Investing in property is probably one of the most daunting things you can do: it involves putting up a large amount of money, (usually) taking on an intimidating amount of debt, and making an endless series of difficult choices.
Most people deal with this in one of two ways: they’ll either get a burst of excitement and rush in without thinking everything through, or will get stuck in “analysis paralysis” and never make any progress at all.
We’ve seen thousands of investors in the Property Hub community successfully navigate between these extremes, and identified five steps you need to work through:
To invest in property, you’ll need to tick two main boxes:
It sounds strange to emphasise that you need to have money before you can invest in property, but in the last boom it was possible to buy with “no money down” and a lot of people (mistakenly) think that’s still the case.
How much do you need? As a rough rule of thumb, you’ll be able to borrow 75% of the purchase price. On the typical buy-to-let property, it’s sensible to add another 5% to cover Stamp Duty, professional fees and other set-up costs.
So you’ll need enough cash to cover roughly 30% of the purchase price.
The amount you’ll need, then, depends on how much you intend to spend. According to our rule of thumb, for a property costing £100,000 you’d need £30,000 in cash.
Unlike the mortgage on your own home, investing in property with a buy-to-let mortgage is only partially to do with how much you earn.
The most important factors are the value of the buy-to-let property you want to buy, and the amount of rent it will produce each month. But that doesn’t mean it’s all about the property and nothing to do with you: your personal situation will need to tick some boxes too.
The main things lenders want to see are a minimum level of earnings, and a good credit history. If you’re self-employed or have irregular work, or you’ve had credit problems in the past, you can expect finding a lender to be harder work.
Unless you have enough cash to cover the whole purchase, the inability to get a mortgage will stop you in your tracks – so speak to a mortgage broker before going any further to make sure you’ll be OK.
You can make money from property in two different ways:
Which do you want? Obviously, “both” sounds pretty good – and over the long-term, the average property investment will grow in value as well as making a monthly profit.
But not all investments are the same, and most will be weighted towards one or the other.
For example, a modern flat in the city centre will typically (not always) grow in value faster than an old terraced house in the suburbs. Typically again, the suburban terrace will normally make you a proportionally higher rental profit each month.
So should you buy the flat or the house? It depends.
If you want to use income from property to quit your job or cut down your hours in the short term, you might want to prioritise monthly income. On the other hand, if you’re looking to build long-term wealth, you’d prefer the capital growth.
One of the biggest mistakes you can make in property is rushing out and buying something without considering what’s most important to you. Get clear on that before going any further.
There are endless ways to make money from property. Some of the main ones are:
Now you’re clear on what you want, you can pick a strategy to match. Again, a common mistake is rushing into a strategy – for example, flipping houses because you’ve seen it on TV and it looks fun – without considering whether it supports your long-term goals.
To get a better idea of which strategy will be right for you, take our free course at Property Hub University.
You don’t have to have been paying close attention to know that the government has taken a dislike to property investors – and this is amply reflected in recent changes to the tax system.
As a result, you can end up paying far more tax than you need to if you don’t set yourself up correctly at the start.
This is another reason why understanding your goals and strategy are essential: otherwise you could end up choosing a structure that saves you tax this year, but leads to you paying far more as your portfolio grows.
Tax for property investors is far from straightforward, and a small investment in professional advice could easily save you thousands of pounds over your investing lifetime. We set up our service Property Hub Tax to specialise in helping investors, but before speaking to anyone you might want to take our free Property Hub University course to understand the basics of property tax.
Having this as the last step might seem strange: for lots of people it would be the first thing they think of. Hopefully though, you now understand why there are more important things to get clear on first.
Many others wouldn’t think about it all, and just invest as close to home as they can. This is a big mistake.
In 2018, property prices rose by 7.7% in the best performing city in the UK – and fell by 2.8% in the worst performing.
That’s a 10.5% difference in a year. An investment of £200,000 in the best city would have grown by £15,400 – and in the worst, it would have fallen by £5,600.
Again, that’s in a single year.
If you just invest in your home town because it’s convenient, you’re giving up control of one of the most important factors that will determine how well your performance performs.
And within any city or town, there will be areas that suit different strategies: one area will be great for flipping family houses, and another will have high demand for multi-lets.
The location of a property is the one thing you can’t change: so while it’s not the first thing to think about, you should consider it carefully before taking action.
But do take action. Investing in property on a whim without doing your research could be a disaster, but doing nothing isn’t a lot better.
Now you know what you need to do before you invest, break it down into steps and give yourself a deadline for achieving each one: for example, commit to having totalled up your savings and spoken to a mortgage broker by a month from today.
If you know you have a tendency to over-analyse and always want more information, give yourself a deadline: a point at which you’ll draw a line under the research you’ve done, trust you know enough, and get to work.
You’ll never know it all, and nobody’s first investment is perfect. But by working through these five steps, you’ll have the best possible chance of building the foundation of a life-changing property portfolio.