The term ‘property investment’ may sound like a rather self-explanatory term, but there are many ways to invest in property, as well as different types of property investment, which may be more suited to your remit and lifestyle. All are associated with varying degrees of risk, so it’s crucial to assess your finances and select a property investment option that’s going to work for you and more importantly, actually generate you a profit. While investing in property comes with a higher entry cost, the returns are often far more reliable than investing in stocks, which can be subject to volatile price fluctuations.
Perhaps you’re interested in the tax incentives that can become available to you by investing in property, looking for a secondary income through purchasing a buy-to-let, have a long-term goal of capital growth, or are looking for the luxury of both a holiday home, in addition to rental income for some portion of the year.
Everyone’s investment strategy will be different, which is why it’s best to get some guidance, whether you’re looking to make a standalone investment or work to build your portfolio.
What is property investment?
Property investment defines the purchase of property in order to generate returns, whether through rental income or capital appreciation by selling the property in the future. For many, property investment is viewed as a more stable and secure investment, with a multitude of potential uses. You may become a landlord and rent out your property, flip and renovate the property to increase its value and sell at a profit, or see it as an asset for long-term capital appreciation. Since property is a tangible asset, you may even opt for a mix of lifestyle and investment, enjoying the property for yourself for a certain period, then deciding to sell it on or rent it out.
What is the best type of property to invest in?
The best type of property to invest in should always be guided by your needs and circumstances and be a personal, tailored choice. There are many factors to consider, including your short-term and long-term financial goals, the level of risk you are willing to accept on your investment, as well as budget and available capital. As a rule of thumb, you should be mindful of investing more than you are willing to afford to lose, since property investment can be subject to economic conditions, maintenance costs and tenant risks. Property is widely regarded as a great asset to have in your portfolio, since as inflation rises, so often do property values.
It’s important to mention that there are both direct and indirect ways of investing in property. Direct property investment means you directly own, control and manage the property, like buying a residential house or office space for tenant use and thus, rental income.
Indirect property investment involves investing into a deal alongside other investors in companies that invest in property. This is commonly done through REITs (Real Estate Investment Trusts) and ETFs (Exchange Traded Funds). (Investment Property)
While direct investment has the potential for higher returns, indirect property investment requires lower capital for entry.
Residential Property Investment
Types of residential property
HMOs (Houses of Multiple Occupancy): HMOs are properties containing multiple rooms, purchased with the intention of renting out each room to individual tenants. If you’re hoping for higher rental yields and are happy with an increased degree of management responsibility, consider investing in an HMO.
Off-Plan: Individuals buy properties before construction is complete. This method can be extremely advantageous to investors, who are able to purchase a property at below-market-value, with the potential for capital growth during the construction process. While some invest with the intention of eventually letting out the property, others buy with their own personal holiday home in mind (or even a mix of the two). Investing in off-plan property is usually seen as a long-term investment, with returns often only emerging once construction of the properties is complete, so this should be kept in mind when making your decision.
Buy-To-Let: Perhaps the most common residential investment is buy-to-let, which almost immediately unlocks access to an additional revenue stream of rental income. If you don’t own the property outright, you’ll need to get a buy-to-let mortgage, which requires a deposit of 25% or more (IP Global). It’s crucial to do your due diligence on the responsibilities you’ll be taking on as a landlord.
Holiday Homes: Capitalise on peak demand by investing in a holiday home, either in the UK or overseas market. With this type of property investment, you’ll need to ensure it’s well managed and that you’ve factored in on-going costs. A popular option is to rent out the property at peak times of the year and enjoy it as a second home in the off-season.
Commercial Property Investment
Commercial property investment can be seen as a more lucrative option than residential, but it often requires higher upfront costs, carries more legal and financial complexity, as well as a higher level of associated risk. It is usually recommended for more experienced investors.
Commercial property investment encompasses offices, retail and industrial and involves a higher level of risk, but also the potential for a higher level of return, with longer lease lengths. However, if a current tenant vacates the property, it could prove more difficult to replace them and thus, be without income for an unknown duration.
Types of commercial property
Investment into commercial property is oftentimes carried out by experienced investors. It is not recommended for beginners, since the initial capital required is usually steep and there are more requirements for securing financing for a commercial property. For those looking to diversify their existing portfolio, commercial property can be a great method of spreading risk, so that you are not solely vulnerable to the volatility of either the residential or commercial market.
Office Space: This kind of commercial property investment offers the chance for higher yields, since a business in situ may be paying rent for a number of years, offering more long-term stability for you as the investor. For this reason, it is one of the most popular commercial property investment options. From single-use office buildings to large properties housing multiple businesses, office buildings generally yield consistent rental income, particularly if they are located in major cities.
Retail Shops: Requiring a higher initial investment, retail can be a good commercial investment, since it offers more long-term stability and higher returns, compared to residential. However, it’s important to consider demand in the area and consumer behaviour, which is always subject to world events and economic downturns.
Industrial: The industrial sector offers a versatile selection of investment options, seen as a good long-term investment, since they are almost always in demand from a manufacturing, imports/exports and product storage perspective. For example, the rising demand for e-commerce has reduced the demand for physical retail space, making industrial units far more attractive. Investments can range from small individual units like self-storage facilities to large-scale manufacturing facilities.
As you can see, there are several ways you can start investing in property. For beginners, residential property is seen as an ideal entry point due to its tangibility as an asset, as well as its predictability and reliability as a source of rental income and potential for capital appreciation.
Here at Brookes Property Group, we’ve helped many of our clients invest in property and create wealth in both the UK and overseas. Upheld by our combined property investment expertise and our origins as an accountancy firm since 1986, we offer clear-cut and simple guidance to build your investment portfolio. Get in touch today to find out how we can help.
