What is Property Investment?

What is Property Investment?

December 26, 2021

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Manchester

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Investing into property is becoming one of the most popular ways of financial investment. In the five years to December 2020, the number of UK buy-to-let landlords grew by a massive 49% from 1.8million to 2.7million.

 

And although people aged 30-50 are more likely to own an investment property than any other group, the fastest-growing age bracket for landlords is 60-64 as they near retirement and look to boost their pension pot.

 

So what is it about property that is driving so many people to invest in it? In this article we will explain what exactly is a property investment and why it’s such a financially attractive option for so many.

 

 

What is property investment?

Put simply, property investment is property purchased with the intention of generating financial returns for its buyer. These returns could be in the form of rental income through buy-to-let properties, house price growth through the future sale of the property or both. Property investments can be owned by individuals or organisations and can be short, long or medium term.

 

Investments can be made into commercial or residential properties for this purpose. When investments are made into residential properties, these properties are not used by the buyer as their primary residence. Rather, investors often build a portfolio of buy-to-let properties that they rent to tenants.

 

Buy-to-let landlords can also choose how their investment property is managed. Gone are the days of landlords alone having to take on the responsibilities of finding tenants, keeping their properties up to scratch and their tenants happy, all the while making sure the rent was paid on time.

 

Nowadays, property investment companies such as North Property Group offer fully managed services where they look after the day-to-day business of managing a buy-to-let property. On the other hand, if an investor wants to take a hands-on approach to their rental property, they are able to do just that.

 

 

Types of property investment

As mentioned above, there are a wide range of types of property investment. These include commercial premises such as offices and commercial outlets, as well as residential which is what we’ll focus on in this article.

 

Even within the residential property investment sector there is a wide variety of property types. One that is growing in popularity due to its boosted rental returns is what’s known as ‘build to rent’ or BTR. The BTR sector is booming across the country – but especially outside of London where large levels of investment is being made into these developments.

 

BTR is exactly as its name suggests – new residential properties that are created with the purpose of being bought by property investors to be rented in the private rental sector (PRS). As they are built with tenants in mind, BTR developments are often of high quality and can come fully-furnished. The buildings often feature an array of sought-after onsite amenities, such as concierge services, parking, gyms, co-working spaces and even cinema rooms in some cases.

 

These kinds of property investments can also be made off-plan, which means they can be bought before the building is fully finished. This allows investors to buy at a lower price than otherwise, often with advantageous payment schedules. This results in better financial returns through both higher rental yields and increased capital growth.

 

If a completely finished property investment is desired, buy-to-let investors can also choose to buy pre-lived in properties that are available on the public market. Whatever kind of residential property there is for sale – from a bungalow to a semi-detached house to a mansion – can be available to buy as an investment property.

 

Generating some of the best financial returns from a property of this type can be through renovation, also known as ‘house flipping’. This is where a property is improved upon by aesthetic or structural improvements to add value to the sale price and to increase the rents that can be achieved. This strategy comes with its own risks and financial investment however, as renovations can be time-consuming, costly and can create more issues than originally planned.

 

 

Property portfolios

Property portfolios are when an individual, a group of individuals or a company own a number of property investments. These don’t have to be the same kinds of property or even in the same area – for example, a landlord’s property portfolio might comprise of a mix of new-build apartments, pre-owned houses and HMOs (‘house in multiple occupation’, i.e. a property that is lived in by at least 3 unrelated people) spread across different cities.

 

Although creating a property portfolio requires a high level of investment, there are many benefits of owning multiple property investments. Owning a number of buy-to-let properties means more rental incomes and opportunities for growth, both of which can be very financially rewarding.

 

By diversifying a portfolio, i.e. investing into different types of property in different locations, landlords can also spread the risk of certain properties not growing as forecasted. This means if you have four properties and three don’t grow, the equity gained from the one that did still allows you to invest in more properties.

 

Another risk reduced through property portfolios is that of properties not being tenanted. If a landlord owns multiple property investments and one isn’t tenanted that doesn’t matter as much as if they just had one that wasn’t tenanted, as rental income will still come in from the others.

 

 

Types of tenants

Tenants make up about one fifth of all households in the UK, and most live in privately rented properties. Four fifths of all tenants stay in their homes for more than two years, with only around a fifth moving more frequently than that.

