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Investing in Property

Investing in UK property might seem a bit daunting, especially if you're a first-time investor. But with mortgage rates at a record low, and savings and pensions offering such poor returns, many people still find investing in 'Bricks and Mortar' highly appealing. 

At Peter Ball & Co we're in the enviable position of knowing the Gloucestershire property market inside-out, so whether you're an experienced investor or just starting out, do get in touch today.

As with any investment, you need to assess the risks and rewards and make sure you're comfortable with the market before investing. We can help guide you through the different types of properties we have available for sale: from low-maintenance flats and apartments, to properties suitable for students and HMOs (Houses of Multiple Occupation).

There are a number of ways to invest in property from shared (collective) investment instruments through to direct property purchase. For the purposes of our guide we will be examining direct property investment opportunities, and specifically investment in residential property.

Why Invest in Property

The demand for housing in the UK has never been higher. Between 2016 and 2017, the population increased to around 66 million (up 400,000 in just 12 months). If this growth continues, the UK population will exceed 70 million people by 2026 – and they’ll all need somewhere to live.

It’s also likely that homes with just one person living there will increase by 159,000 per year, leading to the UK becoming the most densely populated country in the EU.

To keep up with this demand, the government has predicted that at least 237,000 new homes need to be built in England every year. However, as it stands, we are building fewer homes than during any other period since the 1920s.

Due to the constant demand for housing, property investment is often seen as a safer investment than other asset classes (such as stocks and shares). While the economy can and does affect housing prices, for medium and long-term investment it remains the safest asset class.

NB Investment in property like all investments is not risk free. You need to weigh up the pros and cons of investing in property and, most importantly, take legal and financial advice where necessary.

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The Pros and Cons of Property Investment

Pros

  • Ease of financing. 
  • The ability to leverage your investment through borrowing.
  • Flexibility - property offers many different investment strategies. One should be suitable for you.
  • Control - once the property is yours, you have control over what you do with it. 
  • The potential for increased returns over the medium to longer term - yelds historically have been higher than investing in other asset classes.

Cons

  • Illiquidity - releasing your capital from property can be a lengthy business.
  • Potential risk of rental voids.
  • Changing investment environment
    • Fluctuating market
    • Legislative changes
    • Taxation changes
    • Potential for cost of borrowing to increase.

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Financial Returns

Financial reward from direct property investment comes from an increase in the capital value, income paid as rent, or a combination of the two.

Capital gains can be achieved from holding the asset and taking advantage of generally rising property values or from adding value to the property from redeveloping, improving, extending etc., or even just through obtaining relevant legal consents for development or change of use. 

Property rental opportunities range from longer term lets through to short term holiday lets with all the attendant demands of quick turnover and the need to provide cleaning, linen supply, laundering services etc.

Obviously choosing the investment path that is right for you will depend on a number of factors, including the capital available to you, the skill sets that you have, your willingness and ability to get involved or, alternatively, your attitude to employing others to undertake the work.

Whatever your decision, Peter Ball & Co’s sales and lettings teams are happy to discuss market demand and advise on where and what to buy. They are also here to support you once you've bought your property to help make your investment journey as smooth and trouble-free as possible. 

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Where to invest

If you're thinking of buying an investment property, work out which locations are most popular with renters. Ask local letting agents which areas are most sought-after, and why. 

Key factors to think about when choosing an area:

  • What type of tenant would be most suitable for this area? (E.g. families, students, professionals) and do they match my preferred investment profile.
  • How affordable is this area, given your budget?
  • How familiar are you with the area?
  • The more familiar you are,  the more confident you're likely to be with your investment. Physical proximity to the property makes it easier to undertake work and maintenance. The further you live away from the property location,  the more likely you are to be reliant on third party assistance with all the attendant costs.    
  • What are the growth prospects for the area?
    • What kind of job opportunities are nearby?
    • What are the transport links like?
    • What are the essential services (e.g. GPs, hospitals, schools etc), shops and leisure facilities like in the area?
    • Are there any planned rejuvenation projects that may have a future impact on house prices and rents?

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What to buy

Again talk to local agents about the demand for different property types. Research the local market to assess availability and talk to Peter Ball & Co. Check out our latest investment property opportunities and OnTheMarket.com to see the types of property being advertised in your chosen area.

Key factors to think about when choosing the type of property:

  • How does the property fit with my preferred investment profile?
  • Is there existing or potential future demand for that type of property, and at the price that I need to realise for the project to be profitable?
  • Does the property condition and age match my preference for the amount of work that I am prepared to do or have done?

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How to buy – Financing your Investment.

Property purchase can be financed from assets or savings, re-mortgaging a property already owned, or raising a mortgage or loan secured on the investment property itself.

There are many different finance schemes available for property investors. Again the options open to you will depend to a large extent on your personal financial resources and experience; the size, type and condition of the property that you are looking to purchase; the method of purchase (via auctions for instance); and your preferences as to the type of investment that you intend to make.

For example, whilst Buy-to-Let mortgages are relatively ubiquitous they are unlikely to be available for the purchase of holiday lets. Similarly, standard residential mortgages are probably not the appropriate method of financing an investment property renovation or new builds.  

Buy-to-Let (BTL) Mortgages

As the name would suggest, these are mortgages designed to allow you to borrow against a property that you intend to let out. In many ways they are similar to standard residential mortgage but there are some key differences.

