Starting anything new can be daunting, especially when it comes to investing. In many cases, becoming an investor can involve large sums of money upfront and the topic of risk may be something you’re thinking about. But even if you have all the right tools to get started, knowing how to do it well can be difficult.
There are many different ways to invest in the property sector and many routes to explore depending on your upfront investment, time horizon, and your expected returns.
In this post, we will cover topics such as goal setting and its importance, the different types of investment methods to explore in the property market, their pros and cons, and calculating the potential returns on a property investment, which will form a complete guide to help you get started in real estate investing.
- How do I plan a real estate investment?
- Different types of property investments
- How much money do you need to invest in property?
- How do I start investing in property with little money?
- Getting your first mortgage
- What are commercial property investments?
- Pros and cons of property investing
- The BRRRR method
- How property investment can help you achieve your financial goals
- Is property a ‘good’ investment in 2022?
- Calculating ROI and the 1% rule
- Buying bonds in property development companies
- Are you ready to get started in property investing?
How do I plan a real estate investment?
When deciding to make any kind of investment, it’s crucial to outline your end goal. What are you hoping to achieve and how will you get there? Having a clear pathway to your financial goals is a good way to ease into that first step of deciding to invest. Without this fundamental understanding of your intentions, the road to success can be confusing and aimless. Goal setting is also a great way of having clarity and staying motivated, particularly if you have a long-term time horizon.
Starting to map out your objectives can be difficult, let alone committing to an investment. A useful technique to try to start clarifying your goals is the SMART method:
· Specific: Understand how much money you want to save and the reason for saving. What are you aiming to fund? It could be a house, a wedding, or retirement, for example.
· Measurable: Be aware of where you are in your financial life and having clarity on how close you are to your goal. This is a way of working out the right time horizon for your investment.
· Achievable: Set yourself realistic goals. Over-estimating your potential can be counterproductive in your investment journey and it can even reduce motivation and productivity, so it’s suitable to set yourself attainable targets which, once ticked off, which feel rewarding.
· Relevant: Be true to your values. Try to keep your goals applicable to your broader priorities and needs – a financial investment is also an emotional investment, so it’s important to make it matter to you.
· Time-bound: Apply an end date to your goals to generate a timescale for your action plan. This can provide greater clarity on what you need to do and when to do it to achieve the end goal.
Once you’ve been able to tick these boxes and get a good idea of what you’re saving for and why, doing your homework on where your money is going is useful to know. So, in the example of property stocks, you may want to familiarise yourself with the company, its values, and its financial stability. All of these factors can affect your investment in different ways, so it’s important to understand the ins and outs of what you may be invested in to ensure it is impacting your goals in the right way.
Different types of property investments
There are direct and indirect ways of investing in the property market, and one way of establishing which is most suitable for you can depend on the amount of money you’re willing to invest. Some vehicles will require larger upfront costs than others, but generally, the key investment types include:
· Buy-to-let (BTL)
This means becoming a landlord and buying a residential property to rent out to tenants. BTL properties can involve high upfront costs and a challenging borrowing process for first-time landlords, but it can also be a rewarding investment form if approached correctly, with prospects for a monthly income to cover your mortgage repayments and increased property value over time.
· Property development
Buying a property to refurbish and sell at a higher value. This can be a good way of upscaling property value through renovation, but it’s important to carry out detailed research on factors such as location and demand beforehand to make sure your investment has the potential to grow.
· New builds
Buying a property that is yet to be built or off-plan. Discounted prices can be acquired during the construction phase and property value can increase upon completion, so there is good potential for attractive returns. However, with new builds, value can also depreciate once the property becomes available, much like buying a brand-new car, so it’s important to be knowledgeable in this area before buying.
· Real Estate Investment Trusts (REITs)
Buying shares in a property investment company alongside other investors. Shares are combined to invest in a property and profits are gained from the rise in share prices. Unlike BTLs, a collective investment program can require lower upfront costs.
