An introduction to property investment
What is property investment?
Property investment is one of the most common types of investment and for many people offers an alternative to traditional investments such as pensions and shares.
With property investment there are two key ways to generate a return on investment – a buy-to-let, renting a property to tenants and generating a rental income, or by buying and selling a property for a higher price. With a buy-to-let there is also the potential to earn a profit in two ways – firstly through rental income which exceeds your monthly outgoings on the property (mortgage, management fees, overheads and repairs), and secondly through capital growth if you sell the property for more than the original purchase price.
As with all investments, property prices and rents rise and fall depending on whether there is a fast or slow market, and so property investment should be considered a long-term investment.
What are the advantages of property investment
For some people, property feels more tangible than stocks or shares. Property investment has the potential to generate strong return on investment but the property market does fluctuate.
What are the disadvantage of property investment?
Property is an illiquid asset which would take time to sell – in the UK, at the time of writing, the conveyancing process can take between 16-20 weeks – and has attached costs such as estate agent and surveyor fees, Stamp Duty and legal costs.
At the time of writing, the purchase of a buy-to-let property is subject to an additional three per cent Stamp Duty in England. You may need to pay income tax on rental income and Capital Gains Tax if you sell a buy-to-let property – seek professional advice from your tax adviser. It’s also important to understand that a buy-to-let investment is different from owning your own residential property and comes with important legal responsibilities.
Unless you take a fixed mortgage on a property, interest rates can rise, and it is important to ensure you can afford any potential increase for the duration of the mortgage. Similarly, rental income can fall in value and this should be factored in when considering a property investment.
What is a Special Purpose Vehicle (SPV)?
If you are a higher rate tax payer, it may be advantageous to purchase a buy-to-let property through a limited company with a Special Purpose Vehicle (SPV). This is an off-balance sheet vehicle created as a subsidiary to a parent company and, as a separate entity with its own assets, liabilities and legal status, which isolates the risk. It is advisable to speak to a tax adviser for advice about buying a property through a limited company with a Special Purpose Vehicle.
What is an HMO property?
For buy-to-let landlords, buying a house in multiple occupation (HMO) or converting a property into an HMO may offer an opportunity to increase their return on investment. An HMO is defined as a property with five or more occupants and is subject to specific legislation which governs the way it must be managed. HMOs are often located in cities, offering high quality accommodation to professionals or students who wish to rent a room with shared facilities. Specialist lenders offer HMO and Student Let mortgages, so speak to Complete Commercial Finance to discuss your project needs.
How to finance property investment
If you are looking to become a landlord or grow a portfolio of rental properties, a buy-to-let mortgage is a specialist mortgage product which enables you to buy more than one property at any time.
As with residential mortgages, these are available as interest-only or repayment buy-to-let mortgages. An interest-only mortgage is popular amongst portfolio landlords as it will potentially release more of a property’s rental income as working capital to acquire further properties. A repayment mortgage is often used by investors looking to acquire a buy-to-let property as a long-term alternative to a pension pot, as once the mortgage is paid-off the sale of the property releases a nest egg which has hopefully grown in value over the term.
What do I need to get a buy-to-let mortgage?
Lenders will want to ensure that a buy-to-let property is profitable and, in addition to the property price, will want to know the likely rental income when considering a buy-to-let mortgage application. Often referred to as a rent to interest cover calculation, lenders will look for 100-130 per cent of the monthly interest payment.
For first-time property investors, lenders prefer an applicant to have a £25-30,000 standalone income in addition to the potential rental income generated by the property. Most lenders will require a minimum 15 per cent deposit and will offer up to 85 per cent loan to value (LTV) on a buy-to-let mortgage.
