How to Invest in UK Property
So you’ve always wanted to invest in property but you haven’t a clue where to start. How do you invest in property? Well you’ve come to the right place, we have put together this article to help people to understand a little more about how to invest in property and where you can start.
Your Current Position: Understanding Your 'Why'.
Understand your starting point. When first getting into property investment it’s always a good idea to step back and analyse your goals. Think about your position in life and assess your financial situation before devoting yourself to the cause. It is also important to identify your appetite for risk and amount of time that you are able to give to devote to investing. Full time investors may use more diverse strategies than part time investors to scale their portfolio's quicker so it’s important to understand why you are considering investing. Is it for cash-flow purposes? To create a pension pot? To put more money aside for the future? To become financially free? Figure out your why and go from there. Your why may also affect your property investment strategy.
What is an Investment Strategy?
I won't go into huge amounts of detail about strategy as we have written a more detailed blog post listing a break down on each strategy in more detail which can be found here if you'd like to understand a little more about each strategy.
A strategy simply refers to the type of property you will be purchasing and the purpose it will be used for to generate profit.
Single let – A single let is a house or apartment that you let it through one AST. The one tenant could be an individual or family.
HMO- A house of multiple occupation – is rented by three or more tenants that are not of the same household. HMO’s are normally set up within student areas to maximize returns. Each tenant will be on separate AST contracts.
SA- Serviced accommodation or Holiday lets refers to properties that are fully furnished and are available for both long and short term rental. Normally charged on a nightly basis, facilities are very similar to that offered by a hotel.
Flip- Buying a property, refurbishing it and selling it on for a profit.
BRRR- Buy, Refurbish, Refinance, Rent out. Buying a property, refurbishing it/adding value, remortgaging it, then renting it out. Often purchased with cash or a bridging loan
Your own personal circumstances and how much time you have on your hands will determine what strategy you might want to go with at first. For example, let's say you work a busy job and don't have much time on your hands but you'd still like the benefit of a bit of extra income each month. You might prefer a Single Let (just renting to one tenant or family) rather than a Serviced Accommodation or holiday let as it is a less time consuming strategy.
Once you understand what you want our of property investing pick ONE strategy which will suit your needs. This will allow you to grasp the basics first.
Finance: How will you fund your property?
The next step after choosing your strategy would be to plan how you are going to fund the property investment. Do you have cash to invest or would you be looking to purchase with a mortgage? What many people don’t realize is that there are many ways of financing a property purchase which include:
Cash - Cash is a great way to fund a project if you have it, as it means you won't be paying a mortgage or any interest by using your own capital. There will be no broker fee and the purchase should complete quicker as there are no lenders involved.
Buy to Let Mortgage- Many investors will use a Buy to Let mortgage. This will usually require a 25% deposit of the purchase price. This is a good way to finance a project as although you are paying monthly repayments (which will be covered by renting the property out) you will be able to leverage your money into more than one property and scale your portfolio quicker.
Bridging Finance – Bridging finance is becoming more and more popular nowadays. A bridging loan is usually used to purchase a property which is uninhabitable or needs refurbishment. A bridging loan usually requires 25-30% deposit of the purchase price however, you also have the opportunity to borrow money to refurbish the property. Unlike a mortgage the loan will be over a shorter period of time usually around 9-12 months in which you would refurbish the property and pay back the loan after re-mortgaging or selling the property on. Keep in mind bridging loans typically have higher interest rates than normal mortgages and will also charge higher buying fees. You might also want to think about getting a good mortgage broker if you are going to use a bridging loan as they will be able to get you more competitive lending rates. To find out more about this check out our previous blog post about bridging finance here.
Using Other People’s Money- Another way in which many investors scale their portfolios is through joint ventures or what is called Angel Investing. This is usually done when the investor has a little more experience to give the angel investor peace of mind that they know what they’re doing. The angel investor will receive an interest rate typically of around 6-10% back on the money they have invested, therefore their money is doing much better than it would be doing in the bank for them.
Choosing a Strategy That Requires No Capital- Yes! There are ways of investing in property which requires no money down (not including legal fees). These aren’t the easiest to come by and are usually in the form of what is called a Rent to Rent or a Lease Option Agreement. In simple terms a Rent to Rent is essentially where you pay a landlord a fixed amount of rent per month, and you rent out their property either as a HMO or a Serviced Apartment on Airbnb taking home the profit you make on top after paying rent. This can be a great strategy to use if you have little capital. A Lease Option Agreement would also be a useful strategy if low on capital. It works by agreeing to purchase a property within a time frame, for example 5 years and pay the vendor a fixed amount of money per month with the OPTION to purchase the property at the end of the fixed time. Lease Option Agreements are often used for vendors who have property that’s empty and cannot sell. DISCLAIMER: Even though these types of ventures require little capital you will still need money for legal fees such as getting contracts drawn up from your solicitor.
The next question you want to ask yourself is, where? Where is your investment property going to be? Which brings me onto my next point. Where is a good place to invest? This is relatively dependent on how much capital you have and of course where you live.
For example, if you have a smaller amount of capital but live in London, you might want to think about investing where house prices are a little lower like South Wales perhaps, as you will get a better return on your money and a higher yield.
What should you look for in a good investment area and should you invest where you live? Once more, this depends on where you live and whether or not your chosen strategy will work in your location. Your chosen investment area will also be strategy dependent. For example if you wanted to invest in a Serviced Apartment you’d probably want it with good links to a city center or a popular tourist attraction to ensure the maximum amount of bookings and profit. Similar to if you wanted to invest in a Student HMO it is going to need to be within close proximity to a university.
Looking at capital appreciation rates can also be a good place to start if you are investing for the long term, as over time your property will increase in price. Analyse house prices in your chosen area to see how well they appreciated over the decade.
Other elements to consider:
Will you want to add value to the property you are purchasing by refurbishment. Some investors love getting involved in the refurbishment process of a property and it can certainly be rewarding if you enjoy it and have the time. If you are refurbishing a property with the intention to refinance to release capital you will either be using cash or a bridging loan to fund the venture.
Purchasing Through a Limited Company
The last thing I want to briefly touch on is who the property is going to be purchased through. Many people are unaware that purchasing investment property in a personal name the taxes will be very high on your earnings. By setting up a limited company to buy assets through (which is very easy to do) you can save a lot of money on tax which you can then reinvest into more property. This will allow you to scale your property much quicker. However for more detail on this matter you will need to speak to a registered accountant.
Using a Property Sourcing Service
Sound like a lot?
Property investing can be challenging and stressful at times. Many people feel as though they don't have the time and energy to put into such a big commitment but would still like the returns. This is where using a property sourcing company can come in handy.
Apollo Property Sourcing offers you the ability to invest in property completely passively so you don't need to worry about anything. We guide our clients step by step in purchasing their first investment property all the way through to managing the refurbishment of the property and getting it rented out with one of our trusted agents. For more information on how the process works go to our how to invest page here. You can also book your free consultation call to see how we can help you get started in property.
Thanks for reading!