There are many different ways to benefit from the property investment market and buy-to-let (BTL) is one of the most popular ways to get onto the ladder. Whichever method you choose, real estate is a long-term investment, suitable if you have sufficient funds to lock away for a decade or more. This may sound daunting if you’re new to the property market, but this lucrative investment method has plenty to offer if navigated correctly.
In this blog, we will look at potential profits that property investing can generate in the long term, including how prices and rents have risen over the years, where to find the best rental yields, and how to get started in property investing.
Why invest in property
There are several reasons why property can be a wealth-building and useful investment. For example, buy-to-let landlords can earn a steady income from rental property, which could be suitable for those looking for a fixed revenue stream. Also, when it’s time to sell, property owners are likely to make a profit from capital growth as house prices tend to rise over time, and if any renovation or improvements have been made to the property, that can also help boost its value. Lastly, it’s an excellent source of diversification. Investors can achieve a well-structured portfolio through property whether or not they are new to the market. Adding property to your pool of assets can help spread volatility and reduce the impact of market falls on your investments, while investing in new elements of the property market, such as location or property type, can also help with balancing your portfolio.
Short-term property investing
There are a few ways to invest in the property market for the short-term. However, it could be considered the riskier choice over long-term investing. One way is to ‘flip’ property, which means buying and selling quickly for a profit. This can be either through buying low and selling high such as through auction or buying a new build in its development phase and selling when it’s complete, or renovating a property to increase its value. But if your priority is your time horizon rather than the investment method itself, you could consider alternative avenues such as stocks or short-term bonds, which are better suited to investors with a short commitment scale and looking for a quick profit.
Why property is a long-term investment
The property market takes time to change — good or bad — and it can take several years for these changes to affect your profits. That’s why real estate is typically a long-term investment. Whether you’re considering buying a BTL or running a holiday let, there are a few key reasons why property is more suitable as a long-term commitment.
1. Illiquid investment
Physical property can be difficult to navigate and the process of selling and buying can be extensive. Whether buying or selling, finding the right buyer orproperty can take months or years. Even once you’ve secured a deal, the ownership transaction can take several months, too, so if you’re looking for a turnaround, real estate may not be suitable.
2. Upfront fees and ongoing costs
There are several upfront fees and ongoing expenses to be mindful of with BTLs, and even more so if you need a mortgage. A BTL mortgage typically requires a deposit of 20-25% of the property value. Once this has been secured, you may incur some of the following fees:
· Solicitor fees
· Land registry
· Broker fees
· Estate agent fees
Depending on the intended purpose of the property, you may also need to carry out interior refurbishment or health and safety checks. Generally, due to the substantial costs involved with property investing, it tends to be suitable for the long-term to make those costs pay off and start to generate a decent profit.
3. Capital gains tax
You may be liable to pay capital gains tax on a BTL or a second home. The fee depends on your tax bracket, profit, and how long you have owned the property for. If you own a property for less than a year, you could end up paying a higher rate of tax due to the short-term profits, but if you hold a property for over a year, you may be taxed the long-term rate, which is generally lower.
On top of the above, the housing market is one that grows over time and prices rise over the long-term, so a short-term investment in property could mean missing out on substantial profits.
How have house prices changed?
One of the main ways to make a profit from property investing is capital growth. Generally, house prices tend to rise over time even if the market experiences some price drops along the way. Ultimately, property is an asset that appreciates in value over the long term. The below table shows how house prices have changed in the UK between 2007 and 2022.
House prices have generally been on the up since the financial crisis in 2009. Despite a temporary dip in 2019, the pandemic was the catalyst for further growth in the last few years, causing the average annual property price to grow by nearly 9% between June 2021 and 2022 and in Q3 of 2021. This is a dramatic increase, showing that the UK housing market has thrived overall despite significant pandemic pressures.
On a more granular level, this growth was slightly bumpy and while mortgage approvals plunged in early 2020, the second half of the year recovered significantly to pre-pandemic levels. Since then, the market has seen further progress with the average house price having grown by nearly 10% in the year to October 2022.
In the last few months, property prices have experienced a drop as a result of the cost of living crisis and high interest rates, although, some regions like York and Scotland continue to rise. Looking at historical trends, the housing market recovers over the long term from its natural ups and downs. So, in order to get the most out of your property investment, it could be more suitable to lock in for several years to monitor market performance and benefit from its long-term growth.
How have rents changed?
Rents in the UK have also been on the up, growing by 4% last year. In fact, private rental properties have recorded “the highest rise since comparable records began.” The rise has been another domino effect of the cost of living crisis as landlords experience their own budget squeeze and pass those new costs onto tenants.
The below graph shows how private rental prices have changed between 2016 and 2022.
Mid-pandemic, all UK regions except London returned to an upward trend. London rents plunged at this point as many office workers relocated due to no longer having to commute, meaning that the rest of the UK benefitted from a rise in tenants. However, the capital wasn’t too far behind before starting to regain its strength in 2022 and private rental prices increased by 3%, the strongest annual increase since July 2016.
Now, the average rent in the UK is £1,174 PCM, which is the first drop (-0.1%) in over a year. On a regional level, Greater London has seen the highest annual increase in rental figures of +14.6%, followed closely by Scotland (+13.8%), and the North West (+11.1%).
Where are the best rental yields in the UK?
When choosing the right property investment, there are several factors to consider such as property prices, rental yields, tenant demand, tenant demographics, population, transport links, and BTL opportunities. In light of the private rental market growth highlighted above, here are some of the top UK regions that can offer strong BTL investment opportunities this year:
|Region||Avg property price||Avg yield|
Rental market forecast
Despite some property price drops in recent months, which are expected to continue to drop until 2024, the rental market has reached new highs. With inflation, the cost of living crisis, and the long-term impact of the mini-budget, industry experts forecast a promising future for BTL investors.
As house supply remains low, rents continue to be pushed higher and in the next 3 years, both prime outer London (POL) and prime central London (PCL) regions are expected to grow by over 30% in rental value. Researchers at Knight Frank add that “accidental landlords may return to the lettings market as the sales market cools down. These are property owners who decide to let out their property after failing to sell for the asking price. This should help more balanced conditions to return in the medium term in PCL and POL.”
How to get started in property investing
Even in the best of times, there’s a lot to consider before entering the BTL market to get the most out of your investment. In its current state, the market calls for savvy and experienced property investors who are confident in tackling falling house prices and rising rates and rents simultaneously. BTLs are also a hands-on investment that requires ongoing property and tenant management. Instead, high-net-worth investors looking for passive, fixed income from property may find Propiteer Capital suitable.
Investing in the Propiteer Capital Property Bond gives investors exposure to our core asset classes that would normally only be available to commercial investors, including residential assets and high-value development properties. We target popular locations around the UK and Ireland with our projects, giving investors the confidence that they are benefitting from high-demand, lucrative regions. Our property bond also eliminates the need to speculate possible vacant tenancy periods or market drops – plan your finances easily with our asset-backed, fixed-rate returns.
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