Track Capital has developed this detailed guide to teach you everything you need to know before embarking on your property investment journey.
Are You Ready to Invest In Property?
Before you can get into the nitty-gritty details of how and where to invest in property, you must first consider if you are ready to step into the world of property investment.
Property is unique, permitting investors to be as hands-on or hands-off as they wish to be. However, it will still undoubtedly require a large portion of your time, funds, and attention, especially in the early days.
Do You Have the Funds?
Whilst the amount of money required to invest in property will inevitably vary based on the type of property you hope to purchase, having a sufficient starting pot is essential to help you begin your property investment career.
£40,000 is a great starting point. Considering that a 25% deposit can purchase most buy-to-let homes with a 25% deposit, £40,000 will afford you a city centre apartment with solid potential for capital growth.
Those with a more substantial pot (between £100,000 and £200,000) will have more options. For example, they may choose to purchase a small portfolio of homes or a property in a more expensive area. Those with a larger than average investment budget may also opt for a more sophisticated investment strategy in the alternative market – an excellent way to diversify their portfolio.
However, this is not to say that property investment is impossible with less than £50,000. There are many ways to navigate the sector, and working with a dedicated property investment company will enable you to explore all your options.
Do You Have the Time?
Even with the most hands-off approach to property investment, it will still take up a significant portion of your time.
Some investors prefer the property development route, which will demand all of your attention, and realistically can rarely be worked around another full-time job. However, the lump sum financial payoffs can be huge.
At the opposite end of the spectrum is the traditional buy-to-let route. Here, many landlords choose to employ a management agency to oversee their properties, meaning the investment will only take a tiny portion of their time.
Using a company such as Track Capital can enable you to benefit from a complete hands-off model, with our experts taking care of all the operational aspects of your investment.
Do You Have the Skills?
No qualification, course or accreditation will immediately make you a great property investor. However, many personal skills and attributes are essential to succeeding in the sector.
Firstly, you must have to ability to think objectively. Unfortunately, many property investors become too emotionally attached to the homes they are contemplating, meaning they cannot make clever business moves. Communication skills are vital too, as you will be regularly dealing with developers, contractors and tenants.
Additionally, a genuine passion and interest in the industry are crucial, as property can become all-encompassing at times. Many investors find their excitement and confidence grows with every business decision, strengthening their enthusiasm for property over the years.
Teaming up with a property investment company can help remove the stress from these sometimes daunting decisions, especially crucial in the early stages of your career.
Why Choose Property?
The next step is to ensure that property is the suitable asset class for you.
There are many options for those with a sizeable investment pot, including but not limited to property, stocks, cryptocurrency and index funds.
So why choose property?
Of course, it would be unwise to describe any investment as definitively ‘secure’. All markets are fluid and can be volatile occasionally, yet property in the UK has shown itself to be relatively stable.
This is because the demand for private rented housing in the UK is enormous. As of 2020, the number of privately rented homes in the UK hit 4.44 million. Yet, there is still a considerable housing shortage, with the government estimating over 300,000 homes need to be built yearly to bridge the gap between supply and demand.
The acquisition of first-time mortgages is now notoriously tricky. Meaning, many young professionals are happily accepting private rented accommodation over ownership, enjoying the flexibility this option offers.
House prices have steadily climbed over the past 30 years and even grew by 8.5% during 2020, which is staggering considering the economic impact of the coronavirus pandemic. Meaning, when the time comes to sell your home or release equity from it, the value increase is often significant.
Investors can make their assets more ‘secure’ by opting for traditional buy-to-let in well-performing areas. Conversely, those with a high-risk appetite might be drawn to buy-to-sell (property flipping), which is less secure but can offer incredible short term results, with investors expecting substantial returns within 6-18 months.
One of the greatest draws to property investment is that the individual can secure leverage in the form of a mortgage.
Whilst a £200,000 investment in stocks might be out of your remit at this current time; a £200,000 property might not.
A 25% deposit plus stamp duty and legal fees will allow you to purchase a home of this value, gaining income in the form of a monthly rental charge and capital appreciation.
Many investors are drawn to property due to the flexibility it offers.
It allows you to be as hands-on or as hands-off as you wish.
The buy-to-let landlord is at one end of the scale, who wants to generate an entirely passive income. Investing in an off-plan property built to an excellent finish minimises the risk of any issues arising with the home.
Once the home is completed, the investor can then instruct a management agency to oversee the property. These agents will find and vet tenants, deal with the legal paperwork and be the first port of call for any queries. Meaning, as the landlord, you will only usually be contacted in cases of emergency.
Conversely, at the other end of the spectrum, we have the property developer. A property developer is someone who builds a home from the ground up, transforming a piece of land into a home with immense value.
