The Beginners Guide to Property Investing
Whether you’re interested in generating some extra cash, replacing your income, or building financial freedom – a property portfolio can provide many lucrative benefits.
In this guide, we cover some of the key things you need to consider if you’re thinking of investing in property.
1. Decide on your Property Strategy
As with any business, the success of your property business depends on having a well-thought-out and developed business plan. To develop this business plan, you’ll first need to clearly identify your goals and what you want to achieve.
There are a variety of ways you can successfully start and scale a property portfolio. Which strategy you opt for depends largely on your personal interests, goals, financial situation, and the time you have to invest in the business.
Property investing can essentially be broken down into two areas:
- Buy and hold: purchasing a property to rent out and build long-term wealth, known as a buy-to-let.
- Buy and sell: purchasing a property to sell on and make a profit. There’s no steady income or long-term capital growth, only the profit you make when you sell the property.
Based on your business goal, you can then determine the types of properties you’ll invest in.
- Traditional Buy to Let (BTL)
This is the most common property investment type and consists of purchasing a property and renting it out to tenants to live in. The rent should cover any mortgage borrowing and costs and ideally provide a profit. This strategy is normally a medium to long-term investment, with returns made through the rental income as well as the possible capital appreciation of the property.
- Buy, Refurbish, Refinance, Rent (BRRR)
The BRRR strategy consists of buying a low-value property and refurbishing it to increase its value before refinancing it. With the increased property value, you can then pull your money out of it to invest into another property and then rent the property to generate a rental income.
Houses in multiple occupation (HMOs) are properties with at least three tenants from more than one family living together. They typically have a shared communal kitchen and living area and, in some cases, a shared bathroom. HMO properties require a licence and are a popular investment choice as they can provide higher rental yields than a traditional BTL but come with more costs.
- Holiday Lets
This type of BTL property investment is focused on short-term renting as the property is only rented out for part of the year. Choosing the right location is vital to attract holidaymakers and avoid empty periods.
- Build to Rent
Build-to-rent properties are ones that have been designed and built specifically for the purpose of letting out to renters rather than owner-occupiers. Many investors also follow the build to rent strategy to create purpose-built student accommodation.
- Traditional Property Development
This requires purchasing property or land and building from the ground up or extensively renovating an existing property to sell on for a profit. There is a lot to consider in order to successfully complete a build and most lenders will not lend to first-time developers without any investing experience due to the level of risk involved.
- Off-Plan Property
This consists of investing in a property before it’s been built. One of the main benefits of this strategy is that the value of the property when you secure it at the beginning of the build stage is likely to have increased by the time the development is completed, resulting in higher capital appreciation than buying the traditional way.
Once you’ve determined your property strategy, the second part of your plan should set out how you’ll reach your goals. Here, you’ll need to plan how much finance you’ll need to bring your plan to life.
Like any business, there are likely to be unforeseen circumstances, market changes and issues that arise that will require you to adapt and pivot, however, having a clear understanding of the direction you want to go in will help you stay focused on the bigger picture.
2. Do Your Research
Before you start investing, you’ll need to do your research. So, based on your business plan, you’ll need to research the different funding options, marketing, and how to manage a portfolio of properties.
You’ll also need to learn what affects property values, get insights into market trends, and be aware of the things you need to consider when investing in property. Ultimately, this will make it easier for you to find the right deals that can give you the biggest return on investment.
3. Use the Right Team
To be successful, you’ll need to surround yourself with the right team. This means you’ll have to use the right solicitors, property finance advisers, estate agent, tax advisor and the like.
Remember, they’re experts in their fields, so they can help you save a lot of time and effort which means you can focus on running your business. In turn, this will allow you to scale your business effortlessly and build a profitable portfolio faster than doing it alone or working with the wrong people.
4. Start With One Strong Investment
It’s perfectly understandable that you’d be eager to get started. As such you might want to invest in more than one property in the beginning. However, it’s always better to start with one property and build your business from there. In this way, you’ll get to experience first-hand how a property business works and get a taste of your chosen strategy. It also means you’re not putting all of your eggs in one basket from the get-go.
It’s for this reason that your first property should be a strong investment. If it is, it will lay the foundation for your future success. As a result, you should ensure that all the numbers stack up and that you’ll be able to achieve a good return on your investment. This will give you the capital to invest in your next property and build your portfolio.
Conversely, if you invest in the wrong deal, it could have dire financial implications that could impact the success of your business and prevent you from investing in more properties.
5. Market your Business and Connect with People
To find the best deals, you should consider marketing your business. It simple terms, effective marketing will increase your reach and expose you to more investment opportunities.
Nowadays, with more people using the internet and social media than ever before, this will almost always involve an effective digital marketing strategy. As such, you should use channels like social media and email marketing to find and engage with potential buyers, sellers, and tenants.
This will also allow you to connect with other people in the industry to learn from and do business with.
6. Leverage the Right Finance Products
To be successful in your property business, it’s crucial that you have a funding strategy. Firstly, you need a cash flow strategy in place and one that you stick to. If you don’t, you could end up investing in deals you think are better than they actually are.
This is often a result of investors wanting to grow their property portfolios as quickly as possible, and as a result, buying properties that don’t provide the returns they expected.
An effective cash flow strategy will prevent this as it requires that you always ensure that the numbers add up and, by implication, invest in the right properties and make a return.
Another crucial aspect of your financial strategy is leveraging the right property finance to grow your portfolio. Fortunately, there are many options depending on the specific property and your requirements.
