Property Investment

UK property Investment Guide
Welcome to your complete guide to property investment in the UK.


Property Investment Guide

Property Investment in the UK

Property investment in the UK covers a wide spectrum of different property types as well as a variety of ways to invest. Our UK property investment guide covers all aspects of this subject with valuable advice, useful tips on how to get started and highlights any areas where you should be careful.

What is property investment?

Property investment involves buying property (residential, commercial or land) to make money. A profit can be made in two ways: from capital growth (the increase in property prices over time) and from rental yield (the money made when the property is rented to a tenant).

As an investment strategy, property investment is relatively low risk, but it works best over the medium to long term. If you are interested in property investment in the UK, you should have an investment goal of at least 5 years.

How does property investment compare to other types of investment? Let’s compare it to buying stocks and shares in a company.

Property investment vs. the Stock Market

Whether to invest in property or the stock market depends on a number of factors: your attitude to risk, potential returns on your investment, how much time you have to devote to your investment and how accessible you want your capital to be.

Security of your investment

Property investment will suit you if you prefer to invest your money in something tangible and more secure. Bricks-and-mortar buildings are something you can see and touch while for many, the stock market does not seem ‘real’. Although there are occasional slumps in the property market, the trend for property prices is generally upward as demand for property continues to be high. By contrast, trading on the stock market tends to be more volatile depending on a variety of socioeconomic factors. It is therefore higher risk than property investment.

Trading on the stock market can be volatile and, unless you are very experienced, a much greater risk than investing in property.

The returns on property investment and shares

The returns on the two types of investment also differ. Shareholders are paid annual dividends on their holdings while property owners receive a monthly rent payment. It is impossible to compare the two since there are so many variables. How much you make annually depends on which company you have bought shares in or the location/type of property you own.

However, we can compare returns in the long term. Property investment also comes out better than the stock market when we compare property and share prices. In the period 1989-2018, house prices rose by an average of over 300% while the stock market saw an increase of 228%.

Personal involvement in your investment

Investing in the stock market is suitable for people who want to adopt a hands-off approach to their investment. Apart from regular reviews of their portfolio or twice-annual meetings with their financial advisors, the stock market does not involve any personal involvement.

By contrast, property ownership is much more hands-on. As a landlord, investors have a wide variety of legal obligations and financial responsibilities towards their tenants. Property also needs ongoing maintenance to ensure that it is habitable. Although a letting agency could be used, their fees would reduce returns on the investment.

Accessibility of your capital

If you need quick access to your capital, selling stocks and shares is relatively easy. By contrast, capital tied up in property is much more difficult to access. Selling a property takes more time and can be more expensive if estate agent fees are taken into consideration.

If, after careful reflection, you decide that property investment is the right choice for your character, personal circumstances and investment goals, you need to decide whether you prefer direct or indirect property investment.

Direct vs Indirect Property Investment

Whether you opt for direct or indirect property investment depends on how involved you wish to be in managing your investment, your level of expertise and how much time you have at your disposal. Let’s briefly consider the different types of direct and indirect property investment – from buy-to-let to REITs.

Investing in buy-to-let property

When the media talk about property investment in the UK, most people would naturally think about buy-to-let because it is the most popular and most widely publicised way to invest.

Since buy-to-let mortgages were introduced in 1996, purchasing a buy-to-let property has become much easier. However, a continued housing crisis in the private sector and the publicity given to unscrupulous buy-to-let landlords means that laws and regulations, including taxation, have been tightened up.

Buy To Let Property Investment
See our detailed guide on How To Buy To Let

If you are thinking about purchasing a buy-to-let property, you should be aware of the laws regarding your financial and legal obligations towards your tenants as well as how it might affect your tax status.

If you do not have time to be a hands-on buy-to-let landlord or your investment property is in another part of the UK, you could use the services of a letting agency. For a monthly fee (usually 10%-20% of the monthly rental payment), they will take over every aspect of managing your buy-to-let property from vetting potential tenants to dealing with emergency repairs such as a burst water pipe.

If you don’t have the time to be a hands-on landlord, consider using a professional letting agency. For a relatively small fee they will take care of many aspects of your buy to let property in a legal and professional manner.

Buying property at auction to become a landlord?
Includes many useful legal documents for property in England, Scotland, Wales and Northern Ireland

What is indirect property investment?