Property development is a very hands-on investment style and is generally not possible alongside another full-time career. However, the joint venture model permits property development for those with stricter time constraints, often allowing them to balance the demands of a full-time job alongside.
Developers tend to have extensive experience in the field, as well as a network of contacts.
Calculating Your Budget
Obviously, the budget you require will hinge on several factors.
It entirely depends on the type of property you choose, your appetite for risk, and the timeframe in which you expect to begin to see returns.
Generally, people begin investing with a minimum budget of £40,000. This enables them to purchase a well-located off-plan home with a 25% deposit. With less than £40,000, buying a property that will generate substantial timely returns can be challenging, especially if you solely focus on the UK’s best-performing markets.
Those with higher budgets will be afforded a great deal more freedom, including the ability to purchase multiple units and secure greater discounts, as well as the option to invest in more premium markets.
Of course, there are many more expenses involved with property investment than the initial outlay for the building. These include but are not limited to:
- Legal Fees – the costs of the solicitors and conveyancing during the buying process. Surveys will likely also need to be carried out (and paid for) before completion.
- Stamp Duty Land Tax – this is a tax on the property payable once you complete. The rate varies depending on the investor’s residency status and the value and type of asset. See a Stamp Duty calculator here.
- Furniture Packs – in some cases, investors will need to arrange for the property to be furnished. These packages can cover everything required to set up a home, including sofas, beds and even electricals.
- Mortgage Brokers / Remortgage Costs – you will likely use a mortgage to leverage your property investments. You will probably want to work with a dedicated broker to secure the best deals where this is the case.
- Letting and Management Fees – if you plan to instruct a letting agent to oversee your property once completed, these will attract a monthly charge. Lettings agents tend to work on a sliding scale, ranging from those who merely acquire a tenant to those who deal with every aspect of the home.
- Service Charges – this is a yearly cost to maintain the development’s communal areas, including stairwells, entranceways, and shared gardens.
- Ground Rent – a minimal yearly fee payable to the freeholder by leaseholders.
- Extra Charges – investors may also wish to consider insurance and a small maintenance budget for minor repairs throughout ownership.
Rental Yield v Capital Growth
Capital growth (also known as capital appreciation) is the value that the property will increase over your period of ownership.
The average trajectory shows that over time, property prices rise. However, they are known to dip in the short term, indicating that capital growth cannot always be relied on for those with immediate goals.
On the other hand, rental yield is a crucial metric for those who invest in buy-to-let property.
It considers the amount it costs to run the property (mortgage, insurance etc.) and the monthly rent the property attracts. It is then presented in a percentage format, which generally indicates how successful the rental property is. Anything above 5% is considered an excellent rental yield.
Yields in London tend to be substantially lower than the rest of the UK, as the housing prices are significantly higher.
So, Which Is More Important?
Again, this will depend on your personal situation and goals.
Focusing on building strong capital growth is more important in the early stages of your investment career.
The home’s value will increase throughout ownership, meaning you will be able to withdraw equity from the property in a much shorter time frame. This money can then be reinvested into other properties, meaning capital growth is the best way to build your portfolio.
Strong rental yield is a focus for those who are investing to supplement their primary career, building an entirely passive secondary income stream.
A combination of two will lead to the best long-term results. This will allow you to generate an additional monthly income whilst accumulating wealth to help build your portfolio.
Taxes and Legal Implications
For new landlords, ensuring they are paying the correct level of tax can cause a massive headache.
Stamp Duty Tax
This is the first tax that springs to mind when most consider buying a property in the UK.
The stamp duty rules have changed significantly following the budgets in 2020. As a result, homebuyers have greater flexibility, with the government keen to incentivise a bounce-back in the housing market.
As of the 1st October 2021, the rules will again regulate. Meaning stamp duty tax is payable in bands, depending on how much the home is worth.
£0-£125,000 = 0%
£125,001-£250,000 = 2%
£250,001-£925,000 = 5%
£925,000-£1,500,000 = 10%
£1,500,000+ = 12%
Please be aware that these figures relate to England and vary slightly when purchasing in Scotland or Wales.
There are various ways to pay stamp duty, and some lenders are happy to add this tax to the mortgage balance to be paid alongside your monthly instalments.
Please note the rates will also vary for non-resident investors, with an additional surcharge of 2% applied.
Income tax is the tax we all pay on our earnings, regardless of whether we are paid by an employer or are self-employed.
The amount of income tax you pay on your rental property will depend entirely on the profits you are generating and your circumstances. Therefore, it is always best to speak with an accountant who will advise on the records you need to keep and the amounts you should be paying.
Capital Gains Tax
Capital gains tax is the tax that you pay when you sell an asset.
Meaning, when you come to sell your property, the tax will be payable on the profits you have generated. This will be a serious consideration for those hoping to liquidise their assets in retirement.
