How To Invest in Property in 2024

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Investing in property extends beyond buying physical buildings, offering diverse avenues for both direct and indirect involvement. Whether as a standalone venture or within a diversified investment portfolio, exploring property investment requires diligent research, financial assessment, and strategic decision-making.

To increase your likelihood of success, our comprehensive property investment guide navigates you through essential insights. From understanding different investment methods to evaluating financial readiness, we provide valuable information to empower your property investment journey and mitigate potential risks.

Why invest in property?

Investing in property appeals to individuals for various reasons:

Rental Income: It provides a steady income, particularly beneficial for the self-employed or retired individuals.
Capital Growth: Property prices often appreciate, offering a likelihood of returns over time.
Diversification: Property investment adds diversity to a well-structured investment portfolio, spreading risk.
Tangibility: Property is a tangible asset, making it easy to understand and engage with.

In an era of low-interest rates on traditional investments like bank accounts and corporate bonds, property stands out as an alternative that offers desired returns with the added advantage of being tangible and comprehensible.

How much do you need to invest in property in the UK?

When preparing to acquire your initial buy-to-let investment property, focus on three crucial aspects:

Larger Deposit: Save approximately 20% to 25% of the property’s purchase price. Some lenders may accept a 15% deposit, but a larger deposit enhances your options.
Additional Stamp Duty: Be aware of an extra 3% stamp duty on top of standard rates for buy-to-let properties, affecting your overall purchasing costs.
Financial Safety Net: Ensure a cash reserve to handle maintenance costs and mortgage payments during property vacancies. A recommended safety net is six months’ worth of rent.

Pros and cons of property investments

Property investment comes with its positives, but drawbacks exist too. Consider the following aspects:

Illiquidity: Property can be challenging to sell quickly, emphasizing the need for a long-term investment perspective rather than a short-term approach.
Tax Changes: Recent tax changes have diminished the attractiveness of property investment. Higher stamp duty and reduced expense claims impact overall returns.
Market Uncertainty: Property prices don’t consistently rise, and political uncertainty has affected certain areas, such as London, leading to market depressions.
Labour-Intensive: Direct property investment can be demanding, especially if you handle renovations or repairs. Outsourcing these tasks incurs additional costs.

What to think about before you buy

Considerations for buy-to-let investment:

Property Type: Tailor the property type to the local demand. In student areas, multi-room houses may be ideal, while one-bed flats could be sought after in areas popular with young professionals.
Expense Awareness: Be aware of various expenses, including stamp duty at a higher rate for non-residential properties, basic development costs, and mandatory certificates like gas safety checks.
Development Costs: Budget for property development, including furnishing and potential renovations.
Certificates and Insurance: Obtain necessary certificates like gas safety checks and secure landlords’ insurance, as standard home insurance may not cover rental situations.
Time Commitment: Buy-to-let can be time-consuming. Some opt to hire estate agents for tasks like marketing, rent collection, and maintenance, with associated costs being tax-deductible.
Insurance Requirement: While not legally mandated, landlords’ insurance is crucial, especially if you have a mortgage, as lenders may insist on coverage before renting out the property.

Research your options for investing in property

1. Introduction to Property Investment:

Briefly introduce the concept of property investment.
Highlight the various ways individuals can invest in property, either directly or indirectly.

2. Diverse Property Investment Options:

Explore different methods of property investment, including direct purchases and participation in investment funds.
Emphasize the importance of aligning investment choices with individual circumstances and needs.

3. Types of Property Investments:

Outline specific types of property investments, such as Buy-to-Let, Property Development, Reselling New Builds, Investment Abroad, and Real Estate Investment Trusts (REITs).
Briefly discuss each type, providing a snapshot of considerations and potential returns.

4. Risk and Reward Awareness:

Caution readers about the risks associated with property investment.
Emphasize the need to invest within one’s financial capacity and the importance of not exceeding the affordable limit.

5. Financial Preparedness:

Stress the significance of financial stability before venturing into property investment.
Encourage settling non-mortgage debts and establishing an emergency fund for unforeseen circumstances.

Invest in rental properties

Investors often explore ‘buy-to-let,’ turning second homes into rental properties. This strategy offers steady rental income and potential equity gains if property values rise. However, buy-to-let is labor-intensive compared to other property investment methods.

Buy-to-let mortgages differ from residential ones, with higher deposit requirements and potentially higher interest rates. Monthly rental income must surpass a certain percentage of the loan interest. Additionally, purchasing additional homes for buy-to-let incurs a three percentage point loading on stamp Duty Land Tax. For instance, a 5% stamp duty for a primary residence becomes 8% for a buy-to-let investment.

Make money from property development

Property development involves buying a property, renovating it, and selling or renting it for profit. Success requires spotting lucrative opportunities and ensuring the financials make sense, considering DIY, renovation, and administrative costs. Dealing with planning rules is crucial. Buyers with capital, know-how, and experience are better positioned for success in property development.

Invest in property funds

Investment funds specializing in property offer an alternative for those unable to afford a property deposit. These funds pool contributions from numerous investors, managed by finance professionals following specific guidelines. Property funds may directly invest in property or shares of property-related companies. The IA UK Direct Property sector focuses on bricks and mortar, while the IA Property Other sector includes overseas or property company shares. Property funds typically invest in the commercial sector, covering retail, leisure, office, and industrial spaces. Their performance is tied to economic conditions, with demand impacting rents and prices.

However, economic downturns, especially when coupled with high inflation, can adversely affect commercial property funds, leading to reduced capital values and rental income. Illiquidity in property portfolios, highlighted during the pandemic, can pose challenges for investors looking to exit quickly due to prolonged selling times for physical properties. The situation is magnified for commercial properties, which can take years to sell, making property funds an ‘illiquid’ investment, as evident during the pandemic when some investors were barred from exiting certain funds due to the inability to sell assets quickly enough to meet redemption requirements.

Real estate investment trusts

A Real Estate Investment Trust (REIT) is a company structured as a pooled property fund listed on stock markets like the London Stock Exchange. Introduced to the UK in 2007, there are approximately 50 trusts listed, covering various property sectors with a combined market value of around £50 billion. To qualify as a UK REIT, at least 75% of the company’s profit and assets must be involved in property rental.

REITs are exempt from corporation tax on profits generated from rental income and the income from the sale of rental properties. Investors can buy REIT shares or invest through exchange-traded funds (ETFs), which are designed to track a basket of REIT companies. The IG spread betting platform provides users with a demonstration account that allows them to practise trading REITs with £10,000 of virtual cash without any risk to their own money.

Invest in property stocks and shares

Investing in property-related stocks and shares rather than directly in real estate can have advantages. It allows potential landlords to avoid tenant-related issues and lowers entry barriers, requiring only a modest investment and a few hours to set up on an investment trading platform. With a stocks and shares ISA, investors can shelter up to £20,000 of their investments annually tax-free.

Property-related shares cover various entities, including house builders like FTSE 100 companies Persimmon, Barratt Developments, and Taylor Wimpey. Additionally, companies such as Ibstock plc and Marshalls plc, supplying raw materials to the construction sector, and property portal Rightmove offer diverse investment options in the property sector.