Indirect property investment is an umbrella term to cover alternative ways to invest including:

  • Property unit trusts or OEICs (Open-Ended Investment Companies)
  • Shares in listed property companies
  • REITs (Real Estate Investment Trusts)
  • Insurance company property funds
  • Property crowdfunding
  • Peer-to-peer lending

The pros and cons of indirect property investment

Advantages of indirect property investment

One of the main benefits of investing in property indirectly is that you do not need any level of expertise as the trust or fund does all the work for you. This hands-off approach is very similar to investing in the stock market.

Another advantage of investing in property in this way is your investment is not limited to one property like in buy-to-let. This means that your exposure to risk is shared. You will still see a return on your investment even if one tenant falls behind in their rent payments.

Indirect property investment allows you to have the flexibility of a mixed property investment portfolio. You can choose a trust/fund according to how you want your money to be invested, and this depends on how risk-averse you are.

Instead of tying up all your capital in one property, indirect property investment gives you the flexibility to invest a lump sum (from as little as £500) or a monthly payment (from £50). This is ideal if you want to ‘test the waters’ and try property investment without taking on extra debt in the form of a mortgage.

The disadvantages of indirect property investment

One of the drawbacks of investing in property indirectly is that you must pay fees to the property fund or trust. These charges are of two types: an initial investment fee of around 2% of the amount invested and an ongoing annual administrative charge of approximately 1.5% (deducted from your returns). Before signing up to an investment fund/trust, you should compare their relative OCF (Ongoing Charges Figure) or TER (Total Expenses Ratio) to see how much you will pay.

Although fund managers are regulated by the FCA, indirect property investment carries the same degree of risk as investing in the stock market. Your degree of protection depends on how you invest your money. REITs are not covered by the FCA’s compensation scheme if they go bust although OEICs are. However, you will only be paid by the FSCS (Financial Services Compensation Scheme) up to a maximum amount of £85,000.

A limitation is that you are only liable for compensation if the OEIC goes bankrupt as a result of poor management or if they misrepresented their financial product when selling it to you and not because the share price went down.

Another disadvantage of investing in property indirectly is that you do not necessarily have immediate access to your capital. There may be restrictions as selling property takes time.

UK Property Investment FAQ

How does property investment work?

When you invest in property, there are two ways that you make money. These are capital growth (the increase in the price of the property) and rental yield (how much money you make every year from your tenants after maintenance expenses are deducted). Property investment has two types: direct and indirect. Buy-to-let ownership is the main form of direct property investment while indirect property ownership is when you buy a share or unit of a property investment company or trust. Which one you choose depends on your personal/financial circumstances, how much capital you have to invest, your attitude to risk and how much time you have to manage the property.

How do I start investing in property?

Before investing in property, you should weigh up affordability by considering your income and monthly financial commitments as well as any capital you have (for example, in savings). You should also decide whether direct or indirect property investment is the right choice for your personal circumstances and investment goals. It might also be a good idea to consult an independent financial advisor as they can explain the tax ramifications of property investment and your financial obligations as a landlord. Once your property investment financing is in place, you should research the best area to invest in property. Whether to use a property management company or letting agency depends on how hands-on you want to be.

Is UK property investment worth it?

Yes. Lack of social housing in the UK means that the demand for private rented accommodation is far greater than the supply so you will easily find tenants. Not only will you have a regular income from the monthly rental payments, but you will also benefit in the long term from the continued rise in UK property prices.

What is the best place to invest in UK property?

The best places to invest in UK property are in the north of England and the Midlands. Birmingham has seen house prices rise by nearly 20% since 2014 while the highest rental yields are in university towns such as Nottingham NG1 (11.9%), Liverpool (10%) and Leeds LS2 (9.9%). This compares favourably to the average annual UK rental yield of 3.54%.

Is buy to let a good property investment?

Yes, buy to let is a good property investment. Despite occasional slumps in the UK property market, the tendency of house prices is to rise. In the short term, monthly rental payments should be sufficient to pay your mortgage, cover maintenance of the property and still provide you with a regular supplementary income.

What are property investment companies?

For a fee, property investment companies offer a range of services to their clients such as finding the right property or facilitating the property purchase. Using a property investment company is ideal if you do not have the time nor the knowledge to research all property investment opportunities on the market and to manage your investment.

Can I get a mortgage for investing in property?

Yes. However, the eligibility criteria, terms and conditions differ from a residential (own home) mortgage. Mortgage providers would expect applicants to have a minimum of a 25% deposit while fees and interest rates are both higher. To assess affordability, lenders place emphasis on the rental cover rather than income. This is calculated as 125%-145% of the monthly rental payment.

