes, including:

Buy-to-let properties

By-to-let properties are one of the most common property investments. This is when you buy a home and rent it out to someone else. In this scenario, the tenants pay off your mortgage, while you earn income from their rental payments.

You’ll need a special buy-to-let mortgage, and generally a higher deposit than a residential mortgage. The amount you can borrow is largely based on the amount of rental income you’ll be able to get, but many lenders may require a minimum salary as well. 

It’s worth noting that if you’re a first-time buyer, you can technically buy a buy-to-let, but your mortgage options will be limited. This is because many lenders need you to have owned your own residential property for at least six months before they’ll offer you a buy-to-let mortgage.

Property development

Property development involves buying a home or some land, renovating it to increase its value and then selling it for more than you bought it for. For example, you might buy a two bedroom house in need of some TLC for £200,000. If you did it up and turned the living room into an extra bedroom, you could sell it for more like £250,000 and receive extra rent from the additional bedroom. 

Real Estate Investment Trusts (REITs)

A real estate investment trust (REIT) is a company that owns, operates or finances income-producing real estate. A bit like a mutual fund, a REIT offers a way for everyday people to invest in – and profit from – property.

You can invest in portfolios of real estate assets the same way as you would in other industries. For example, by purchasing company stock or investing in a mutual fund or exchange-traded fund (ETF). You’ll then earn a share of any income the property makes.

Buying a new build to sell on

New-built homes are relatively easy to get hold of and they tend to be well located, making them ideal properties for city workers. They’re also likely to be less high maintenance (due to them being brand new) and require fewer repairs than older homes. Plus, they’re at the end of the chain and ready to move into, so you could sell on to a buyer who’s looking to move imminently.

Investing in property abroad

One of the benefits of buying property abroad is that you can rent it out for potentially higher prices than you would get in the UK. Plus, when it’s not being rented out, you have a ready-made holiday home to jet off to. But bear in mind that the rental payments might not cover your mortgage, and you’ll probably need a management company to deal with the property when you’re not there.

When doing your research, it’s also worth considering the average cost of houses in the area you’re looking at, as well as the average rental yield.

Consider the fees involved

Investing in property naturally comes with a variety of fees, including some hidden costs

As well as your deposit (the largest of the costs) don’t forget to factor in:

  • Solicitor fees
  • Estate agency fees
  • Land Registry fees
  • Surveys
  • Mortgage fees
  • Stamp Duty 
  • Buildings and contents insurance

What are the risks of investing in property?

  • House prices can go up and down, so you might sell your property for less than you bought it
  • Property is a very illiquid investment – this means it takes longer to sell so you can’t get your money back quickly if you need it
  • You might not always be able to find tenants, particularly during times of high unemployment
  • Be wary of difficult tenants who can cause damage to your property
  • House repairs, such as broken boilers and roof replacements, can be expensive and time-consuming
  • It’s important to see property investment as a long-term investment – the buying process itself is long and complex, and as with any investment, you’re likely to get more for your money the longer you leave it
  • Be wary of over-stretching yourself, for example, by taking on too expensive a mortgage and not being able to cover your other bills

Can you afford it?

Once you know what kind of property interests you and the costs involved, you can calculate whether or not it’s an affordable investment.

Work out your income and outgoings

Get a clear idea of how much you have coming in each month versus how much is going out. If there’s not a huge gap between the two, you might be better off investing in something cheaper. Or if you’ve got your heart set on property investment, is there a way you can reduce your outgoings to make room for the mortgage you’ll be paying off?

How much do you have in savings to contribute towards deposit?

With most lenders typically charging 10-20% of the property price up front, the deposit is undoubtedly the biggest cost of buying a home. Have you got enough money set aside to cover the cost of your deposit? If not, can you find a cheaper property to buy?

Can you afford the mortgage?

Finding an affordable mortgage is key to making property investment work for you. Shop around for the best deals – don’t just jump at the first provider who offers you a loan. If you’re already a homeowner, remember that you’ll need to juggle two mortgages.

How to find the right property

Tick off this checklist to make your property investment dream a reality:

  1. Research potential areas and tenants
  2. View several properties and narrow down your favourite
  3. Get an offer accepted
  4. Arrange a mortgage and surveys
  5. Exchange contracts
  6. Complete the sale!

Do you want to rent the property or sell it?

If you’re investing in a property, you have two choices to make money from it. You can either rent it out or sell it on.

Here are some things to consider before you make your decision:

How much would you get for the sale of your property?

If you sold your property in the same condition as you bought it, would you make any profit? If not, it’s probably not the best idea, as you’ll be wasting a lot of time in return for not much money.

How much would you make if you rented out the property?

Again, if the rental payments aren’t enough to cover your mortgage, then it might not be worth renting it out. Especially when you consider the demands of being a landlord.

Could you get more money by adding value to the property?

If you’ve bought a property in less than stellar condition, it might be worth renovating it to add value to it. That way, whether you sell it or rent it out, you’re pretty much guaranteed to earn more money. A lick of paint and some fresh furniture can go a long way.

Are you prepared for the responsibilities of being a landlord?

Planning to rent out your property? Make sure you’ve thought through what it takes to be a landlord. Everything – from repairs to contracts to home visits – will fall on you. It might be worth paying a management agency if you don’t have the time or patience for it, but remember that these costs will eat into any rental income you make.

Do you have many other financial commitments?

Think about the other outgoings in your life. If you have a number of financial obligations, would selling the property straightaway make for an easier life? Alternatively if you’ve paid off your existing mortgage or are confident you can balance two mortgages, you might be happy to rent it out and enjoy a stream of rental income each month.

Still unsure about the process of buying a property? Find out how Claro’s financial coaching feature helped this person take the first step onto the property ladder. If you want to book a call with one of our in-house Financial Coaches, download the Claro app and create an account now.

When you invest, your capital is at risk.

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