How to Invest in Rental Property: A Guide
If you’re interested in building your own wealth, you’ve probably considered property. If you’ve not previously, then now is a great time, as different types of commercial properties in the UK are expected to see the highest return on investment between 2024 and 2028.
With its many benefits, real estate investment is very popular as it’s associated with a high safety and success rate. It can provide you with a steady income stream through rental tenants and offer long-term financial growth. However, before getting into an investment, you must make sure you have done your research to know what you’re getting yourself into.
For that reason, we have broken down the topic of rental property investment to help you make a more informed decision on how to learn how to buy an investment property. So, keep reading for more.
What Is a Rental Property?
A rental property is a real estate that is purchased and rented out to tenants. It typically includes properties like houses and flats, commercial properties, student accommodation and other specialised types.
Real estate investors tend to be attracted to rental properties due to their ability to generate passive income, their ability to appreciate over time and their promising market growth.
What Are The Benefits of Being A Landlord?
Property is a popular investment for multiple reasons, which draws people to want to become landlords. Not only does it give you a steady income, it also appreciates in value over time, offers tax benefits and gives you more control over your investments.
What Are The Different Types Of Investment Properties?
Knowledge is key with all types of investments, including property. Here are the different types of investment properties that are available, their advantages and their potential risks.
Off-Plan Properties
What is it? These are properties that have been purchased before construction is completely finished.
What’s the benefit? Investors can buy these properties at a lower price, which can land them a higher profit due to value appreciation.
What’s the potential risk? There may be some delays and market fluctuations.
Refurbished Property
What is it? These are existing properties that have been renovated to modern standards.
What’s the benefit? Their modern features allow for a higher rental income.
What’s the potential risk? Risks are low due to already being built.
Residential Property
What is it? This property is lived in and includes single-family homes, flats and multi-family buildings.
What’s the benefit? It is the most common type of rental property, offers stable rental income and is quite easy to finance with a variety of mortgage payments.
What’s the potential risk? A number of factors can influence a residential property’s value including interest rates, supply and demand and economic conditions.
Student Property
What is it? Student properties are accommodations specifically for university students.
What’s the benefit? These can provide high rental yields due to the constant demand from students.
What’s the potential risk? They require more active management and may experience higher tenant turnover rates.
Can I Use A Buy-To-Let Mortgage?
It’s good news – Yes, there are various buy-to-let property mortgages available, which we will explain in the following section. Read the table below to learn more about the different types of ways that you can invest in rental property.
| Type of Mortgage | Definition |
|---|---|
| Standard Variable Rate Mortgage (SVR) | An SVR mortgage has an interest rate that can change and is usually in line with the Bank of England’s base rate. It’s typically flexible but your payments can fluctuate, which makes budgeting more challenging. |
| Interest-Only Mortgage | With an Interest-Only Mortgage, you only pay the interest on the loan each month, not the capital. This results in lower monthly payments, but you will need to pay off the full loan amount at the end of the mortgage term. This usually means selling the property or refinancing it. |
| Fixed-Rate Mortgage | A Fixed-Rate Mortgage has an interest rate that remains the same for a set period, typically 2, 5, or 10 years. This provides stability and predictable payments, making it easier to budget. After the fixed term, the rate usually reverts to the lender’s SVR. |
| Tracker-Rate Mortgage | A Tracker-Rate Mortgage follows the Bank of England’s base rate plus a set percentage. Your payments will vary with changes in the base rate which means your payments can fluctuate. |
Simple Tips on How To Invest in Rental Property
If you’re interested in getting on the property ladder for investment purposes, there are some steps that you should follow to ensure you’re getting the best value for your money and that it aligns with your investment goals. Here are some simple steps to follow for some guidance:
- Check if there’s high rental demand by properly searching the property market
- Set a budget that includes a deposit and mortgage repayments to check affordability
- Choose a property type that suits your investment goals and risk tolerance
- Arrange financing that suits your investment strategy
- Carry out property inspections, legal checks, and verify rental potential
- Finalise the purchase, ensuring all legal and financial documents are in order
- Make any necessary renovations or repairs to make the property tenant-ready
- Market the property and screen potential tenants thoroughly
- Regularly maintain the property and handle tenant issues promptly
Does Rental Property Have Any Risks?
Yes, like all investments, there are some elements of risk with rental property. These include potential periods where the property is unoccupied and not generating a monthly rental income, market fluctuations, unexpected repairs and maintenance costs, potential damage by tenants, and changes in laws and regulations that could impact property management and rental income.
Are There Any Taxes or Fees Involved With Rental Property?
There are some taxes and fees involved with rental property that you must be familiar with and these include stamp duty, income tax, capital gains tax, council tax and insurance.
Gain A Passive Income With Rental Property
Carefully investing in rental property is a great way to generate a reliable source of passive income that can help improve your wealth. However, it’s important to consider certain factors mentioned in this blog before making any investment-related decisions.
Becoming a landlord for the first time may sound scary, but at Peninsular Property, we are here to guide you through the process, utilising over 30 years in the real estate industry.
Whether you’re just getting started on the property ladder or are on the hunt to strengthen your investment portfolio, our friendly team simplifies this process so that you can make more informed choices to support your future. Speak to one of our experts and get started on your investment journey today.
Rental Property FAQs
Partnering with someone that you can trust can be beneficial, as it allows you to share the financial burden, diverse expertise, risk mitigation and decision-making of the property.
If you want to invest in property, you will need to make a down payment, which typically ranges from 20-30%.