How to get started in property investment

Investing in UK property

Our step-by-step guide is of invaluable assistance if you are new to property investment and do not know how to get started. From affordability to finding UK property for investment, it answers any questions you might have as well as pointing out any pitfalls to watch out for. For a shorter read, try our simplified guide on how to invest in UK property.

Can you afford to invest in property?

Before you contemplate any property investment, you should assess the affordability of the property purchase. Apart from considering your income and expenditure, you should also have some money to pay all the associated fees of buying property. These include fees (for conveyancing, estate agents/auctioneers, etc.), the 3% surcharge on Stamp Duty for a second property, insurance and so on. Lenders would also expect you to have at least a 25% deposit if you are planning to take out a mortgage though the most preferential rates are offered to buyers putting down 40% or more.

To pay for the deposit and all upfront fees for a property purchase, you should calculate how much capital you have including savings, premium bonds, ISAs and any other investments. Before releasing this capital, you should check how much interest it is making for you and whether there are any penalties for early withdrawal.

Financing investment property

To finance your investment property purchase, your options are to use one or more of the following property financing methods:

  • Release capital by selling other investments or using savings for an outright purchase
  • Remortgage your primary residence to release some of the equity in your current property
  • Take out a secured property loan
  • Apply for a second mortgage

Before deciding, it is advisable to consult an FCA-registered financial advisor. They will be able to advise you on the best way to borrow money for investing in property. They also might be able to recommend specialist lenders who give better rates than High Street financial institutions.

Mortgages for the purchase of investment property are an entirely different financial product from the mortgage you take out to purchase your own home. Fees and interest rates are both higher for an investment property such as a buy-to-let mortgage.

Eligibility criteria also differ so you should check that you meet the lender’s requirements in terms of age, income, home ownership and credit rating.

Affordability is calculated in a different way for property investment mortgages with your income playing a secondary role. As your rental income will probably be used to pay back the loan, lenders calculate the rental cover. To allow for the additional expenses of being a landlord and periods when the property is unoccupied, most lenders stipulate that your rental cover should be 125%-145% of the monthly rent.

Consulting experts about property investment

Financial advisors and mortgage brokers are both sources of invaluable advice if you wish to start investing in property.

You should also consider talking to a tax advisor. Making money from property investment will have an effect on how much tax you must pay. Consulting an expert beforehand could save you a great deal of money as they will explain how to offset your expenses against your tax liability.

For indirect property investment, a tax advisor can inform you of tax-efficient means to invest such as stocks and shares ISAs.

Considering your investment strategies

Most property investments work best if you have a longer investment strategy which is re-evaluated every 5 years. You make a profit from your investment from both the regular income from rent payments and the steady rise in property prices.

However, you will always find that certain areas in the UK and specific types of property have either higher capital growth or better rental yield. You should decide whether you want to concentrate on the immediate benefits of rental growth or prefer to think in the long term (capital growth), perhaps because the investment is part of your pension provision. Making this decision in the early stages will dictate to a certain extent what property you should buy and where.

Finding UK property for investment

Apart from your investment strategy of capital growth vs. rental yield, there are a wide variety of factors to consider when finding a UK property for investment including:

  • Location (how near your home you wish to purchase property)
  • Type of property
  • Age and condition of property
  • The price of the property
  • Your ideal tenant if it is a buy to let property

You can use newspaper ads, estate agents, auction houses and online property portals to find your ideal investment property. Most property websites have tools which allow you to specify your search parameters.

If you are daunted by the thought of scouring the property market for something that meets your requirements, then you could save time by using the services of a property management company. But what exactly do property investment companies do?

The role of property investment companies

Each property investment company is slightly different, but they usually provide one or more of the following services:

  • Help you find an investment property after a consultation about your requirements
  • Help with the bureaucracy involved in buying property as an investment
  • Take on the monthly management of your property

Property investment companies are useful if you have neither the time nor the expertise to do your own research. They can save you a great deal of time in your search and ensure that you do not make any costly errors. These companies have more contacts in the property market so you might find out about properties which have just been released on the market, properties only they have access to or even be given a discount on the purchase price. Most also offer a guaranteed predicted monthly income so that you can budget your property purchase financing accordingly.

