How to make money from property investment
Of course, before you enter the property investment market you need to understand how to make money out of it, and which of these methods most appeals to you. Essentially, there are three main ways in which people aim to make money in the property market.
Here you buy a property in a specific area and earn regular income from renting it out to a tenant. This rent should ideally cover your mortgage plus expenses, and bring a small profit. This is popular because, depending on the location and the type of tenant you want, there is always likely to be a strong demand for buy-to-let properties in terms of tenants and wannabe-landlords when you come to sell it.
With buy-to-let you can build up a portfolio of properties all earning regular income for you, and you can buy and sell these over the years as and when it makes market sense.
A good rental yield is what you need to look out for and calculate. This is the amount of rent you can expect to receive in a year, expressed as a percentage of the property price. So earning £10,000 on a £200,000 house is a 5% yield, while earning £8,000 from a £150,000 house is 5.33%. So pound-for-pound the cheaper house brings a better return.
However, you might find that other locations bring much better yields, for example in locations where demand is high, but property quite cheap, which could be a student area. Any rental yield between 8-10% is deemed to be very good but you need to work out what is acceptable to you.
Being a buy-to-let landlord can be a hassle in terms of finding tenants, preparing contracts and maintaining a property, but there are ways of doing it passively, either by letting to people you know and trust or employing a letting agent, and the regular income is very attractive and maybe even crucial to some.
Buy-to-sell a.k.a flipping
With this method you aim to buy a property quite cheaply, knowing that it has a lot of work to be done on it that will likely increase its value. Then you can either do the work yourself if you are a DIY expert – the cheap method – or pay contractors to do it. This will swiftly increase the value of the house and thus you can sell it for a much higher price now it is more appealing to the market.
The work involved is usually far more than cosmetic decorating, however, and to really add value and appeal you are talking about new driveways, new kitchens or bathrooms, decking the garden or maybe even a loft conversion or a small extension, if it is deemed to be cost-effective.
This method depends a lot on location and how much a property is likely to increase in value. You need to balance this against the refurbishment costs and the time involved to assess whether it is a good investment.
Many people can get in over their heads using this method, if their DIY/building skills are not up-to-scratch or they have wildly underestimated the costs. You could spend £20,000 doing a house up, but this only increases the value by around £10,000. Sometimes this is dictated by market forces and sometimes by the quality of the refurbishment, but location and costs need to be looked at very carefully.
You can make good money very quickly using this method too, and you can use that to invest in another property to do the same. Of course you won’t be earning regular income using this method, more a lump sum after a period of time, so this needs to be weighed up against your income status to assess whether you can afford to exist day-to-day, and whether buy-to-let may suit you better.
The wrong decision at this stage could influence the next few years and your entire strategy, as you may end up needing to sell a property cheaply to release cash quickly, when a little time and patience could have realised a better market value. Therefore, you always need to assess the liquidity of an asset in line with when you need access to your money.
This is similar to buy-to-sell, but doesn’t necessarily involve you physically improving the asset, instead you hope the location improves. Here you would buy a property at market value, knowing that the market is about to change and the property is expected to become more desirable. This could be due to something like a new school being built nearby or a new road or other transport route opening up.
It is harder to judge this kind of investment and such opportunities are less plentiful. It is very much down to timing and taking an opportunity, but using this method you can turn around a property in 12-18 months, for example, and potentially make around £20,000 on a property sale, all without having to invest anything in refurbing the property itself.
Even if the capital appreciation is more modest than anticipated, you haven’t lost money, although if you have to wait longer than you thought for the market value to increase, this can bring problems in terms of liquidity and accessing your money.
Legal and financial considerations of property investment
Anyone who has bought a property will be aware of the various legal and financial commitments you have to make, such as conveyancing, contracts, property and land surveys, mortgage arrangements etc. This takes up the majority of the process once a bid has been accepted, and in this respect, buying a property for investment is no different.
When you buy any property, of course the title deeds are now in your name, so you immediately have a legal responsibility. However, whichever investment route you choose, there are a number of wider responsibilities.
Buy-to-let landlord responsibilities
As a landlord you must not discriminate in who you let a property or room to, you must maintain the property, provide adequate welfare facilities, smoke alarms and safe gas and electric supplies.
You must provide a contract stating agreed rent and tenancy term and you can’t change the rent or evict a tenant without prior written notice, and in the case of eviction, also a court order.
You must also obtain an energy performance certificate for the property before you rent it out, you must check that a tenant has a ‘right to rent’ in the UK and you must also safely protect a tenant’s deposit.
This applies to all properties costing over £125,000, or £150,000 for a non-residential property, which a buy-to-let property usually is. This applies whether you are buying the property outright or via a mortgage, and this also increases by 3% if the property is your second home, which, again, a buy-to-let property more than likely is.
Buy-to-let landlords need to pay income tax on rental income, or the profit made after deducting allowable expenses such as letting agent expenses, council tax or buildings insurance. You can offset mortgage interest payments against this income, however, higher and additional rates of tax relief are being phased out and will be restricted to 20% for all landlords from April 20201.
Capital Gains Tax
Whether you are a buy-to-let landlord or you bought the property to ‘flip’ or sell-on, if you make a profit on the sale, you will be liable to pay capital gains tax.
You are not covered by the same consumer protection when buying a property, as you are with other purchases and investments, so it is all the more advisable that you seek legal and financial advice at all stages of the process. This will help to safeguard you against rash decisions, to ensure you are suitably protected and to ensure you are making the most of your money, and hence your investment.
Ultimately, smart investment coupled with good advice is the key to being successful in property investment.