The percentage of Capital Gains Tax depends on the amount of profit generated from the property. It is also worth noting that some investment classes (such as Purpose-Built Student Accommodation) are exempt from Capital Gains Tax and Stamp Duty Land Tax.
There are considerable benefits to property investors working under a limited company rather than personal ownership.
Over 80% of UK buy-to-let mortgage applications were made in limited company names last year, illustrating how popular this structuring is.
There are substantial tax benefits, including the ability to deduct your entire mortgage interest from your UK tax bill and the fact that you will be taxed at corporation rates rather than income tax rates. Additionally, when you sell the property, you will pay significantly less in Capital Gains Tax.
Moreover, extracting money from the property at a limited company is much more straightforward. Dividends, owner loans, and pension contributions become options, meaning you can withdraw money from the investment in the most tax-efficient way.
However, perhaps the most significant benefit to a limited company formation is protecting your personal assets. The limited liability means that the risk associated with the investment is much lower, often permitting individuals to make bolder property decisions.
Seek Professional Advice
Whether you own one property or ten, we would always advise that you speak with an accountant to ensure your taxes are appropriately registered.
Working with an accountant can save you a significant amount of money, as they will be able to provide you with the most cost-effective solutions to structure your business.
Tax is often an afterthought for many landlords but can become a nightmare if left to fester in the background for too long.
Choosing An Asset Class
This is the most significant decision for every property investor.
Residential buy-to-let is the most common choice for property investors.
It is arguably the most straightforward option, making it ideal for those at the start of their property career.
This method is where a landlord purchases a home to be rented to tenants. These tenants then pay a monthly charge to live in the property, and the investor can keep the profits.
The landlord then generates an income by way of both rental yield and capital appreciation.
This is debatably one of the ‘safest’ investing methods, with tenants usually signing a 12-month tenancy agreement before moving into the home. Some landlords chose to work with managing agents to look after the property, whereas others prefer to maximise their profits and deal with the tenants personally.
However, there are also more advanced buy-to-let strategies, such as Serviced Accommodation. This can be an excellent way to benefit from the residential market whilst driving up rental yields.
Commercial buy-to-let works in a similar way to residential but are favourable amongst many investors.
Commercial property takes many forms, with office and studio space being the most common.
Landlords often choose commercial property as tenants tend to take significantly longer leases. Therefore, once an occupant is acquired, landlords can rest assured their income is secure for the following 24 months.
However, many investors discover that mortgages or alternative funding can be more challenging to secure for commercial properties. Additionally, obtaining great tenants can take substantially longer than for residential homes, and investors often find that the capital growth is typically less aggressive than in the residential sector.
Purpose-Built Student Accommodation
Student properties offer a great opportunity for investors. With over two million individuals enrolled in universities across the UK, the demand for this asset class is astronomical.
The requirements have evolved over the recent years, with students now willing to pay more for high-quality accommodation. The UK also welcomes nearly half a million overseas students each year, demanding excellent, centrally located housing.
Student lets are favourable amongst investors as they are typically much less expensive to purchase than standard rentals. This decrease in price combined with the high demands leads to robust rental yields on this asset type.
Purpose-built student accommodation allows investors to secure assured rental periods, higher than average yields, and attractive tax exemptions.
Houses In Multiple Occupation (HMO)
A HMO is a property where every bedroom is rented separately.
They can be highly lucrative for investors and reportedly offer three times the rental yields than standard buy-to-let.
They are prevalent in London, with the rental market outpricing many young professionals. However, HMO’s are not purely in the capital. They are also popular in cities such as Liverpool, Manchester and Sheffield, with tenants opting for this way of living for various reasons.
However, there are many logistical issues associated with HMO’s.
Firstly, it can be challenging to secure a mortgage against the property, as lenders treat these homes differently from standard buy-to-lets. Additionally, many other regulations are associated with this style of home, mainly linked to health and safety. Moreover, these properties can be much more time consuming due to a higher turnover of tenants.
Finally, those interested in HMOs should note that the landlord covers the costs of utility bills, so council tax, electricity and water should all be factored into the monthly budgets for the investment.
Residential Buy-To-Sell (Property Flipping)
As the name suggests, residential buy-to-sell is where an investor purchases a home, improves the property and sells within a short timeframe.
This is an excellent option for those with knowledge and expertise in the home renovation sector or close connections with those who do.
The buy-to-sell route generally requires an investor to be very hands-on, making decisions and being present throughout the process.
Investors considering the buy-to-sell route should be aware that market dips are always a possibility. Meaning, individuals sometimes have to hold onto the property for slightly longer than they initially imagined or risk making a loss on the investment.
Property development appeals to those who have extensive expertise, knowledge, and connections in the building industry.
A great way to enter the property development market is to focus on refurbishments or joint ventures, building partnerships with those more experienced.