Before hiring any property investment company, you should check both their credentials and fees. Most will charge a one-off fee for locating a suitable investment property. If they offer a letting or property management service, this is usually charged at 10%-20% of your tenants’ monthly rental payment.

A property investment company will make recommendations to you, but it is your responsibility to verify that they are exactly what you want in terms of price, location and so on.

Couple buying a property as an investment
Buying a property as an investment is both exciting and rewarding.

Investing in property at auction

Buying a property at auction is becomingly increasingly popular because of the speed of the purchasing process. You will not waste your time because you are part of a chain or risk being gazumped. However, it is imperative that your auction property financing is in place before attending an auction. As soon as the gavel goes down on your winning bid, you are liable for paying 20% of the purchase price immediately with the remaining 80% due within 28-56 days.

Flipping Property To Make Money

Another attraction of buying an auction property is the chance to pick up a bargain. Some investors choose to buy a poorly maintained or derelict property and then do it up for a quick resale. This process, known as ‘flipping’, is the sole exception to the rule that property investment is a medium- to long-term investment strategy.

For you to make money from flipping a property, you must draw up a meticulous budget and preferably do a lot of the renovation work yourself (or have industry contacts who can help you).

Renovating a derelict property has potentially high returns, but it is also comparatively high-risk. Your renovation work might go over budget or take longer than you expected. Also, selling the property might take longer than you expected while profits of over £12,000 annually are liable for CGT (Capital Gains Tax). For all these reasons, this strategy is not recommended if you are new to property investment.

Buying your first property for investment

Location is one of the key factors to take into account when you buy your first investment property. We have prepared an overview of the 5 most popular UK cities for property investors where you can find a wide variety of residential and commercial properties for sale.

Investment Property Rental Yields – UK Cities Approx Rental Yield
London Rental Yields 4%-6%
Manchester Rental Yields 5.5%
Liverpool Rental Yields 5%-11%
Glasgow Rental Yields 7.7%-8.5%
Birmingham Rental Yields 4%-10%

Property investment in London

As the largest city in the UK, London attracts large numbers of people because of its employment opportunities as well as playing host to over 400,000 students at its 39 universities. However, property prices in the capital are the highest in the UK at an average of £671,000.

London property prices chiefly depend on location with some property types in sought-after areas in the centre and west of the city surpassing the £1 million mark. The best areas to look for investment properties are now in East London which enjoys good transport links to the centre and is undergoing rejuvenation projects such as Barking Riverside. Neighbourhoods to keep an eye on include Whitechapel, Ilford and Romford. These areas have some of the highest rental yields in London (4%-6%) which compares favourably to the UK’s average rental yield of 3.7%.

Related: Auction properties in London

Property investment in Manchester

Manchester is one of the property investment hot spots in the north-west of England. The demand for rental properties is high because 40% of the population is aged 15-34. This includes a student population of 99,000 as well as many graduates who stay on in the city because of the job opportunities there.

Manchester is much more affordable than London with an average property price of £180,000. It has been predicted that property prices will increase by 17.1% over the next 5 years while rents are set to rise by 16.5% in the same period.

The rental yield in Manchester averages out at 5.5% with some postcodes outperforming such as M14 (over 7%).

Related: Auction properties in Manchester

Property investment in Liverpool

Liverpool is another city in the north-west which is highly recommended for those wishing to invest in property. The average house price in Liverpool is £131,000 although there are neighbourhoods where it is possible to buy property for a fraction of this price.

Property prices in Liverpool are predicted to grow by 13.1% over the next 5 years as the city continues to expand, flourish economically and regeneration schemes are completed. This economic boom will also ensure that demand for rental properties remains high with rents forecast to increase by 16.5% by 2024.

Rental yields in the city are on par with those of Manchester (5.5%) but 6 postcodes in the city have yields significantly higher than this such as L7 (11.79%), L6 (11.52%) and L1 (9.36%).

Related: Auction properties in Liverpool

Property investment in Glasgow

Scotland’s largest city continues to perform well economically and has been given a boost by continued improvements in its infrastructure such as the Clyde Gateway. With over 64,000 students at its universities and nearly a third of its population aged 20-34, the demand for rental properties in Glasgow remains stable.

Averaging £124,000, property prices in Glasgow are much lower than those in similarly sized cities in England. Such low prices have attracted investors from all parts of the UK as well as overseas. Forecasters predict that capital growth in Glasgow will be the highest in the UK in the coming 5 years (15.4%).

