Traditional buy-to-let investment property

The most popular investment type, buy-to-let residential properties generate returns from rental income as these properties are purchased with the intention to be let out to tenants. Generally, this investment category is considered low risk, due to the lower financial output needed and the typically lower costs associated with purchasing a buy-to-let property. Rental properties allow the investor to benefit from a constant rental income, high enough to cover monthly mortgage payments and maintenance costs, with room for profit. A buy-to-let investment is perfect for those looking for long-term financial benefits who wish to build a portfolio. Additionally, landlords can benefit from capital growth returns when the property is eventually sold.

Student buy-to-let property

Operating in a very similar way to the traditional residential rental property, student accommodation also generates income from rental costs. The main differences between the two types of buy-to-let properties are the tenant type and recommended locations, as student accommodation should always be within close proximity to educational institutions in the UK’s prime cities. This type of property investment is a good starting point for first-time buyers due to the low purchase prices and high average yields. The demand for student accommodation continues to grow in the UK as its higher education reputation remains unrivalled, attracting thousands of students across the globe each year.

HMOs

Houses in multiple occupation (HMOs) are an increasingly lucrative market for landlords seeking to maximise their returns and benefit from higher yields. Essentially, an HMO comprises numerous bedrooms and shared facilities such as bathrooms and kitchens. Larger properties that have been converted and licensed into a home for multiple tenants are favoured by landlords for the several sources of rent that can be earnt at once. By allocating more than one tenancy for a single property, landlords suffer minimal income loss from void periods, as other tenants can cover the income. However, there are drawbacks to HMOs in the sense that there can be complex licensing requirements in place, depending on the area the property is located in.

Build-to-rent property

Build-to-rent properties are built with the sole purpose of appealing to the rental market, rather than being built for owner-occupiers. This type of property is a long-term business model, designed to ensure that investors benefit from sustainable income on a residential property. This is an emerging sector in the UK property market that has seen extraordinary success over the past few years. As the private rented sector grows and flourishes, build-to-rent developments aim to meet the demands of tenants across the UK. This a popular investment type for individual investors and institutional investors alike, often offered to investors with guaranteed annual yields.

Location

Location should be at the heart of your search for lucrative investment opportunities. You should research desirable and attractive locations for both investors and tenants, making sure to factor in the strength and predicted growth of the following elements.

Property prices

The average property prices in the area you wish to invest in should correlate with your affordability. Similarly, average property prices are a good reflection of the performance of the local property market, signifying the costs people are willing to pay and incomes of the population in that area.

Average rents

Generally speaking, average rental costs will vary depending on the economic growth of a city, how close the property is to a city centre and the demand for property in that location. City centre tenants in many of the UK’s high-growth cities are much more likely to pay more in rent. On the other hand, low average rental costs ensure a consistent and long-term tenant demand.

Population

By analysing property market forecasts for each town and city that you are interested in, you should be able to locate prevalent areas by the predicted population growths.

Level of demand

To reiterate the previous point, the level of rental demand is crucial for any buy-to-let, HMO, build-to-rent or HMO property. By selecting a location that has convenient transport links, nearby universities and schools, and prosperous career opportunities, your property should maintain a high level of demand.

Career opportunities

Many cities in the UK have evolved into popular business hubs for many of the nation’s biggest industries and business sectors. By providing the community with property in an area with abundant job opportunities, you are highly likely to avoid instances of your property sitting empty.

Potential for capital growth

Prime locations for investment will have promising price growth potential with forecasts predicting property values to rise exponentially in years to come.

Rental yields

Average rental yields play an important role in determining worthwhile investment locations, as this allows you to plan your potential monthly income and set expectations.

Although investing funds in bricks and mortar is one of the most valuable ways to generate passive income and cash flow, there are a number of considerations that should be taken into account when looking to invest. In addition to the degree of risk connected to investing, you should also account for costs, such as capital gains tax, rising interest rates and legal costs and stamp duty. For help with general housing management of the complexities surrounding tenancy agreements, damage, and legalities, delegating these tasks to a property manager can be especially helpful.

By preparing for the following potential pitfalls, you can prevent any significant setbacks and financial burdens:

Market fluctuation – The value of a property is calculated from the initial yield, which is determined by the current annual rent divided by the property’s value. This includes any upfront purchasing cost. As a result, the initial yield can vary from year to year. In general, the yield will inevitably reflect the economic cycle of the property market. Having realistic expectations of your returns and potential short-term fluctuations can help you produce a viable strategy for your property investment. Another way to ensure you are not significantly impacted by market fluctuations is to save emergency funds to create a financial buffer.

Rent arrears – When rent payments become overdue, it can cause issues for the landlord and their income. Despite the fact that payment dates are clearly laid out in tenancy agreements, missed payments can occur during a tenancy. If the unpaid rent builds up each month, this can become grounds for eviction and legal action. However, there are numerous strategies that you can implement to assist tenants in paying their rent. From the offset, screenings should be conducted to determine the tenant’s financial history, working background and credit score. If this is completed and rent arrears still become problematic, offering repayment plans may be a worthwhile action to take.

Property damage – It is essential to note that once your property is occupied, general wear and tear will occur and become visible over time. To benefit from your asset, it is important to consider the materials used for walls and flooring to ensure that the property is as durable as possible. Furthermore, once a tenancy ends, you should take the necessary steps to find a solution for stains, light damage and marks. Although landlords possess the right to deduct funds from deposits, landlords should take caution in assessing the impact before refraining from returning the down payment.

Earning passive income

Purchasing property assets is one of the best ways to earn passive income. Simply put, this means generating revenue without much active involvement. Once you have secured multiple rental properties, you will begin to see a noticeable difference in how quickly you earn profits. Managing properties comes with a lot of challenges, however, choosing to invest in this way can drastically boost your assets. Passive income can provide you with a comfortable income throughout retirement or help you to achieve financial independence.

Multiple income streams

When you own multiple properties, the amount of rent you can charge typically increases over time. Furthermore, you can increase your profits as your rental income increases. It’s important to check with the estate agents about when you can raise the rent. Mortgage payments are typically the biggest expense, so they won’t tend to increase except for any changes in interest rates. In other words, you will earn an extra profit, which can all contribute to paying off your mortgage payments sooner.

Spreading the risk of investment

One of the biggest pitfalls of property investment is the unreliability of both the tenant and building itself. However, when your portfolio comprises numerous properties, it becomes less of a risk should you need to sell a troublesome property. This could include any property that doesn’t perform as expected or a home which does not have much demand. Similarly, any issues with unpaid rental costs should not dramatically affect your income if there are multiple streams of income coming from several different tenants.

A diverse assortment of property types

Portfolios can be diversified by owning a variety of properties. The combination of commercial, industrial, and residential properties provides the best cushion against economic downturns. It is possible to invest in property in a variety of areas and cities, even if you stick with one type of property, for example, residential property. This can range from student apartments to luxury short-term let holiday homes.

If you’re considering expanding your existing property portfolio or plan on building one, you will need a sharp sense of facts and figures. Almost inevitably, there will be hidden costs, so it is a good idea to plan for the unexpected and set aside a contingency sum.