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Property Investment
2023 guide

Property Investment: Complete 2023 Guide

What is Property Investment?

Topics:

  •         Basic Definitions You Need to Know
  •         Property Investment Defined
  •         Buy-to-Let Property Explained
  •         The Types of Investment Property
  •         Freehold vs Leasehold
  •         What is Capital Growth?
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Why Invest.

Should You Invest Now?

Capitalising on potential growth, seize investment opportunities, secure future financial stability.

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How To Inveest.

Why Invest In Property.

Property investment: wealth creation, passive income, and long-term financial security.

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Where Should I Invest?

What Are Rental Yields?

Rental yield: a measure of investment property’s profitability through rental income.

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What is Property Investment?

Put simply, property investment is investing in property as an asset to generate cash.

There are many ways to invest in property, which we’ll discuss in Chapter 5, but likely the most common form of property investment is buy-to-let property.

What is Buy-to-Let Property?

Buy-to-Let property is a property purchased by an investor to rent to a tenant to generate income.

With buy-to-let property, you can manage the property yourself and find your own tenants as a landlord or use the services of a property management company for a fully managed investment.

You can have many tenants in buy-to-let real estate, including families, couples, retirees, students, and businesses.

Buy-to-let is by far the most popular investment strategy here in the UK. While there are plenty of reasons this is the case, perhaps the most exciting detail for investors is that you can earn two types of income.

  1.     Rental Income

Investors who rent out their investment property to a tenant will earn income every month called rent. The amount of income you make will depend on your property type and location.

For example, a one-bedroom apartment in Liverpool had an average rent of £659 PCM in June 2022. But a one-bedroom apartment in London had an average rent of £2,186 PCM.

Want to learn more about rental yields? Check out the complete guide.

  1.     Capital Growth

Sometimes referred to as capital appreciation or capital gains, capital growth is the increase in the value of a property over time. Growth is one of the most exciting parts of property investment as it allows investors to earn a huge future profit.

Let’s say you bought an average detached property in Manchester in March 2012 and sold it in March 2022. In that case, you’d stand to earn a profit of over £200k, according to Land Registry UK House Price Index data.

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What Are the Different Types of Investment Property?

While we will discuss the specific types of property investment in Chapter 5, there are four main types of investment property.

  1.     Residential Property

Residential properties are properties that are lived in. They include apartments, townhouses, detached homes, and terraced houses.

  1.   Commercial Property

Commercial property is similar to residential property, except investors rent solely to businesses or corporations.

Types of commercial property you could consider include office spaces and retail stores.

  1.   Student Property

Student property is a property rented exclusively to student tenants. There are two main types of student property, purpose-built student accommodation and student HMOs.

Student properties have less capital growth potential than residential properties as their demand is lower. But they’re usually smaller, particularly PBSA, which means purchase prices are far lower.

  1.   Mixed-Use Property

The final type of property investment is a property that features commercial and residential units.

In practical terms, this means a property that houses both a commercial unit and residential living space. For instance, shops like convenience stores often feature residents living above them, which will fall under the bracket of a mixed-use property.

Can I afford an investment property? Check out our complete guide for more information.

Considering Investing With A Partner?

Exploring the Potential: A Comprehensive Guide to Successfully Investing in Property Alongside a Trusted Partner for Mutual Gains.

What is Freehold vs Leasehold, and Why Does it Matter?

When investors buy a freehold property, they own the building and its land. But those buying a leasehold property will only own the building and not the land. This ownership will only last for a set number of years outlined by a lease. In effect, a leaseholder owns the lease and not the property itself.

When a lease expires, the home will belong to the landowner unless you can extend the lease.

For example, most flats are sold as leasehold while the builder or developer holds landownership. However, this isn’t always the case as some flats share the freehold ownership with others in the same building, known as the ‘share of freehold.’

In the same vein, houses tend to be freehold. But this isn’t always the case. In recent years, controversy has been sparked with some new-build homes sold as leaseholds.

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Avoid Leases Under 80 Years

By owning a leasehold, you have the right to live in the property for a set time.

In effect, a leaseholder is essentially the tenant of the freeholder. You don’t technically own the property, but you can freely buy and sell the physical bricks and mortar.

Upon the end of your lease, ownership of the property will fall into the hands of the freeholder. So, how can you avoid this?

Fundamentally, you should avoid any lease that falls under 80 years. Buying a leasehold under the 80-year mark can be incredibly dangerous and makes it difficult to get a mortgage or sell the property.

However, you can extend the lease, but this can be extremely expensive with the price rising the lower the lease length. For investors, you should always aim to buy a property with a lease length above 100 years, as it can add £10,000s to the property’s marketing value.

The Cost Of Extending A Lease

LEASE LENGTH EXTENSION COST PROFESSIONAL FEES (1) TOTAL POTENTIAL ADDED VALUE
90 years £4,500 £4,000 £8,500 £12,500
85 years £5,500 £4,000 £9,500 £16,500
79 years £13,000 £4,000 £17,000 £19,500
70 years £19,500 £4,000 £23,500 £25,000
60 years £28,000 £4,000 £32,000 £33,000
Data: MoneySavingExpert. The typical cost to extend a lease on a £200,000 flat by 90 years

What is Capital Growth?

Capital growth, otherwise known as capital appreciation or capital gains, is the profit earned upon selling a property in the UK.