Rental yields in Glasgow are also attractive to prospective investors. They stand at 7.87% which is over double the UK national average.

Related: Auction properties in Glasgow

Property investment in Birmingham

Good transport links to all parts of the UK, the best economic performance outside the capital and ongoing inner-city rejuvenation projects are some of the reasons why Birmingham appeals to property investors.

Birmingham was one of the first English cities to witness relocation from London so the property boom there was in 2013-2018 when prices soared by over 40%. This dramatic rise has since slowed down. The average property price in Birmingham is now worth £163,000 with larger properties in areas like Edgbaston topping half a million pounds.

Rental yields in Birmingham are not so dramatic as the north west of England but remain steady at 4%-6%.

Related: Auction properties in Birmingham

Alternatives to investing in residential properties?

Buying and renting out homes is not the only type of UK property investment. Two alternatives are commercial property and land investment.

Commercial property investment

Commercial property investment involves buying retail, office, industrial or mixed-use properties to rent out to tenants. It differs from residential property investment in a number of ways.

Firstly, the leases for commercial properties tend to be longer – usually 8-12 years (compared to 6-12 months for home tenancy agreements). This gives you greater security and saves money on vetting and looking for new tenants every year. Commercial property tenants are also less likely to default on their rent payments compared to those in residential properties.

Another difference is that a FRI (Full Repairing and Insurance) lease stipulates that the tenant is liable for maintaining and repairing the property rather than the landlord (as is the case with buy-to-let).

Investing in commercial property allows for greater flexibility. It is much easier to renovate, modify or redevelop the property as the market changes. For example, converting a former factory into retail units. This can be done to attract different or more affluent tenants.

Purchasing a commercial property offers investors the potential for higher returns with a better rental yield. Leases usually state that annual rent increases at least keep pace with inflation. However, it is also higher risk. For instance, in the wake of the 2008-9 economic crisis, commercial property prices plummeted by nearly half and it took nearly a decade for prices to reach their pre-crisis level.

Another drawback of buying a commercial property is that it requires investing a great deal more capital as they tend to be more expensive. Your capital will usually be tied up for longer as these properties generally take more time to sell.

If you wish to invest in commercial property, you need to research the market and consider the following factors:

  • The market for retail, office or industrial properties
  • Type of commercial property for investment
  • Location of the commercial property investment
  • Tenant demand for the property type and area
  • Lease or covenant strength of potential tenant (the reputation and reliability of possible tenants)

Buying a commercial property is not recommended if you are new to property investment. However, you could get started by investing indirectly through a property trust, property investment company or fund.

Investing in land in the UK

Land bought for investment purposes in the UK is of 3 main types: agricultural land, forestry and undeveloped land (for building).

Some people choose to buy agricultural or forested land for tax purposes as inheritance tax is calculated differently on these investments. There is always a market for renting out land to farmers or as pasture although potential returns tend to be quite low.

When most people think about land development, however, they usually think about buying a plot of land at a low price and later selling it for large sums to a property developer. Demand is high since the pre-existing stocks of land for property development in the UK is at an all-time low. This investment strategy is more difficult than it sounds as the price of the plot depends on whether it has planning permission or not.

Land in the UK falls into three categories:

  • Land with no planning permission
  • Land with OPP (Outline Planning Permission)
  • Land with DPP (Detailed Planning Permission)

Land without any planning permission is the cheapest to buy while DPP land is the most expensive. Even when planning permission has been provisionally granted (OPP) there might be restrictive covenants about what can be built on the land and a time limit (usually 3 years) of when construction should begin.

Land banking schemes

A land banking scheme is when a large expanse of land without planning permission is purchased, divided into smaller plots and re-sold to individual investors. Their sales strategy is that the value of the plot will increase hundredfold as soon as planning permission is granted. The problem is whether this will ever happen.

The FCA has been increasingly concerned about land banking schemes and how many are nothing more than a scam. Unless they are sold as a collective, they are not regulated by the FCA either and so investors are not entitled to compensation from their FSCS.

If you are approached to invest in a land banking scheme, you should always contact the local council to see if there are plans to award planning permission on this plot of land. If the land banking scheme is pooled, then check to see if it is registered with the FCA.

Conclusion – UK property investment

With the correct research and preparation and after consultation with the relevant experts, property investment in the UK is not as difficult as it seems. As a way to make money, it is far more profitable than keeping savings in a bank account and also compares favourably with investing in stocks and shares.

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