How to start investing in property
If you’re new to property investment, you will have many options and it’s often confusing to know where to start. There are lots of things to consider before getting started, especially if you want the best results. In this article, we teach you how to start investing in property and the main considerations to be aware of.
How to start investing in property
There are a few things you will need before you can consider investing in property. The first two are non-negotiable:
- A cash deposit.
- The ability to obtain a mortgage.
Some people may try to sell the idea of “no money down” deals or using “other people’s money”. However, the reality is that you will need some money to invest in property. The only people that win from those strategies are the people selling courses!
Typically, you will need enough cash to cover a 25% deposit, plus purchase fees and any initial refurbishment costs.
You will then need the ability to obtain a mortgage. Even if you have enough money to buy outright in cash, it’s not recommended in most circumstances. That is simply because the main benefits of property investment come from using leverage.
Speak to a mortgage broker to understand if you qualify for a mortgage. Typically, if you have a secure income, good credit history, and own your own home, you shouldn’t have any problems.
Set clear goals
It’s impossible to know how to start investing in property if you don’t know why you’re doing it. That’s why the first step is to ensure you have clear goals.
Start by thinking about the main over-arching reason why you want to invest in property in the first place.
It could be to secure your retirement or allow you to work fewer hours. It might be about providing security to switch careers, or to grow wealth to pass on to your kids. Or it could simply be because you’re passionate about property! Knowing that main purpose for investing will determine your strategy and almost every other decision you make, so it’s vital!
One way to approach this is to set SMART goals.
S – specific
M – measurable
A – achievable
R – relevant
T – timed
SPECIFIC – rather than just saying you want to make money from property, be specific about how much.
MEASURABLE – income goals or equity goals are good examples here because they are easily measurable.
ACHIEVABLE – we all want as much money as possible as quickly as possible, but it’s crucial to have goals that are realistic and attainable.
RELEVANT – always ensure your goals are meaningful and have intrinsic value to you. That way, when things get tough, you’ll be more motivated to put in the work to get results.
TIMED – try to plan a realistic timeframe to achieve your goals so there is some urgency to act.
Fintentional specialises in helping investors achieve financial freedom through property. If this is your goal, contact us for more information and to find out how we can help.
Consider your own circumstances
How much spare time do you have to commit to property investing?
You may like the idea of being hands on because you are passionate about property. But if you have a full-time job and work long hours it might not be practical. In that case, a hands-off strategy is likely to be more suitable.
What relevant skills do you have?
If you are a skilled tradesperson then you would have a big advantage when refurbishing a property. However, if even basic DIY fills you with dread, a more passive investment might be better suited to you.
How much capital do you have available to invest?
If you have plenty of capital and a high income, a passive strategy is probably best. That way, you can focus on earning money in your business or day job. However, if you only have a small pot of cash, you will likely need to be more active to create the equity needed to grow your portfolio.
Take tax advice before you start investing
A decade ago, it was possible to simply buy a property and rent it out without worrying too much about tax implications. That’s certainly not the case nowadays, and if you don’t plan properly, you could easily be losing money after tax.
With the introduction of Section 24, increases in SDLT, and amendments to various tax thresholds and allowances, there’s a lot to consider and tax policy is continually changing.
Many investors will now buy and hold property in a Limited Company, rather than in their personal names. This is because there are some advantages to how the income is taxed.
However, there can also be some disadvantages to buying in a company, so it won’t be right for everyone. Mortgage rates and fees are typically higher for companies, and you also need to consider how to extract profits before you can spend them.
The administration costs and overheads to operate a company will also be higher, so for a single property it’s unlikely to be cost effective. If you have plans to grow a larger portfolio, that’s when using a company has the greatest advantages.
Always seek professional tax advice before investing, ideally from a property specialist, not just a general accountant. Property tax regulations are constantly changing, so you’re always best to work with a specialist. They can stay on top of this for you and be proactive to ensure your portfolio is structured as tax efficiently as possible.
Fintentional partners with Calculated UK who are experts specialising in this field, so we recommend contacting them for a no-obligation chat.
Choose the right property strategy
Once you have followed all the above steps to prepare for how to start investing in property, you will be ready to choose a strategy. These are the most common property investing strategies for you to consider:
Buy to Let (BTL)
This is where you simply buy a property and let it out. It is the simplest and safest strategy because it has the fewest variables. It’s also the most passive and requires the least amount of work.
You will make money from the monthly rental profit, but this is secondary. The main way that money is made through BTL is from the growth in value over time, especially when using mortgages to leverage your deposit.
It is most suited to people wanting a passive investment strategy and with long term goals.
Buy Refurbish Rent Refinance (BRRR)
Like a BTL strategy, you are still buying a property that you plan to rent out and hold long term, so the fundamentals are the same. The difference is that you will also refurbish the property initially to add some value, then refinance to release some of that equity gain to reinvest.
You’re still aiming to generate cashflow and capital growth over time but also create added value from the outset in addition.
The initial refurbishment can be time consuming and hard work, so will be most suited to somebody who has the time and skills to do the work themselves. This also helps to save costs. At the very least, you will need time to project manage contractors.
It’s also best suited to people wanting to generate long term passive income, but the refurbishment is helpful to make your initial capital work harder and accelerate the growth process.
Flips
This is where you buy a property with a plan to sell it on for a profit. It is like BRRR in that you’ll be looking to buy a property that you can refurbish and add value to. The difference is that then instead of renting it out, you will sell to cash out your profits.
This strategy has the potential to be the most profitable of all, however there is a high ongoing time cost. It won’t generate any passive income from rent, so profits are reliant on you continuing to put the work in to create value from building equity.
It’s best suited to tradespeople or anyone with practical skills to do the necessary refurbishments, along with plenty of time.
The typical timeframe will be 6-12 months to complete a flip project, so it can be good for anyone looking to grow their capital and make money in the short term.
Houses in Multiple Occupation (HMO’s)
This strategy is like BTL in that you are buying a property to rent out, but instead of renting to a single family, you rent it by the room to multiple individuals. The advantage of doing this is that you can generate a significantly higher rental return.
HMO’s require a lot more work to manage and there’s far more compliance to consider, so they are more time consuming than BTL.
They are best suited to people with a goal to maximise their short term cashflow and the time to be hands-on with management.
Have a growth plan to continue investing
The key when considering how to start investing in property is to have a clear growth plan that works with your chosen strategy.
The early days of building your portfolio are when it’s most crucial to focus on growth because that’s what will fund your next investment.
That could be properties with strong natural capital growth potential, or it could be creating growth yourself through a refurb. Or, you might have further cash coming from your business or employment savings that you can continue to invest.
Either way, don’t just buy a property without considering how you will fund the next one. If you don’t have a plan for growth, you could tie up all your capital in your first property, then have no way to continue investing.
Build your network
The final thing to consider is working with professionals and building a team to help along your journey. There will always be challenges that crop up along the way, and you don’t know what you don’t know until something goes wrong.
Working alongside somebody who has already achieved similar goals to yours is the best way to fast track your progress, avoid mistakes, and guarantee the best results. It will also help you to stay motivated, accountable, and continue to make progress even when things get tough.
Along your journey, you will need mortgage brokers, solicitors, tax advisers, accountants, letting agents, tradespeople, and more.
Fintentional offers services to help you understand how to start investing in property. These include independent advice and mentorship, plus a fully tailored property sourcing service. We also introduce you to a full network of trusted property professionals who are all experienced and specialising in property investment.
Book a call with us if you would like to find out more.