For instance, if you bought a property for £100k and sold it for £250k, your captain gains would be £150,000. Unfortunately, landlords don’t get access to this entire profit, as it’s subject to Capital Gains Tax.

Growth is one of the biggest attractions for investors, as it shows the potential for a huge cash payout. Unfortunately, there’s no way to guarantee capital growth, but there are some steps you can take to maximise the chances.

Firstly, sizeable capital growth is more common in detached and semi-detached homes, as many homeowners aspire to live in these property types.

Secondly, the location of an area can impact capital growth potential. Investing in areas with high regeneration projects or levels of gentrification can lead to higher rates of capital growth.

Looking to invest your pension into property? View our complete guide.

Basic Property Investment Definitions You Need to Know

We’re going to use some jargon in this guide, so if you aren’t well acquainted with property investment, you may be slightly confused.

Not to fear, though, as here’s a list of the common terms and phrases you need to know before investing.

A

  •         Annualised Return: The amount earned by your investment each year. Determined by your total rental income and estimated capital growth.
  •         Asset Class: A group of investments that share similar traits. For example, property and bonds are examples of different asset classes.

B

  •         Base Rate: The Bank of England’s rate of interest. The rate is typically used as a benchmark by mortgage lenders. So, if the Base Rate rises, your mortgage rates will likely do the same.
  •         Below Market Value (BMV): Property on sale for lower than the market average.
  •         Bridging Loan: A short-term loan that allows a person to buy a property before selling their current one.
  •         Build-to-Rent (BTR): Property that has been specifically built to rent to tenants. Build to rent homes are often modern apartments equipped with features like on-site gyms and work lounges.
  •         Buy-to-Let (BTL): A property that an investor purchases to rent to tenants and earn returns.

C

  •         Capital: The amount of money invested into an asset. It is sometimes referred to as equity.
  •         Capital Gains Tax (CGT): A tax on the profit you earn after selling your property.
  •         Capital Growth: The increase in a property’s value over time compared to its original price.
  •         Comparative Market Analysis (CMA): The estimated value of a property based on similar properties in the area.

D

  •         Diversification: Adding different investments to your portfolio to spread risk and limit losses.

E

  •         Equity: The difference between the estimated value of the property and your outstanding debt, such as your remaining mortgage balance.
  •         Exchange of Contracts: When the buyer and seller of a property sign a contract to make the sale official.

F

  •         Financial Conduct Authority (FCA): The UK’s regulatory body for the financial services industry.
  •         Freehold: A form of property ownership where the buyer owns both the land and the property.
  •         Fully Managed Investment: Property managed by a developer or company rather than the owner. Companies will manage the tenancy, maintenance, and find tenants for a fee. Fully managed investments are sometimes referred to as hands-off investments.

G

  •         Gross Yield: A percentage figure that shows the return on your investment earned each year without deducting expenses
  •         Gross Rate of Return: The total return on your investment without deducting expenses.
  •         Ground Rent: A yearly charge paid by the property owner to the landowner. In other words, the leaseholder pays an annual charge to the freeholder.

H

  •         Houses in Multiple Occupation (HMO): A property that houses two or more tenants who aren’t in the same family. They’ll usually share facilities like a bathroom or kitchen but will have separate bedrooms.

I

  •         Income Tax: A tax on the income you earn in a tax year. This includes the rent you earn from property.

K

  •         Know Your Client: The legal process taken by investment companies and financial service organisations to verify your source of income to prevent money laundering.

L

  •         Land and Buildings Transaction Tax: A tax paid on the purchase price of a property in Scotland.
  •         Land Registry: A government office that records the holding of land ownership. When a property is sold, the buyer pays a small fee to the Land Registry office.
  •         Land Transaction Tax: A tax paid on the purchase price of a property in Wales.
  •         Lease: A document that allows a party to rent a property owned by another party for a set time.
  •         Leasehold: A form of property ownership where the buyer owns the property (but not the land) for a set period agreed upon with the landowner (freeholder).

M

  •         Maintenance Charge: A charge that covers the cost of insurance and maintenance of a property. The charge is typically implemented on leasehold properties.

N

  •         Net Profit: The actual profit you earn after deducting expenses.
  •         Net Yield: A percentage figure that shows the return on your investment earned each year after deducting expenses.

O

  •         Off-Plan: Property that can be purchased while still under construction or in the planning stage.
  •         Open Market Value: The estimated price your property could sell for on the open market.

P

  •         Purpose-Built Student Accommodation (PBSA): Property that has been specifically built to house university students. PBSA typically provides a higher quality of living than older HMOs.
  •         Portfolio: A collection of investments that belong to an individual or group. Portfolios can consist of multiple assets from the same or different asset classes.

R

  •         Rental Yield: The return on investment earned through rental income. It is calculated by dividing the annual income by the original purchase price and multiplying by 100 for a percentage.
  •         Rent Arrears: The money owed by a tenant when they miss a rental payment.
  •         Residential Property Investment: A form of property investment where the property is rented to a tenant for living purposes.

S

  •         Stamp Duty Land Tax: A tax paid on the purchase price of a property in England and Northern Ireland.
  •         Student Property Investment: A form of property investment where the property is rented exclusively to student tenants.

T

  •         Tenancy: The agreed tenant possession of a property set out under the terms of a lease.

V

·         Void Periods – A period when a property doesn’t generate rental income. Void periods can occur if the property is vacant or when the tenant refuses or cannot pay rent.

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