 

When looking at who these tenants are it’s important to note that there are just as many types of tenants as there are property investments. And understanding your target tenant demographic is intrinsically linked to the type of property you choose to invest in.

 

From students to families to young professionals, each tenant group will want something different from their home. Some – particularly students and young people – will prefer to live in HMOs, whereas others like families will want to be the sole occupant of their rental property.

 

Then there is location. While students and young professionals tend to prefer to be near the city centre or their place of study or employment, families and older tenants may prefer to be further outside of the centre. Families in particular will look for homes near schools and playgrounds.

 

If you do plan on focusing on a particular tenant demographic for your property investment, it’s important you invest in properties that fit that group’s particular requirement. That way you can ensure more fully tenanted properties and regular rental income.

 

 

Types of financial returns

The two main types of financial returns to be gained from property investments are rental yields and capital growth.

 

Rental yields are worked out as the annual rental income gained from a property divided by the purchase price of the property. Generally, buy-to-let investors should look at where they can generate the best rental yields in order to maximise the financial returns on their investment.

 

It’s important to research where these places are, as high rents don’t always mean high yields. For example, tenants in London pay some of the highest rents in the country, but as property is so expensive to purchase, rental yields are actually some of the lowest in the country.

 

On the other hand, cities such as Manchester, Leeds and Liverpool still have comparatively low property prices and strong tenant demand, leading to some of the best rental yields in the country for buy-to-let landlords there.

 

The other type of financial return from property investments, capital growth (also known as ‘capital gains’ or ‘capital appreciation’) is the profit made when selling a house if its value has increased from when the seller purchased it.

 

If you sell a property for less than you bought it for you are losing money, so it is important to find out how property markets have performed recently and what they’re forecasted to do in the future.

 

Much like with rental yields, some cities that have benefitted from exceptional house price growth over the past few decades – such as London – are now slowing down with some areas even seeing a recent fall in price growth.

 

Whereas it’s the more up-and-coming cities such as Leeds and Manchester that are predicted to perform the best in future years. Despite the large amounts of property investment and development underway there, supply can’t keep up with demand which is pushing house prices higher and higher.

 

 

Types of property management

As already stated, landlords can choose different levels of involvement in their property investment. Companies such as North Property Group offers various property management services for however hands-on or hands-off a property investor wants to be.

 

A fully managed service of the type North Property Group offers manages the tenancy from the very beginning of the property investment to the very end. At the start, this includes a full property search, assistance with the purchase, promotion and viewings of the property to prospective tenants and putting everything in place to begin the tenancy.

 

During the tenancy itself, North Property Group will manage the regular rental payments, look after the property and the tenants, visit and report on the property’s condition, manage any issues and arrange any necessary repairs and will negotiate any tenancy renewals and rental increases on the landlord’s behalf.

 

Then, when the tenancy is over, this service manages all aspects of end-of-tenancy including inventory checks and deposit reconciliation, as well as finding new tenants to move in or selling the property if desired.

 

There are also tenant find only services in which companies like North Property Group helps with just finding the tenant, administrative tasks related to moving in the tenant and then all end-of-tenancy services.

 

Some property investors prefer to take a fully hands-on approach and do this themselves. But depending on the amount of properties and investor owns this can be very time-consuming and can make for a stressful investment experience.

 

Another service that can make a property investment easier is that of furnishing a buy-to-let property. Furniture packs are carefully curated sets of furniture that can be bought by the landlord and are then delivered fully assembled and installed in the desired location.

 

 

Risks and considerations

Just like any kind of financial investment, property investment does come with its own risks and considerations that must be taken into account. Some of these have already been outlined in this article, such as properties not being fully tenanted leading to a loss of rental income, or the possibility of falling house prices.

 

On an individual level, all property investors must ensure they have the financial capital to be able to invest in property and stay afloat should things go wrong. Landlords must also ensure they have money put away for any unforeseen costs or issues that could arise. It is never sensible to tie up all of your money into one asset as if that money is needed, it could be difficult and slow to get back.

 

 

Find out more

If you’d like to learn more about property investments, get in touch with the friendly team at North Property Group for more information and expert advice.

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