  • Interest rates and fees tend to be higher.
  • Minimum deposits tend to be a higher proportion of the property value (usually 25% as a minimum).
    The proportion of the property value that is borrowed is known as the Loan to Value (LTV). The higher the LTV the greater the proportion being borrowed and the less the proportion having to be put up as a deposit. The higher the LTV, the greater the risk to the lender and therefore the more expensive the mortgage is likely to be - both in terms of interest rates charged and associated fees.
  • Most BTL mortgages are arranged on an interest only basis.
  • The amount that you can borrow is usually determined by the LTV and the rental income you are expected to receive, unlike a standard residential mortgage which would be based on the borrower’s personal income. Lenders normally want to see the expected income being 25-30% higher than the mortgage payment.
    To get a free no-obligation estimate on likely rental incomes talk to Peter Ball & Co Residential Lettings.

Financing for Redevelopment Projects

Specialist financing options are available for redevelopment, but which is right for you will depend on your specific circumstances and potentially the speed with which you need to have the funds available to you and the duration and extent of the redevelopment.

Some general tips for getting the best finance deals are:-

  • Seek specialist advice and fund the development appropriately. 
  • Research the potential of the redevelopment thoroughly. Lenders will want to see that you have a good understanding of potential returns.
  • Get planning permission. If planning permission is required you need to factor in the time that this can take.
  • Prove your experience. Lenders love to work with experienced developers.
  • Budget for contingencies.
  • Own the site if possible. Lenders can often then provide 100% of the development costs.
  • Take time and care to complete application forms accurately.
  • Be honest about your experience, ability and financial standing. If necessary, consider hiring a project manager. 

Financing property investment can be complex and the options varied. By definition, good property developers are good planners. Doing the maths, undertaking adequate market research and getting specialist advice, where necessary, is essential. 

For expert investment advice talk to  White Kite Financial for a no obligation discussion as to which route is best for you.

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Student Lets

Student accommodation is another area where demand is showing no signs of slowing down and there are a number of reasons why investing in student lets can be an attractive option.

Many parents of students look to buy a property that their child can use and at the same time rent out the other rooms to help cover the costs.

Even if you are not considering purchasing property for your own child’s use, student lets can provide an attractive return on investment. 

Some Purpose Built Student Accommodation (PBSA) can offer guaranteed rental yields for initial set periods as well as help in the managing of the property. As a word of caution PBSA will generally require a commercial mortgage as opposed to a residential buy-to let and the re-sale market can be limited.

Things to consider when buying a student house.

  • Location is the key priority. The property itself does not need to be the best in area. Where it is and ease of access to the University/College is more important than being in a quiet location or having amazing views.
  • The most attractive properties for student lets tend to be 3 / 4 bedroom houses. Many student properties utilise one reception room as a bedroom to maximise rental return, as long as there is a decent communal space.
  • With a number of people sharing a property, having a second bathroom or at least a second WC is attractive.
  • The standards of furnishing needs to be functional and hard wearing more than stylish.
  • Bathrooms and kitchens only need to be clean, functional and robust.
  • A valid concern of many investors is the thought of letting a property to a group of students that they have no knowledge of and who in turn are unlikely to have any experience of living away from home. By its very nature, student accommodation is likely to be subject to a greater amount of wear and tear and investors need to bear these potential additional costs in mind. 
  • Many investors will insist on guarantors (usually parents) underwriting their children’s liabilities.

Joint Mortgages

Looking to fund a student property purchase via a joint mortgage (between parent & child) has declined in popularity since the introduction of additional stamp duty on second homes in 2016.

Because of this, some students have looked to raise a mortgage in their own right with parents acting as guarantors. This may require the student to have some income and for the guarantors to secure the loan against their own house, but such an arrangement could have distinct tax advantages: the purchase not being subject to the extra 3% stamp duty, and the student owner potentially being able to take advantage of the ‘rent a room’ tax break. The amount able to be borrowed would usually depend on the rental income realised.

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Property Investment and Tax

Property investment is no different to any other form of investment in that there are a number of tax implications to consider.

Tax related to property investments change all the time. Doing adequate research or getting appropriate expert advice before committing to an investment is essential.

Stamp Duty

Stamp duty is applicable to the purchase of property direct. The tax becomes due on any purchase over £125,000* and rises in bands with the property price. 

Since April 2016 the purchase of an additional (second) home attracts an additional 3% stamp duty in all price bands.

* Special reliefs for First Time Buyers will apply until November 2018.

Income tax

Tax is liable on any profit made from renting a property out. These profits will be deemed to be income by HMRC and so will be taxed at your highest marginal rate. Some expenses are able to be deducted from income before determining taxable profit, namely:-

  • Council tax, insurance, ground rents etc.
  • Property repairs and maintenance
  • Legal, management and professional fees
  • Other expenses such as building insurance premiums
  • Mortgage interest and other finance charges (see below)

Tax relief on mortgage interest is being phased out to be replaced with basic rate tax credits. Whilst this change introduced in 2017 would appear only to adversely affect higher rate tax payers, it could have the effect of putting basic rate tax payers into that higher rate tax banding.

Capital Gains Tax

If you sell a property (that is not your main residence) for a profit, allowing for costs such as stamp duty and agent/solicitor fees, you will be liable for Capital Gains Tax.

There are personal capital gains tax allowances that are distinct from income tax allowances.

If the property had previously been used as a main residence then the gain may be reduced.

Currently Capital Gains Tax is due the year after the tax year in which the property was sold. However from 2020 this will change with tax becoming payable within 30 days of the sale.

Inheritance Tax

A buy to let property will form part of your estate for Inheritance tax (IHT) purposes and is potentially subject to 40% IHT

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