Investment Property

Investing in Residential Property: Advice and Best Practice

When buying property as an investment, it’s important to consider what you want your investment to do: are you looking for it to act as a long-term rental to pay a monthly sum, or are you looking for capital growth.

Whatever you want your investment to do for you, it’s important to remember that you can never do too much research when it comes to buying investment property to let. It pays to know the area well and to buy accordingly. It doesn’t matter if you don’t live within the area you’re planning to buy in, if you’re investing your life savings or putting your own home up as security to buy a property, you must find out as much as you can – even if it means moving into the area for a while to really get to know the place.

It’s important that anyone investing in property they intend to let plans for all financial eventualities. If you’re buying a property that needs refurbishing then not only will you have to consider the cost of the work, but also the mortgage repayments you’ll have to make while the property is unoccupied. Furthermore, in respect of the long-term, a property investor has to take account of the times when the property will not be occupied: there will be lulls with no rental income and these have to be factored into the long-term financial plan, as does the general maintenance of a property. For example, costs such as Council Tax may still have to be met regardless of whether the property is vacant or occupied; and if the property is vacant during a particularly cold spell and you want to prevent burst water pipes, you may have to turn the heating on for regular short periods of time. These costs will add up.

There are also tax implications related to investing in property. Income from a second property that is rented (e.g. a buy-to-let) is taxable. Expenses and receipts from an investor’s UK properties are aggregated to produce a profit or a loss, and the profits are calculated in much the same way as business profits are. Allowable expenses may include such items as advertising the property for let, property repairs and general maintenance costs, managing agents’ fees, interest paid on any loan taken out to buy or improve the property, and wear and tear on furniture and fittings. When you sell a let property (you’ve never used as your main residence) any profit you make from the sale is normally liable to Capital Gains Tax. You should turn to your accountant for accurate tax advise based on up-to-date legislation.

Anyone considering investing in property shouldn’t think that he or she has to stick to residential property though. Commercial property has some advantages over residential property: unlike tenants of residential properties, commercial property tenants typically sign leases for longer tenancy periods; are typically liable for repairs to the property; and commercial property return tends to come from income and is not closely linked to the increase in house prices as is the case with residential property investment.

The popular source of financial funding for investing in residential property is a buy-to-let scheme available from various lenders. This scheme allows the investor to borrow as much as 75 percent or so of the property purchase price with repayment being on either a variable or fixed interest rate.

While the rent is usually stable (with the odd lull here and there as mentioned above), the real return on investment is the growth in the value of the property. This is particularly attractive to the investor who wishes to make a career in the property market. He or she will buy a property, carry out any necessary renovations, and then sell it on as quickly as possible. This property investor’s sole aim is to make as big a profit as possible in the shortest space of time. The other type of investor will buy a property with a view to letting it over a period of time, with the long-term aim being to perhaps live in the property at some stage in the future or pass it on to his or her child/children. The rental income the investor receives can be used for a multitude of purposes – for anything from building up a pension for their twilight years to helping put their children or grandchildren through university. Anyone worried about the disadvantages of letting property such as high maintenance costs and irresponsible tenants can buy a newer property and instruct a Chartered Surveyor or lettings agent to handle the management of the let, which should help mitigate these concerns.

Investing in property can be a wise decision. As well as the prospect of providing financial security for the future, it may set someone with the right inclination on his or her way to becoming a very rich property owner.

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