Investing in a property company via bonds is similar to REITs, the main difference being that you receive a bond certificate in exchange for your investments. Your investment is used by the company to fund property projects in exchange for fixed rates of return, which are pre-agreed. Payment frequency and interest are also pre-established.
How much money do you need to invest in property?
The investment sums required to get started in real estate will differ between property types and investment vehicles. The upfront costs for a BTL with a mortgage, for example, can vary heavily depending on factors such as the purchase price, deposit, stamp duty, and legal fees. The below table shows a rough guide to the upfront costs you could be looking at if you’re considering a BTL investment:
The current stamp duty tax rates in the UK range between 3% and 15% depending on the value of the property. A stamp duty calculator can help with clarifying some of the above figures. It’s also important to note that the above estimates do not include any additional expenses such as mortgage repayments, insurance, or maintenance fees.
However, there are alternative investment methods which may incur lower upfront costs, so it’s worthwhile doing your research and familiarising yourself with the average financial requirements for various investment processes. An easy way to approach this topic could be to determine how much you’re willing to invest rather than how much you need to be able to make a specific type of investment. Once you know your available funds, you can compare the different options that are available to you and choose something that meets your needs.
How do I start investing in property with little money?
With so many investment types available on the property market, there are several ways that can involve smaller sums of money upfront compared to BTLs or commercial properties. Instead, buying shares in a property company or investing in REITs could be a more suitable and lower-cost way to get started in property investing.
One characteristic that investors may find attractive about REITs specifically is that at least 90% of taxable income must be paid to shareholders each year. Depending on the level of risk you are willing to accept, this could be a more fitting option. There are also significant diversification opportunities with multiple property sectors open for investment via REITs, from residential homes and retail spaces to healthcare centres and office units. Simply do your research and understand where your money is potentially going.
Another option could be peer-to-peer (P2P) lending. This is a direct investment into a person, company, or property. A key difference with this investment method is that, for the transaction process, a bank is replaced with a P2P platform. With the middleman cut out, investors may see higher rates on offer as there is no bank to take a cut. However, the absence of a bank can also mean reduced security against your investment.
For thorough ins and outs of P2P lending, Money Saving Expert offers detailed information on the pros and cons, and what to expect.
Getting your first mortgage
Investing in a BTL property for the first time can be a good way of getting on the property ladder, but to do so, you may need a substantial sum upfront for a deposit. It’s possible to purchase BTLs without a mortgage, but buying a property outright will require more funds, so many investors will need to take out a loan from a bank or lender. This process can be challenging, but it can also be valuable and profitable if approached correctly.
As a first step, it’s important to check your eligibility for a BTL mortgage. It’s always advised to speak to a mortgage broker, who can provide professional financial advice, but there are also numerous online mortgage calculators, which offer quick and simple eligibility checks.
A BTL mortgage is similar to an ordinary mortgage, with a few key differences:
· A BTL loan can come with higher interest rates and fees
· You will typically see lower loan-to-value (LTV) ratios with a BTL mortgage (usually 20-25%, whereas a regular mortgage is typically around 10%)
· Acquiring a BTL loan can be more challenging than an everyday mortgage as lenders can view the reliance on rental income to cover repayments as volatile
For first-time buyers, getting a BTL mortgage can be tricky – but not impossible. You may find that there are fewer products available to you and you may be required to pay a larger deposit. Lenders are also likely to run very strict affordability tests, which may be more demanding due to the lack of experience and a strong track record. In the event of being refused by a lender as a first-time buyer, it’s a good idea to speak to a mortgage broker for guidance on the products available to you as well as your affordability.
If you’re ready to compare products, sites such as Mojo Mortgages and Money Supermarket offer a quick comparison tool for BTL mortgages, showing you which loans are available to you based on your intentions for the property.
What are commercial property investments?
Commercial properties refer to business spaces such as hotels, offices, retail stores and industrial warehouses. Similar to BTLs, commercial properties can also be rented out to tenants for a monthly revenue flow, it’s just the use and intention of the property that differs.
There are 3 main ways to invest in commercial property:
· Direct: buying a commercial property outright. This is suitable for high net-worth investors.