Development involves purchasing a site or existing home and then building out properties from the ground up or converting existing structures.
Some developers will look to exit and sell the properties as soon as possible to ensure a profit. Other developers will operate a build-to-rent strategy, which involves retaining ownership and benefiting from monthly income and future growth.
Alternatively, commercial property development can generate extremely generous profits in the right areas, with companies willing to pay high amounts for the perfect premises.
Choosing A Location
Once you have decided on the asset class that suits your taste, you must settle on a location.
Working with a dedicated property investment company removes the limitations of this second home being nearby. Many investors purchase properties throughout the country and across the globe without ever even visiting the home.
Your goals, chosen asset class, and risk appetite will ultimately determine the location you choose.
For example, those with a high budget but a low appetite for risk may choose a buy-to-let in London. Whilst the initial outlay is high, the demand for private rented accommodation in the capital is astronomical.
Conversely, those with a lower budget but a larger risk appetite may choose a buy-to-sell in a less expensive northern city, such as Sheffield or Leeds. This will then generate a lump sum profit that can be reinvested into further developments.
Our top tips for choosing the ideal rental location are:
- Choose a city currently undergoing regeneration. This means new businesses and occupants will be drawn to the town, keeping the demand for housing high. Manchester and Liverpool are prime examples.
- Consider your target market. Two and three-bedroom properties will attract families, so ensuring great schools are nearby is a must.
- If in doubt, choose a university city. Opting for a city like Manchester or Birmingham with a bustling student population is a great way to secure your investment. The demand for student properties will be huge, as well as high-quality accommodation for new graduates.
An off-plan property is a home that is purchased directly from the developer before it is completed.
Developers are often willing to sell these properties at heavily discounted rates due to the early purchase.
The opportunity for capital growth here is staggering, best explained by way of an example.
The price of a home is £150,000.
However, due to the off-plan purchase, you secure the home for a 15% discount at £135,000.
But, the home isn’t complete for another year.
During this time, the price of the property has grown by 4%. Meaning, the property is now worth £156,000.
£21,000 more than your paid for it.
At this point, some investors with short-term strategies choose to sell the property immediately. Others will instead rent out the home, making the most of the monthly rental yield and the continued capital appreciation.
Investors can also secure rental assurances and incentives such as free furniture packs and legal fee contributions by purchasing during the construction period.
Maximise The Potential of Every Investment
The hard work doesn’t stop once you have chosen to invest in a buy-to-let property. Now it’s time to consider how you can get the maximum value from that home.
Think about your chosen target market and what appeals most to them.
City centre apartments are generally filled with young professionals. This demographic tends to be willing to pay more for higher quality, great looking fixtures and fittings. Although bathrooms and kitchens are expensive to replace, upgrading these rooms can dramatically increase your rental yield.
Whereas suburban properties are usually filled with young families. So, for these rentals, you must appeal to those with children. This might involve spending some money and time creating a lovely garden.
Keeping any property in generally great condition will increase the rental value. Replacing carpets, curtains, and white goods will show that you care for the home and encourage tenants to treat it with the same level of respect.
Additionally, consider adding additional clauses into the agreement which increase the rental value. This may include allowing pets in the home or permitting tenants to redecorate to their tastes. These are also great techniques to encourage reliable tenants to renew.
Build A Property Investment Plan
To be successful in property investment, you must build a business plan.
Randomly choosing homes and projects that do not align with your goals can make the investment journey extremely stressful. Therefore, you must create a plan that will help you reach your targets successfully.
Whilst it might sound slightly strange, it is easier to develop a business plan by first considering your exit strategy. Thinking about your end goal will help you create smaller and more achievable targets.
For example, your goal may be to have three tenanted and mortgage-free properties by the time you retire. These will then continue to generate a passive income and can be passed onto your family members.
Otherwise, you may be property investing to fund your retirement. This means you will be planning to sell all, or most of the property around the age of 65, generating a healthy savings pot to enjoy in retirement.
Working with a dedicated investment company can help you implement the stepping stones to reach your more substantial final goals.
Property Investment Recap
- Investing at the right time is critical to success. This means when you are financially ready and when you have enough time to commit.
- There are many other ways you could choose to invest your savings pot. However, property is favourable due to the flexibility and security it offers. Property also has the unique advantage of securing leverage.
- There are many different asset classes involved in property—these range from the traditional buy-to-let method to commercial rentals and property developments.
- Some investors choose to focus on capital growth, whereas others are more concerned with rental yield. The best strategies carefully balance both.
- Ensuring you are aware of the legal implications and taxes payable is essential to ensure you can accurately calculate your property income.
- Purchasing the home is not the end of the journey. You must ensure you maximise the home’s potential.
- Creating a thorough business plan is the only way to meet your long term goals successfully.
For more specialist advice, contact Track Capital at [email protected]