first Time investment property rental buy to let mortgage

What You Need To Know Before Buying Your First Investment Property

In the UK, buying a property for the purpose of renting it out is a popular investment property strategy. Investing in property is a great way to bring in extra income, but there’s a lot you need to know before jumping in.

Having a rental property is often glamourised, but it may not be what it seems; there’s a lot of work that goes into it and the majority of property investments are not get rich quick schemes. In this article, we’re going to tell you everything you need to know before buying your first investment property.

Investment properties are slow burners

It’s important to remember that investing in property isn’t a get rich quick scheme. The key thing to remember about property investment is that it’s all about building wealth steadily over the years. It’s for those who are wanting to buy, hold and benefit from the steady growth of the property market.

Think of it as a business and know your numbers

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Now you’re aware that you’re in it for the long run, it’s time to start thinking of your investment as a business. Beware, this section of the article isn’t to deter you from your real estate investment dreams, it’s simply to educate you on the realities of being a property investor.

It’s a common thought that you simply put down a deposit and let the rent payments pay off the mortgage. It doesn’t quite work like that and there are a lot more fees and responsibilities that come with it.  The 25% deposit causes a high barrier to entry alone, however, you could simply choose to see this as your start-up costs. It’s important for you to do the maths and know your numbers, work out all the potential costs involved with owning a rental while thinking about what rental income you will receive and model it out.

Fees that come with an investment property

Stamp Duty – This is the big one! When it comes to property investment, as of October 2021, rates will return to normal after the stamp duty tax holiday in England but you will have to pay an additional 3% on top of the existing stamp duty rate for your investment property as it is classed as a “second property”.

Deposit – If you’re planning to use a buy to let mortgage, lenders usually require a deposit of at least 25% of the property price.

Solicitor fees – These are typically between £950 and £1,500.

Survey fees – They can cost between £300 and £600.

Insurance – On average, the cost of landlord insurance is £217 a year, and you may want to pay for extra rental income protection in case your tenants don’t pay.

Property management costs – This should typically be 10 to 15% of your rental income.

Regular maintenance and upkeep – The property will need maintenance over time and so it’s important to budget for this.

Emergency fund – You know we love a good emergency fund at Financielle. When you own and run a property, it’s important to plan for the unplanned, including vacancy periods and making sure you’re covered for any unexpected repairs that may be needed.

The pros and cons of investing in property

Like with everything, it’s always best to weigh up the pros and the cons, especially when it comes to something as big as property investment.

Pros of investing in property

Diversification

Having a range of investments is always the best option. Diversification reduces risk and could maximise your returns by investing in different areas. For example, investing in property and the stock market would be a great example of diversification. If you’re an experienced property investor, diversification could look like owning different rental properties, from flats to student housing.

Capital appreciation

In terms of property, capital appreciation is when the value of your property has grown over time. The property market has grown steadily over time and this is something you should benefit from if you’re willing to play the long game. 

Cash flowing asset

Real estate investment is one of the best income-generating assets. Not only are you likely to receive capital growth, but you’re also likely to benefit from cash flow. Cash is constantly flowing from the rental payments when it comes to property investments.

Potential to add value

Owning a property in any respect gives you the opportunity to add value. Whether it be simply decorating, renovating or even adding an extension, adding value to your investment property will not only allow you to charge higher rent but will raise the value of the property.

Cons of investing in property

Illiquid

Property is not a liquid asset. This is due to it taking a little while to complete a sale. If your need for the invested capital is due to an emergency, you may end up losing money by selling your property at a lower price.

Highly taxed

The Stamp duty land tax is much higher for additional properties due to an additional 3% stamp duty on top of the existing rates for the property you are purchasing.  If you are planning to buy a new home and rent out the property you live in currently, you will be required pay the 3% stamp duty surcharge on the new property, even though it is going to be your home.

High barrier to entry

With the required deposit being at least 25%, the barrier to entry of property investing is quite high. Whilst this might be a negative, you could use it as a time to learn to save and budget to reach a goal. You can use our Budget and Goal Tracker to help you get there more efficiently!

Void periods

A void period is when your rental property doesn’t have tenants in, meaning the monthly mortgage repayments will have to be met by you. However, there are ways to avoid these periods, from ensuring your marketing is second to none to not charging too much in rent to ensuring your property is in good condition.

Hands-on and highly regulated

When it comes to owning a rental property, there are a lot of responsibilities. From gas safety to electrical safety to fire safety, maintaining the safety of the property is one of a landlord’s top priorities. If you live close to your rental property these responsibilities are up to you, there is always the option to get someone else to cover these jobs, but it will add to your costs.

This might be helpful

We have an article that focuses on all things saving for a house deposit. When you’ve got 25% to save, it’s best to have a strategy and budget in place to get you there. Read the article here!

 

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