Buying an investment property

Homes are selling extremely fast at the moment, and prices are consistently rising month-on-month as demand increases. For some lucky homeowners, this means they now have the chance to diversify their investments and foray into the rentals business.

In this article, we'll demystify the process of buying an investment property and sum up the pros and potential risks.

How to invest in property

Buying property as an investment is also known as 'building a property portfolio'.

There are two ways to start building a property investment portfolio –– through direct investment (buying properties outright) or indirectly (by setting up a property investment fund and pooling your money into property with other investors).

It's important to note that all investment carries risk, so paying off debt and ensuring that you have emergency savings in place is essential before you start looking into new properties.

But if your finances are in good shape and you think you're ready to start the process of buying an investment property, here are some examples of the types of property you can add to your portfolio:

Buy to Let (BTL)

When most people think of 'property investment,' they think of Buy to Let properties. This type of property investment is where you buy residential property (often with a Buy to Let mortgage) and rent it out to tenants. Many people ask, can you buy an investment property and live in it? Unfortunately, BTL lenders do not allow landlords to live in their investment property alongside their tenants.

Build to Rent (BTR)

Build to Rent is where buyers can invest in purpose-built housing designed for rent rather than sale. They are becoming increasingly popular as renters are willing to pay a premium to live in well-managed, high-quality housing.

House in Multiple Occupation (HMO)

Like a Buy to Let property, HMOs are designed to house residential tenants. However, under a 'multiple occupancy' contract, the property can be shared between multiple households and include common areas and separate tenancy agreement terms.

Off-Plan

Off-Plan is where a property investor can pay towards a property while it is still under construction. This type of investment can be riskier, as the build may not go to plan. However, it’s possible to get a great deal if you're looking to invest.

Freehold

Property investors can purchase a property and the land it stands on as part of a Freehold agreement. The buyer becomes responsible for managing all aspects of property, including land maintenance, insurance and repairs.

Leasehold

In a Leasehold agreement, property investors buy a leasehold property from the freeholder. Leasehold ownership is agreed upon for a number of years. After that time, ownership transfers back to the freeholder.

Is it worth buying an investment property?

Real estate investors make money through rental income, appreciation, and profits generated by business activities that depend on the property. There are some real benefits to investing in real estate, including:

Passive Income

The ultimate goal for property investors is financial independence. Investing in property allows you to generate passive income from your tenants, which you can use to pay off your Buy to Let mortgage, maintain buildings, or reinvest in your housing portfolio.

Stable Cash Flow

Cash flow in property investment terms relates to the net income your properties make once you’ve covered their expenses. Stable cash flow allows property investors to pay down any mortgage loans and gradually build equity in their properties.

Tax Incentives

There are several tax incentives for UK homeowners looking to buy property as investment. For example, landlords can collect the first £1,000 of their rental income tax-free under the Property Allowance scheme.

Property investors can also claim tax relief to cover costs associated with ground rent, council tax, utility bills, and more.

Diversification

Property is an asset that consistently increases in value over time. People will always need a place to live, so housing stock (even during periods of economic downturn) will always be considered one of the least risky investments. If you have investments in a range of assets, buying property can help you diversify the risk associated with your whole investment portfolio.

One of the most important questions to ask is, where should I buy an investment property? Diversifying where you invest in property can help you increase profits as an investor.

As this article is focused on the UK housing market, we’d recommend researching a range of areas in the country that are thought to be ‘up-and-coming.’ For instance, the East Midlands saw the average price of homes increase by 1.2% in March this year.

Leverage

Property investors can use their increasing equity to buy more property, known as 'leverage'. This is key to rapidly expanding your property portfolio. Leveraging can help you get approved for new loans and mortgages if you can't afford to buy properties outright. Investors pose less of a risk to lenders, as they already have tangible assets they can use as collateral for the loan.

What are the risks?

One of the key questions to ask when buying an investment property, is what are the financial risks?

Firstly, you should ensure that you don't invest more than you can afford to lose, because you may have to pay unexpected expenses like legal fees, major repairs, and renovation costs.

There’s also the risk that you’ll be unable to find a tenant for your property. In this scenario, costs can quickly spiral out of control, as you’ll need to cover the costs of loans associated with the property until you find someone to move in.

Along with mortgage and maintenance costs, you’ll also need around 10% of the property purchase price to put towards expenses like conveyancing, surveyors, and estate agents.

If you're considering getting into property investment for the first time as a UK homeowner, seek advice from several real estate professionals.

The right advisors can tell you exactly what to look out for when buying an investment property, and help you carefully weigh up the benefits and risks to your finances.