When it comes to generating passive income, few investments come close to investment property.
And after a record-breaking year in the UK property market that saw average UK property prices soar past £250,000 for the first time ever, you may be thinking that 2022 is the perfect time to make a purchase.
But property can be complicated, with a lot of nuances setting apart a good property investor from a great one.
With this in mind, we’ve decided to give you10 tips for making the best property investment possible in the next 12 months.
Keep reading to learn all about how to buy investment property in 2021 and 2022.
What Is an Investment Property?
So, what is an investment property?
An investment property is real estate that has been purchased to make money from rental income and/or the future sale of the property. As such, investment property can be considered both a short term and long term investment.
Why Is Investment Property a Good Investment in 2021?
There are four main reasons you might consider investing in investment property in 2021 and 2022.
- UK house prices have increased at their highest level since 2004, with buyer demand twice as high as pre-pandemic levels according to Rightmove. This has led to average property prices exceeding £250k for the first time ever, according to Nationwide.
- Rental income is also at a record high, with UK rental property commanding average rental prices of £1,061 per month in September 2021, according to HomeLet.
- Rental demand is the highest it has ever been, with Hamptons estate agents finding that it took just 8.9 days to secure a tenant in Q2 2021, down from 31.9 days in 2019!
- Capital growth potential is huge for investment property, with industry-veterans Savills predicting property prices to rise by up to 18.8% in UK regions by 2026.
How to Invest in Property: 10 Tips for Buying Investment Properties
Now that you know why you might want to make a property investment, it’s time to look at making the best investment possible.
To help achieve this, here are 10 essential tips that every beginner property investor should know when buying investment property in 2021.
Remember, though, the following tips are not financial advice and you should seek expert advice before making a property investment.
1. Do You Want to Be a Landlord?
While generating rental income and long-term capital growth is exciting for prospective landlords, many investors forget about the responsibilities they are taking on by becoming a rental property owner.
As a landlord you must:
- Keep your rental property safe from hazards.
- Ensure all gas and electrical equipment has been safely installed.
- Provide an Energy Performance Certificate.
- Protect your tenant’s deposit.
- Check your tenant has the right to rent in England.
- Give your tenants a ‘how to rent’ checklist when they begin renting.
There are even different rules if you buy investment property in other countries like Scotland and Northern Ireland.
If you don’t want to take on the burden of landlord life, there are ways to have a completely hands-off investment in UK property.
To do this, you’ll need to hire a property management company that will fulfil all landlord duties, including finding tenants and collecting rent. However, keep in mind that you’ll usually be charged around 10% of your monthly rental income for this privilege.
2. Research the Right Location
While findingbuy to let real estate can be simple, ensuring that it is a lucrative investment can be much harder.
A big factor behind the success potential of an investment property is its location, with different cities offering varying rental market strengths.
For this reason, it’s vital you research UK cities and areas to ensure you’ll have access to your targeted tenant group and can generate enough property interest for years to come.
To do this, you’ll need to keep some criteria in mind by evaluating UK locations. You should think about an area’s:
- Average rents
- Rental yields (percentage figure showing the return on investment earned every year through rental income)
- Future development and regeneration potential
- Long term growth and capital appreciation potential
- Transport links
- Employment opportunities
- Local amenities
By finding an area that meets all these criteria, you’ll set yourself up for the best chance of success with your buy to let property.
For finding the right property, the current best places to invest in UK property according to our criteria are:
3. Decide Between Buying or Finance
The next crucial step for buying rental property is to decide whether you want to buy your investment property outright, or use financing options.
With property prices currently sitting at an average of £269,945, according to the latest official Land Registry figures, the average buyer may struggle to cover the entry cost of owning a rental property.
For this reason, you’ll likely opt for financing options by securing an investment property mortgage, otherwise known as a buy to let mortgage. However, there are some key differences you need to be aware of when using an investment property mortgage.
- Buy to let mortgages require a higher deposit than traditional residential real estate mortgages, usually around 25% of the property price.
- BTL mortgages are interest-only, which means mortgage payments only cover the interest owed each month. Upon the end of your mortgage term, you’ll need to repay the total debt in full – usually achieved by selling the property.
- Owner-occupied properties purchased with a BTL mortgage aren’t allowed. This means you cannot live in your investment property if you buy it with a buy to let mortgage. You’ll need to switch to a normal mortgage if you plan on moving in yourself after a while.
- Mortgage lenders will require your rental income to be around 20-30% higher than your monthly mortgage payments.
Speak to a mortgage advisor to learn more about BTL mortgages and their suitability for your financial needs.
4. Get Landlord Insurance
When buying an investment property to rent, you’ll likely want to protect your home from damage during your ownership.
To do this, you will need to secure cover with landlord insurance.
Landlord insurance is a cover that protects landlords from damages suffered in their rental property. This cover can protect landlords from a variety of issues including structural damage, loss of rent, and legal issues.
There are several different types of landlord insurance, including buildings insurance, contents insurance, liability insurance, legal cover, loss of rental income, and home emergencies.
While landlord insurance isn’t legally required, it’s a smart idea to get some protection, with some mortgage lenders requiring buildings insurance before they will provide a loan.
5. Organise a Full Structural Survey
New build properties have slowly built up the reputation of lacking quality, with corner-cutting developers releasing low-quality developments.
While one way to get around this is to conduct due diligence on a property developer before buying the property, another way to ensure quality is by organising a full structural survey.
Although this may set you back around £800 on average when buying your buy to let property, it could save you a fortune in the long run.
By getting a full structural survey, you can flag up any issues you have with the property before buying and can either choose not to make your purchase, or can bring the issues to the developer who will typically fix them free of charge.