How To Invest In Property – Forbes Advisor UK

Capital at risk. The value of your investments can go up and down, and you may get back less than you invest.

Investing in property doesn’t necessarily mean buying bricks and mortar directly. Here’s a look at the choices on offer to would-be investors.

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Why invest in property?

There can be many benefits to investing in property, including the potential for a regular monthly income through rental payments, and long-term asset growth if property prices rise. While house price inflation may have slowed in recent years, over a long term view property has increased in value significantly.

Property could also offer diversification in an investor’s portfolio. Property assets may perform well, for example, when other asset classes, such as bonds or equities, are not.

Investing in your own home

Primary residences are the most common way that Brits gain exposure to property ownership – even if they don’t necessarily regard it as investing.

Unless you’ve inherited a property, would-be homeowners generally take out a mortgage which they pay off over time via monthly instalments. Gradually this builds up a share of ownership – or equity – which is the difference between the amount that’s owed to the lender and the value of the property.

So long as property prices rise, homeowners will be able to cash in on this equity if and when they come to sell – although of course, if they are buying another property, gains will be relative to rising property values elsewhere.

At the time of writing annual house price inflation – as measured by asking prices – was between 2% and 5%.

However, the true value of returns on property is likely to be significantly less once mortgage interest payments are taken into account, not withstanding maintenance and repairs, insurance and property taxes.

To help would-be buyers get onto the property ladder, the government offers support through various home ownership schemes such as shared ownership and the Mortgage Guarantee Scheme. It also offers the opportunity to boost deposit-related savings with its lifetime ISA.

Tax treatment depends on one’s individual circumstances and may be subject to future change. The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of tax advice.

Invest in rental properties

Existing property owners might seek to make money from second homes which they can rent out to tenants – often referred to as ‘buy-to-let’. Rental income can offer a steady cash flow while, if prices rise, there’s the benefit of equity gains too. Recent tax changes have also reduced some of the appeal around BTL as an investment.

That said, buy-to-let can also be one of the most labour-intensive methods of making money from property investing.

Different rules apply to buy-to-let mortgages compared with those taken out to buy a home intended to live in. For example, the anticipated monthly rental income will need to be a certain percentage higher than the monthly interest charged on the loan. 

Deposits required are also greater when compared with a standard residential home loan, while interest rates can be higher.

The Stamp Duty Land Tax surcharge on the purchase of additional homes, such as a buy-to-let, was hiked from 3% to 5% from 31 October 2024. This means that stamp duty bill on the purchase of a £300,000 second property will now be £17,500 rather than £11,500. Only homes worth under £40,000 are exempt.

Make money from property development

The main idea behind property development is to buy a property, give it a makeover through renovation or refurbishment, and then look either to sell it on for a higher price, or rent it out in return for an income stream.

To be successful at property development, it’s important to be able to spot lucrative opportunities and then make the figures stand up once DIY, renovation and administrative costs – dealing with local authority planning rules, for example – have been factored in.

Buyers with plenty of capital, know-how and experience tend to be best positioned for success.

Investing in overseas property

Buying bricks and mortar overseas is an option for those looking to both invest and, potentially, earn a higher rental yield abroad compared with a buy-to-let property in the UK. 

There’s also the added benefit of having access to a holiday home that can be occupied when it’s not being rented out.

But while owning a holiday home in the mountains for skiing, or in the sun by the beach sounds appealing, there are plenty of considerations for would-be investors to bear in mind before taking the plunge.

These include sourcing and buying a home in a foreign location – with unfamiliar and potentially complex tax systems and conveyancing processes – as well as uncertain costs due to fluctuating exchange rates; the logistics of maintaining a property remotely and a potential shortfall if your rental income fails to cover mortgage payments.

Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

Invest in property funds

If the idea of investing in bricks and mortar appeals, but you can’t afford the deposit and other outlay, one option to consider is investment funds that specialise in holding property.

These pool together the contributions from thousands of investors to be managed by a finance professional according to certain guidelines. 

