5 Steps to Finding a UK Property Investment
I’ve found financial freedom through property investment. Over the years I’ve had multiple properties with different tenants. Whereas it’s not always been plain sailing, the experience has generally been positive. It’s a more hands-on investment strategy than the stock market, but it’s also, in my opinion, more lucrative.
In this article I’ll go through the exact steps I’ve used to find and secure property investment deals.
A caveat about this. I’m based in the UK so a lot of this information is UK-specific. The general principles can be used in other countries, but the specific details are UK-centric.
What are the steps?
Step 1 — Decide a Target Market
The first thing to consider is to think about who you’re looking to rent to. Students, families, young professionals. All of these come with different needs. If you don’t consider your target market, you might end up buying a property that doesn’t fit your tenant’s needs.
Let’s consider a few target markets and what they might be looking for:
- Will want to be close to local amenities.
- They may not drive, so should be able to walk to shops.
- They will want to be close to their school.
- If sharing between multiple students, communal space will be important as well as areas for private study.
- Will want to be close to local bars and restaurants.
- Will want a stylish, walk-in quality property.
- Will want to be close to local transport links, like train stations.
- Will want extra space for children.
- Usually at least 2 or 3 bedrooms.
- Will want a bath and garden for the children.
- May need things like space for a buggy, extra storage.
- They may have two cars, so will need parking availability.
Personally, I prefer families. They tend to stay in the property longer, be reliable in paying the rent, and take care of the property. There is no right or wrong here though.
Step 2 — Decide Your Budget
The next step is to create your budget. There are going to be a bunch of expenses that you will need to consider when thinking about how much you can afford. A typical list of expenses is as follows:
- Deposit — usually at least 25% of the purchase price
- Tax (Stamp Duty or LBTT) — Also a percentage of the purchase cost. There are various stamp duty calculators online. Depending on where you live, this will be at least an additional 3% of the purchase cost.
- Legal Costs — You can get conveyancing done for under £1,000, but from my experience, these tend to be poor service. You should expect to pay between £1000 to £2000 depending on the value of the property.
- Renovations — This is very much dependant on the property. New kitchens, bathrooms, carpets, redecorating. All these items cost money and you should consider what your budget is for doing work to a property.
- Mortgage Fees — Most of the time these can be added to the loan, but it’s worth noting that product fees can be £2,000+ for buy-to-let mortgages.
- Letting Agent Fees — If you’re planning to use a letting agent to find tenants, then you should also consider their fees. They typically range between 5 and 10% of the rental income, depending on the level of service they provide.
You can plot all these figures into a spreadsheet in order to get an idea of what you can afford. The following screenshot shows the amount of capital required in order to complete a purchase for properties at different price points around £200,000.
As you can see from the screenshot, in order to buy a £200,000 property, you will need at least £60,000. This also doesn’t take into account any renovation work needed for the property.
The idea of this step is to go into your property investment journey with complete transparency regarding the costs involved.
Step 3 — Finding an Area
The next step is to find an area where you want to buy. Many investors decide to buy property in areas they know and live in. In general, this is great advice. If you have personally lived in an area, then you will know the good streets from the bad. But it’s not necessary to have lived in an area to decide whether it’s a worthwhile investment. You can gauge whether an area is a good investment opportunity just by visiting and looking around.
What does it look like? What are people’s gardens like? Would you feel safe walking around late at night? What cars are on the driveway? Where are the local shops? Have you eaten in any of the local restaurants? Where are the transport links? Are there any new buildings, shops, or new generation projects in progress?
Talk to people. If you’re out and about researching an area, ask them what it’s like. Talk to local coffee shop owners and ask them if it’s a nice place to live. Ask them how business is going.
After a lot of research in and around Glasgow, I really like East Kilbride. It has good train links, the housing is beautiful, good schools, there are lots of nice local shops, bars, and restaurants. On top of all that, there is a large availability of jobs at local hospitals and government buildings. I’ve never lived in the area, but I came to this opinion just by visiting it multiple times and talking to people.
The only rule when looking to assess an area is that it should always be considered with your target market in mind.
Step 4 — Finding a Property
Once you’ve decided on a target market, a budget, and an area, the next step is to find a specific property. In the UK, this means trawling online marketplaces such as Rightmove and Zoopla. These are a good first step, but it also pays to reach out to some local agents to get on the books as an active buyer. Some of the best deals get sold before hitting the online portals.
Depending on your individual needs, there are a wide variety of criteria you may consider when deciding on a property. There is, however, one crucial criterion that you should consider of all else.
Achievable Rental Income
In order for the property to be a viable investment, you need to ensure that you’re able to achieve the right amount of rent for your capital deployed. You want a good return on our money, otherwise, the money would be better utilized elsewhere.
There is also legislation around how much a mortgage lender can lend to you relating to the achievable rental income. Each lender is different in this regard, but the rules mean that if you can’t get enough rent, then you won’t be able to mortgage your property. Rules differ between lenders, but a good standard to follow is:
The rental income achieved, must be 145% of the mortgage interest, assuming an interest rate of 5%.
What this means is that, if you want to borrow £100,000, the rent achieved must be £100,000 x 0.05 x 1.45 = £7,250 (per year), roughly £600 per month.
There’s a range of online calculators for this. Here’s one from The Mortgage Works, but similarly you can do the calculation in a spreadsheet.
As an example, here is a real property that I considered buying that met this criterion:
- https://www.rightmove.co.uk/property-for-sale/property-95481704.html — sold for approximately £250,000.
- In order to borrow £187,500, 75% of the purchase price, I need to achieve approximately £1250 in rent per month.
- Achievable rental income is about £1200–1300 per calendar month. This was verified by asking a local agent, but also finding this similar property on the lettings market: https://www.rightmove.co.uk/properties/98129507#/
Step 5 — Commit
The final step is to actually make an offer and buy a property. Once you’ve created a shortlist of properties that meet your criteria, set up some viewings and make some offers. This is by far the hardest step as it involves overcoming your hesitation and taking the plunge.
Investing in property is by no means cheap. It is scary to part with so much money. I can say from experience that, not only is it hard work and scary, it is also extremely rewarding.
Let’s look at the example I shared above and say the property purchased for £250,000 with a mortgage of £187,500.
- £76,000 capital deployed
- £1,250 rental income per month
- £300 per month in mortgage interest (assuming a mortgage rate of around 2% which are widely available at the minute)
- £100 per month in additional expenses (insurance and such)
- £100 per month letting agent costs
This means that you could be realizing a gross profit of approximately £750 per month. That’s a whopping 12% return on investment from your original £76,000 capital deployed.
Good luck to anyone looking to get on the property investment ladder. If anyone wants to discuss anything mentioned in this article, please reach out. I’m more than happy to help. Property investment is something I’m deeply passionate about and I’m always keen to help others to be successful in it.