If you’re not sure which finance you need for your strategy, check out this article.
When building your property business, it often happens that you come across a deal that’s simply too good to miss. The problem is, these deals often require that you have access to capital. If you then use the capital you have available, it could impact your cash flow. Conversely, arranging financing can be a lengthy process which could lead to you missing out on the opportunity. Bridging loans solve this problem.
They are especially helpful for those situations when you need access to capital quickly and in the short term. Typically, you’ll have access to a bridging loan when you buy a new property before another property sells. You’ll then use the bridging loan to pay for the new property in full or partly, and then use the proceeds of the prior sale to repay the bridging loan.
Generally, you’ll be able to borrow anything from £75,000 to £500,000 at up to 85% loan-to-value and at competitive rates. In other words, you could have access to up to 85% of the value of your property. The biggest benefit is that, unlike traditional financing, the funds will be available in days.
Buy to Let Mortgages
Buy to let mortgages are similar to residential mortgages but are aimed specifically at property investors who want to invest in rental properties like houses or flats. There are, however, some key differences.
The first major difference is that most buy to let mortgages are interest-only loans. In other words, you’ll pay only the interest on the outstanding capital, and they don’t require capital repayments.
As a result, these loans allow you to keep your monthly expenses low and are therefore a valuable tool for any investor who wants to grow a property business. Keep in mind, however, at the end of the term the full capital debt will be payable. This will be done either by selling the property or taking out another mortgage.
Another difference is that buy to let mortgages are typically more expensive compared to residential mortgages. As such, they often require deposits of between 20 and 40% and have higher interest rates.
Recently, an increasing number of investors have been investing in HMO (House of Multiple Occupation) properties. This is perfectly understandable considering that these properties can offer investors a higher yield when they’re able to let out the property under multiple tenancies.
The problem is that regular buy to let mortgages do not allow multiple tenancies. This is where HMO mortgages come in. They allow you to finance HMO or multi-let properties.
It’s important to note, however, that HMO mortgages often have certain criteria that you’ll need to meet in order to qualify and typically involve a more comprehensive mortgage application process. For instance, some HMO mortgage providers might have minimum income requirements.
Likewise, some providers might require that you at least have a certain amount of buy to let experience while others could have requirements relating to who manages the property.
A commercial mortgage is typically used by businesses that want to purchase property for commercial use like, for instance, a trading premises.
They’re also available to investors who want to invest in property and grow their property businesses. In fact, buy to let mortgages are a specific type of commercial mortgage. Like buy to let mortgages, commercial mortgages differ from residential mortgages in several ways.
For one, although commercial mortgages offer lower interest rates than typical business loans, they often have higher interest rates than residential mortgages. This is simply because they’re considered by lenders to be higher risk. Another difference is that commercial mortgages typically don’t offer fixed interest rates which means your repayments can differ as the interest rate changes.
Development finance is generally used by property developers to finance large-scale construction projects. When investing in residential properties, investors can also use it to fund renovation or refurbishment costs. This could, for instance, be the case where you buy a property, renovate it, and then sell it for a profit.
Unlike residential, buy to let, and other types of finance, the amount of money borrowed will not depend on the value of the property, but rather the predicted value when the renovations or construction is completed.
This is referred to as the Loan to Gross Development Value or LTGDV. Here, you can obtain financing for up to 70% LTGDV. Generally, loan terms for development finance are also shorter and range between 1 and 5 years and many development finance products are interest-only loans.
In the fast-paced auction environment, the key to success is the ability to react quickly. In other words, to capitalise on excellent deals, you need access to capital fast. This is where auction finance is the perfect solution.
It’s a type of bridging finance specifically designed for investors who buy properties on auction and gives you quick access to capital. In fact, in many cases, you can have access to funding within hours of applying.
Much like bridging loans mentioned above, auction finance is typically offered over the short-term and many products offer loans on an interest-only basis. Also, the interest rates on auction financing are generally higher compared to residential mortgages and bridging loans.
Holiday Let Mortgages
Unlike buy to let mortgages, holiday let mortgages are aimed specifically at investors who want to purchase properties that they’ll let out on a short-term basis to holiday-goers. It’s also important to distinguish them from holiday home mortgages which are applicable to holiday homes only the owner will use.
To qualify as a holiday let, the property must be available to let for a minimum of 210 days a year and each individual letting should not be longer than 31 days. Typically, when it comes to holiday let mortgages, mortgage providers have different lending criteria including minimum income requirements, maximum mortgage amounts, LTV requirements, and rental income projections.
Secured loans, also known as second charge mortgages allow you to borrow larger sums of money compared to unsecured loans. The reason for this is that these loans are secured by using a property you own.
This makes them the ideal solution if you’re unable to obtain further advances on your mortgage or re-mortgage to raise capital to, for instance, renovate a property. It’s important to remember that the amount you’ll be able to borrow will depend on the amount of equity you have available in an existing property or properties.
The Bottom Line
Starting and running a successful property business isn’t easy, but when done correctly, can provide short and long-term financial benefits.
As a result, you must have a proper business plan, do extensive research, market your business, have the right team, and consider the right funding options depending on your specific needs and requirements.
And that’s where we can help. At Ramsey & White, our team of specialist property finance advisers help property investors and developers across the UK. Our skills, expertise, and professional network can help you generate momentum quickly while growing your property portfolio.
To learn more about our range of services and how we can help you, contact us today.