A complete guide

The Investment Property Guide: How to Invest in Property

Definition: What is property investment?

Property investment is purchasing real estate with the intention of either selling it on or renting it out to gain a return (or both). Once purchased this can involve the management of the property for rental or improving the property for sale with the aim of making a profit. It can also involve investing in funds focused on the property sector.

Different types of property investment

Commercial

Commercial property can bring real diversity to a portfolio and offers many options from retail and hospitality to industrial units, warehouses, factories and car parks. They will all have different levels of risk to your investment and can be direct (purchase of bricks & mortar) or indirect (stocks, shares & bonds with companies that specialise in property investment).

Buy To Let – Rental Property Investment

The purchase of a property to then rent it out is an area that has become slightly less lucrative than in the past due to recent tax changes. The investor will get a return in the form of rental payments on a regular basis. With residential property this is usually monthly, but with commercial can vary depending on the agreement in place between the landlord and tenant. They will also have the asset that could increase in value to sell on at a later date.

REITs

Real Estate Investment Trusts are companies that own, operate or finance income producing property. They invest in most real estate types including office buildings, apartment blocks, hospitals, hotels and retail space. REIT’s will pool the capital from multiple investors making it possible for individuals to see a return without having to manage or finance any properties for themselves.This can offer a regular income, but little capital appreciation.

Property Development/Renovation Project

The purchase of an existing property with the intention of improving it to add value before selling on or renting out. This is an area that has many factors to consider before determining any profits to be had. How much work the property will need to achieve the desired outcome and the cost. If the investor is looking for a return the sums will need to add up. This could be a simple project like basic aesthetic decoration, or more substantial like installing a new kitchen or bathroom, extending or remodelling.

New-build property ‘flipping’

Purchasing a property ‘off plan’ before it is built and then selling it on before or once the work is complete with the aim of making a profit. Any returns will be dictated by market conditions, if demand in the area is high there could be healthy profits to be made. Like any investment flipping comes with its own risks so it takes a good level of knowledge and research to ensure an investor will see any ROI.

Ethical property Investing

Offers investors the opportunity to put their capital towards causes they believe in and that align with their values. This could be based on social responsibility, environmental factors or supporting underprivileged areas. This takes research to ensure any company or property being invested in meets the moral values required.

Student property investment

The purchase of property to rent exclusively for the use of student tenants. The student property market is one of the fastest growing sectors in the UK. This is due to a change in the expectations of students’ living standards and nearly *90% of students living in student accommodation. Most are now looking for high quality, premium lets so in the right location, demand can be high and see good returns.

*Source: National Student Accommodation Survey

Foreign property investment

Overseas property investment can be an attractive option for investors with rental yields potentially higher than in the UK. Buying in the right location can see a regular rental income and good property value appreciation. Holiday destinations have always been popular, but depending on your reasons for investing, any city with strong economic activity and a high-ranking university could be a reliable choice.

How does property investing work?

Property offers an investment strategy that can be lucrative. Unlike stocks, shares & bond investments, borrowed capital can be used meaning an investor can access funds to pay a portion up front and pay off the balance (with interest) over time.

Becoming a Landlord and gaining income from renting to a tenant is a primary way of gaining returns when investing in property. This will usually be monthly payments in residential and can vary in commercial property. There is also the potential for capital gain over time as the property may increase in value, with the option to sell in the future and see a ROI.

Things to consider before investing.

Decide which strategy you’re going to follow.

Research the market.

Be aware of all the fees involved.

Get Financial Advice.

Find a good solicitor or conveyancer.

Make sure to get a survey.

Check the tenure.

Finding the right location.

Location will always be a vital factor in determining the value and potential rental income of a property. There are some basic principles that can help when deciding on the right location.

Local amenities – does the area have everything residents need such as supermarkets, good transport links, medical facilities, schools, restaurants etc.
Is demand high? Are there empty properties? Are local shops occupied and offering a variety of goods, or are there empty or run down units?
Is the area ‘up and coming’ This could be next to a popular area where supply is less than demand.
Look up local crime statistics, this can help determine if the area is desirable.
Consider who already lives there compared to your target market. Generally people like to live around similar people. For example, is it a student area, does it have a lot of families or young single professionals?

UK property prices vs UK stock market

Long term, stock market prices have always outperformed property prices. However, events around the global pandemic between 2020-2021 meant UK House Price Index outperformed FTSE 100 returns as shown in the graph below.

FTSE 100 vs UK House Price Index 2015-2022

Is there a way to calculate the return on investment?

If you are looking to rent out a property it’s important to understand your potential returns. You can calculate the rental yield for a single or multiple properties.

To do this, divide the annual rental income by the property value, then multiply by 100 to get the % yield.

(Annual Rental Income ÷ Property Value) x 100 = Yield %

Here is a free calculator: https://www.landlordvision.co.uk/rental-yield-calculator.html

Understanding the risks.

As with any investment opportunity, property investment does not come without risks. Understanding what they are can help decide a level of risk you are comfortable with. Here are some of the main ones to consider.

Property prices could fall, meaning your investment is worth less.
Interest rates could rise, this would affect the cost of future borrowing
Unpaid rent, if your tenant does not pay you; or the property does not have a tenant and remains empty for any period of time.
If most of your money is tied up in property, should you need funds it can be difficult to access.
Damage to the property, this could be caused by a tenant or outside elements like storm damage or flooding.

Getting professional investment advice.

About Alex McCann - DipPFS & CeMAP

Alex graduated from Leeds Metropolitan University in 2013 and has worked in the financial services industry since 2016. Alex has completed the Chartered Insurance Institute Diploma in Regulated Financial Planning (DipPFS) and the London Institute of Banking and Finance Certificate in Mortgage Advice and Practice (CeMAP) qualifications.

View all posts by Alex McCann