· Direct commercial property funds: a group investment into a portfolio of commercial projects. Your investment is made alongside other investors.
· Indirect commercial property funds: a collective scheme, which focuses on investing in property shares.
Some of the challenges around commercial property investing can include substantial upfront costs (considerably higher than BTLs) and lengthy vacancy periods. However, there is also a high income potential as well as a possibility to secure long-term leases, which could help generate a regular revenue flow for longer.
Read our complete guide on commercial property investing here.
Pros and cons of property investing
Like any investment, property investing has its pros and cons. One of the key aspects that may attract investors to the property market is an asset’s potential to grow in value over time. While this is not guaranteed, there is a good chance that traditional property buying will lead to profit at a later stage with inflation. This can typically be achieved either by investing in property developments, which add value through refurbishment, or BTLs, which can generate a regular income stream via renting the property to tenants.
Some common pros and cons of property investing can include:
|Flexibility prospects||Reduced short-term exit options|
|Regular income source||Rising interest rates|
|Potential long-term yield||Substantial upfront costs|
|Diversification opportunities||On-going expenses|
These will vary between investment types, so it’s important to explore each one in detail if it sounds of interest to you. Every investment will come with its advantages and disadvantages, but the way these are weighed out will depend on your priorities, capabilities, and what you’re looking to achieve from your investment.
The BRRRR method
In real estate, a BRRRR (Buy, Refurb, Rent, Re-finance, Repeat) method is a way of ‘flipping’ distressed property. This refers to property that is on the brink of bankruptcy and is either already owned by the bank or facing being closed down. This investment method works in the following way:
The property should be distressed at the point of purchase, meaning that it requires maintenance work before reaching a stage where it’s suitable for renting. Due to the initial conditions of the property, this can present cheaper purchase prices.
Refurbishment will be required due to the distressed conditions of the property. This is the renovation step of the process, making sure the property progresses to be safe and attractive for prospective tenants.
The property is ready to rent. Some research and calculations may be required at this stage to determine an appropriate rent charge, ensuring that it matches both the market standards as well as your financial expectations.
A cash-out refinance is a form of a mortgage refinance, which can be beneficial as it means that you gain equity in the property if its value rises. This gives you money in exchange for taking out a larger mortgage.
Once re-financed, there is an opportunity to repeat the process by purchasing another distressed property.
The focus on distressed properties and the idea of refinancing are the key differences between the BRRRR technique and more common ways of property investing. However, much like some traditional methods, the BRRRR process can also offer passive income opportunities. The potentially lower purchase costs are a key benefit, and the cash-out refinancing can open further property investment opportunities for additional monthly income.
How property investment can help you achieve your financial goals
On the plus side, 88% of eligible employees had been signed up to a workplace pension in 2020 since the introduction of auto-enrolment, with gaps in those enrolled and not enrolled having narrowed significantly since 2012. But the fact of the matter is that, for many people, this will not generate a sufficient retirement income. Young adults in particular are reported to be saving too little and may be facing a ‘pension crisis’.
But whether it’s your pension that you’re thinking about, aiming to save for a big purchase, or preparing for family life, there are several ways in which investing in property could be beneficial to your financial goals. With options to suit all time horizons, property investments vary largely and offer the potential to be passive, saving you time and effort, and generating healthy returns.
Read our guide to investing in property with your future in mind here.
Is property a ‘good’ investment in 2022?
It’s no secret that new tax laws and market regulations have caused BTL investments to become less appealing to investors in recent years. However, the fact remains that people will always need a place to live, and industry experts are optimistic about the property market in 2022 with a series of investment opportunities on the horizon.
House prices in the UK have been on an upward trend since 2016 and this is expected to continue. This could mean potential increased returns on property investments as asking prices and, therefore, rental costs are rising. At the same time, higher prices also mean higher upfront costs and higher mortgage interest rates.
