Whether you are investing directly or indirectly, residential or commercial, the market lends itself as the combination of low property prices and low interest rates makes for potential return on your investment. If you are investing in property for the first time you have a number of options, including flats, townhouses and houses (residential) and offices or commercial properties (commercial). Other things to take into consideration are property management, the initial costs and the on-going costs (like insurance and repairs).
1. Direct property investment
Buying your home or a property to let out is a way of investing directly in property. However, although the Financial Services Authority (FSA) regulates most mortgage sales, it doesn't regulate most buy-to-let mortgages. If you're thinking of investing directly in property as a way of making money it's important to be aware of the risks. In particular, beware of 'get-rich-quick' promotions.
Buy-to-let is a form of residential investment where you buy a property, usually with the aid of a mortgage, and rent it out. The 1988 Housing Act made investment in residential property more attractive to landlords when it introduced a new type of tenancy giving landlords more control over their properties and there has been a substantial recovery in the private rented sector since then. The availability of loans for buy-to-let purchasers has also increased the appeal of owning rental property.
When you buy a property to let out, you are becoming a landlord. And owning investment property is not like owning your own home. Instead you are effectively running a small business and you have important legal responsibilities, for example with regard to your tenants' safety.
Before you choose a property and arrange the finance to purchase it, there are a number of factors you should look into:
Research your market:
You should carefully research the market where you want to buy your property. You can either do this yourself or ask a specialist letting agent to provide advice on the best area and type of property to renting out. If you research the market yourself, you could gather information from estate agents, local papers, existing landlords and even the local authority, about the demand for and supply of, rented housing.
Find your tenants:
You will also want to think about the type of tenant you are aiming to attract. Are you hoping to attract single people, or families, as they will have different requirements. It is important to remember your property should have features that are attractive to would-be tenants, rather than would-be purchasers.
Choose your location:
You should also look at how close the property is to local amenities such as shops, transport and schools, and are these the type of amenities that are important to your tenants? So, if you are aiming to let your property to say a family with school-age children, how close the nearest schools are, will be an important influence on where they choose to rent.
A buy-to-let property investment may be right for you if you:
- prefer investments that feel more tangible than stocks and shares
- are willing to tie up your money for a long period of time
- understand property prices can go down as well as up
- are willing to take the risk that you may not earn a profit on your investment
- understand and accept the additional risks that go along with borrowing money to buy a property
- understand and accept the costs and time involved in owning and running a property and the impact that this will have on your potential return
To buy a residential property, you can use your own cash or take out a buy-to-let mortgage with a cash deposit. Keep in mind that a mortgage comes with risks – if you need to sell the property for a loss, the sale price may not cover all that you owe on the mortgage. You would need to make up the difference. Also remember, that if your tenants leave and there is no rent coming in, you still need to make your mortgage repayments.
Once you buy a property, you can potentially earn a profit in two ways:
Rental yield – what your tenant(s) pay in rent, minus any maintenance and running costs, like repairs and agents fees.
Capital growth – the profit you earn if you sell your property for more than you paid for it.
2. Indirect property investment
Property Open Ended Investment Companies (OEICs) and Property Unit Trusts are schemes which pool investors' funds and invest as much as possible in property. The fund invests either directly and/or by buying shares in companies that invest in property. A few of these schemes are regulated, so there are safeguards to reduce the risk of financial loss.
Indirect property investment may be for you if you:
- want to invest in property markets without having to buy a house or flat yourself
- are ready to commit to a long-term investment
- understand that the property market can fall as well as rise and that the value of your investment can therefore go up or down
- Indirect property investment options
There are three main types of indirect property investments:
1. real estate investment trusts (REITs)
2. shares in property companies
3. land banking schemes
Other ways to indirectly invest in property include property funds, property unit trusts and OEICs, property investment trusts and property authorised investment funds.