A property fund is a type of investment fund that invests either directly in property or in the shares of property-related companies.

There are two Investment Association fund sectors devoted to property. The IA UK Direct Property sector contains funds that invest in bricks and mortar. The IA Property Other sector includes funds that invest overseas or in property company shares.

Property funds tend to invest in the commercial, rather than the residential sector. This means investing in retail and leisure developments (such as shopping centres and leisure parks), office space and industrial or trading estates.

The performance of property funds usually depends on how the economy is doing. In good times demand for property increases, pushing up rents and property prices and encouraging more construction. During a slowdown or a recession, the opposite happens.

A recessionary scenario coupled with high inflation – not unlike what the UK is facing today – can be a toxic combination for commercial property funds.

This is because economic conditions such as these have a detrimental impact on both capital values (the price of the building concerned) along with the potential rental income to be gleaned from it.

Recessions force companies out of business. In turn, this leads to vacancies amongst tenants making it difficult for a landlord to raise rents when other would-be occupiers are able to shop around for space.

Selling a physical flat or house can take months – in some cases, years. The situation is magnified when it comes to commercial property – factories and office blocks can take years to sell, often making property funds an ‘illiquid’ investment.

Illiquidity in property portfolios has been a major issue in recent years. This was exacerbated during the pandemic when nervous investors, looking to exit their holdings from certain property funds, were barred – or ‘gated’ – from doing so by the manager because a fund was unable to sell the necessary assets quickly enough to meet redemption requirements.

Real estate investment trusts

A real estate investment trust – or REIT – is another type of pooled property fund that is structured as a company and is listed on a stock market such as the London stock exchange. The aim of a REIT is to generate a profit from exposure to property through the contributions it receives and ultimately produce a return for its shareholders or investors.

REITs are a relatively new investment product having only been introduced to the UK in 2007. That said, there are about 50 trusts listed in London – spanning a range of specialist property sectors including commercial, residential and even healthcare – with a combined stock market value of around £50 billion.

According to the London Stock Exchange, to qualify as a UK REIT at least 75% of the company’s profit must come from property rental, and 75% of its assets must be involved in the property rental business.

REITs are exempt from corporation tax on profits generated from rental income and the income from the sale of rental properties.

With REITs, investors can buy the shares of the companies themselves or invest via exchange-traded funds (ETFs), which are designed to track a basket of REIT companies. 

The IG spread betting platform provides users with a demonstration account that allows investors to practise trading REITs with £10,000 of virtual cash without any risk to their own money.

Invest in property stocks and shares

Instead of putting money directly into bricks and mortar directly, would some potential landlords be better off investing in property-related stocks and shares instead?

On the plus side, not only investors would side-step the potential problems from either finding tenants (or dealing with troublesome ones), the barriers to entry are that much lower. An investor can be up and running with an investment trading platform within a few hours and, with an outlay of a few hundred pounds, create a modest portfolio of property-related shares.

What’s more, stock market investors can protect themselves from the taxman by taking out a stocks and shares ISA and sheltering up to £20,000 of their investments each year tax-free.

Property-related shares span a wide spread of names, from actual house builders – such as the FTSE 100 businesses Persimmon, Barratt Developments and Taylor Wimpey – to companies such as Ibstock plc and Marshalls plc that supply raw materials to the construction sector and the property portal, Rightmove.

Pros and cons of property investment

The advantages and disadvantages of property investment will vary depending on how you invest. But here is a summary of some of the plus points and drawbacks.

Pros

• potential to make competitive long-term gains
• potential to earn a regular income from rental payments (for physical property)
• property can offer investment diversification to reduce risks across a portfolio.

Cons

• physical property is an illiquid asset, which could be difficult to sell
• regulations and tax rules around property investment are subject to frequent change, which can make it difficult to plan your finances
• may be difficult to find tenants for a property (void periods mean no rental income)
• physical property requires maintenance and upkeep, adding to costs.

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