Industry experts also anticipate that the demand for houses over flats will continue. Since the ‘search for space’ was introduced at the start of lockdowns, many people have been looking to upscale their homes in more affordable areas, such as coastal towns and city outskirts. Now, with hybrid working styles starting to become a permanent measure for many office-based businesses, working professionals remain on the lookout for properties that match their new and flexible lifestyles.
What potential does this present for the property investment market? Despite some reduction in the appetite for BTLs, enthusiasm, and opportunity for investors continues in many other areas. UK property stocks are currently valued at £9.5tn. The average price of a property has also risen to £240,800 in 2021 from £224,800 in the previous year. As prices rise, investment opportunities reappear and investor interest returns, with a reported 40% showing willingness to invest in the London region specifically as the nation’s capital bounces back in post-pandemic conditions.
For detailed insights into property investment market expectations in 2022, we’ve put together a forecast piece here.
Calculating ROI at the 1% rule
With the basis of most investments being wealth building, it’s crucial to understand how an investment will benefit you before committing. The fundamental knowledge of how an investment will financially impact you and your goals is vital to make sure that property investing is right for you and that, if you do choose to invest in property, it generates a positive income flow.
Property investing can offer a range of positive investment prospects, such as passive and steady revenue and diversification opportunities. So, if there’s a property investment that you’re considering, first off, it’s important to establish its profitability. In other words, will it make you money?
There are a few slightly different but basic formulas to be aware of when calculating ROI. The input may differ based on the investment method, but generally, you will need to divide the net profit by the original cost.
A concept is known as ‘the 1% rule’ may be a term you’re familiar with if you have started researching real estate investing, and it can be a good rule of thumb if you’re just getting started. This is a way of measuring the profitability of a BTL investment, whereby the property price is measured against the gross income it is expected to produce. For an investment to pass this rule and be considered profitable, the monthly rent must be no less than 1% of the purchase price. This can be a helpful way to determine a suitable rent charge for tenants, but it’s only a guidance tool and there may be additional factors to consider such as property type and location.
Click here for our detailed guide on how to calculate potential returns from property investing.
Buying bonds in property development companies
If you’ve decided to commit to property investing, finding the right property for you can be complicated. With so many variables coming into play, what’s the best way to approach finding a suitable property investment that suits your needs and objectives?
Prime Property Agents offer newsletter sign-ups and alerts on new properties in the BTL investment market. This site offers an easy way of exploring BTL investments based on factors such as property type, number of beds, location, yield expectations, discount, and rent prices.
A similar site Pure Investor has clear property listings across a variety of locations in the UK with an estimated yield, property size, and project status, including both off-plan and completed properties. The site also includes tenanted properties, which can save some time by skipping the search for tenants. However, this means that you’d be unfamiliar with your prospective tenants. If this does not fit your needs, it helps filter those unwanted options out and narrow your choices down to those that are more appropriate.
Don’t forget that choosing to invest in property doesn’t mean you need to purchase a BTL or become a landlord. If you find that BTLs are too complex and high maintenance, there are passive ways to invest in this market without buying physical property, such as bonds, which is similar to buying shares.
At Propiteer Capital, we have an extensive portfolio, which includes rental homes, luxury apartments, new builds, and world-class branded hotels. Our investment platform offers a variety of methods to get involved in our Residential Rentals, Branded Hotels, or Development properties investments. There are term times and exit options to suit both short and long-term plans, and our fixed rate of returns range between 4.5% and 9.5%. If you’d like more information about us or our services, give our friendly customer service team a call on 01376 319 000.
Are you ready to get started in property investing?
Unfortunately, there is no single answer on how to approach property investing. Any form of investing will require extensive research as the suitability of each approach will vary depending on your motivations and the intended results from your investment. This is a subjective field, and a method that may work for someone else may not necessarily work for you as your financial objectives will differ as well as your starting position, time horizons, and capabilities, among many other variables. However, hopefully, this makes a useful guide on some practical ways to approach property investing, how to manage expectations, and get involved if you decide that it’s the right fit for you. Whatever direction you choose to take in your property investing journey, we wish you the best of luck. Thanks for reading!
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