What is it?
Property, sometimes called 'real estate', refers to 'bricks and mortar' such as homes, offices, shops, factories, hotels and also land.
The attraction of property to some investors is that, unlike shares, they can see and touch it, i.e. it's a 'real' asset. However, it's usually harder to buy and sell than
shares, making it less 'liquid'.
Although most of us simply try to buy our own home and leave it at that, some investors buy property with a view to developing it for profit and/or renting it out. A decade
of soaring property prices from the mid 1990's created a boom in property investment, particularly investors who bought houses to rent out (often using borrowed money),
known as 'buy to let'. Some burned their fingers as property prices fell back down to earth, reminding us all that there's no such thing as a 'dead cert' in the investment
Ways to get a return
There's two ways to earn a return on property. An increase in the property's value and/or rental income.
Property PriceRental Income
If you can sell a property for more than you paid for it, you'll make a profit. If you're lucky, the price might simply rise due to a buoyant property market. Some
investors prefer to seek profit by developing a property. This could mean buying a run-down property and renovating it, or perhaps buying land and seeking planning
permission to build a residential or commercial building.
Don't forget to factor in the costs of buying and selling. Buying costs include stamp duty, surveying and legal fees. Selling costs include estate agent and legal fees.
These costs could all add up to around 3% - 7% of the property's value. Use our
Property Buying Costs Calculator to get a clearer idea of the overall costs of buying a property.
What types are there?
Property really falls into two categories, residential and commercial. Holiday homes are technically residential but as there are additional factors to consider we'll
treat them as a separate category.
This is property where someone can live. If you own, or are buying, the home you live in then this is technically an investment, and chances are it's the biggest
you'll ever make.
Some investors buy property to rent out, which has created a large rental market. However, if you borrow money to buy a rental property you could struggle to make a profit
from rent alone, especially after deducting running costs. Most investors therefore rely on rising house prices for an investment return, unfortunately prices tend to
be more erratic than rents.
The UK residential property market has generally boomed over the last 30 years, but there's been some steep downturns along the way. It's certainly not the one-way bet
that some had seemingly started to believe!
What's going to happen to house prices?
Well, let's be honest, no-one knows for sure. The credit crunch has taken its toll, but given the extent rising house prices had outpaced earnings you might feel that a
downturn was inevitable anyway, take a look at the chart below.
There's no doubt that the cost of borrowing, i.e. interest rates, plays a role. If mortgage rates are low you can afford to borrow more money, as can everyone else,
fuelling demand for property and pushing up prices. However, if there's an economic downturn and you lose your job, then low interest rates make little difference if
you lose your home through having no income to pay your mortgage.
Three sensible ways to improve your chances of making a profit are:
- Buy a property that requires some renovation/building work at a rock bottom price. However, tread very carefully and accurately estimate the building costs.
- Buy a property that is very marketable (e.g. great location, size, features etc.) as this will increase your chances of selling in a stagnant market.
- Buy in an area that has a strong rental demand. A consistent rental income will help stabilise your investment return.
What costs can I expect?
The following are typical (ignoring any mortgage related costs):
||Typical Annual Cost
||0 - 5% of purchase price
||1% - 3% of sale price
||10% - 15% of annual rent
||£250 - £1,000+
||Legal / Conveyancing
||£250 - £500+
||10% of annual rent
|Legal / Conveyancing
||£250 - £500+
(if a flat)
|0.25% - 1% of property value
||£40 - £700
||Building Insurance (if not covered by a service charge)
||£150 - £300+
||Gas safety certificate
|Estimate for £200,000 property / £10,000 annual rent
If the property is vacant between tenants then you may be liable for council tax.
Find out how much profit and yield your investment property is generating using our Property Rental Yield Calculator.
How is it different from residential property?
As an investor there are several key differences:
- Commercial buildings tend to be larger, hence more costly to buy, than residential.
- Rental agreements are usually much longer than residential, typically 10 years or more.
- Commercial property can take much longer to sell than residential.
- Tenants are normally responsible for all insurance, maintenance and repairs.
- Most of the investment return is likely to come from rent, not rising property prices.
- Rent is normally charged at a rate per square foot or metre.
What types are there?
These can range from a single room to a huge multinational company headquarters and business parks. Office space can be used for many types of business, so provided
it's in a good location it can be easier to find tenants than retail or industrial space. Nonetheless, it's not immune from an economic slump. In bad times companies
maximise use of existing office space and cut jobs, both reducing demand.
What is rental growth and yield compression?
If you ever talk to a commercial property professional you'll almost always hear the words 'rental growth' and 'yield compression' mentioned.
Rental growth refers to the extent a property owner can increase the rental income they receive. This might happen by increasing a tenant's rent, renting out previously
vacant space or redeveloping sites that can be rented to new tenant's for more money.
Yield compression refers to a fall in rental yields, most likely due to a rise in property prices. Suppose commercial property yields 10% while gilts only yield 5%.
Investors might flock to commercial property seeking this attractive yield. However, the increased demand for property will push up prices, which in turn reduces
(i.e. compresses) the rental income yield.
Is it a good idea?
If you're buying property overseas purely as an investment and have little intention of ever spending time there, either now or in future, then I'd seriously think twice
before doing so.
You'll have to delegate day to day management to someone else many miles away, which can often lead to problems, and currency movements could affect your investment.
If you plan to spend time in the property, perhaps even retire there, then the personal benefit and pleasure you'll get from it could help make the investment risks more
What things should I consider?
If you do decide to buy then think about the following points (amongst many others) before you take the plunge:
- Does the property market rely on foreign investors rather than locals? If so, you might struggle to find a buyer if the area/country falls out of favour with foreigners.
- If the property requires building work/renovation, get several quotes and ensure there are no hidden extras. Builders could be hard to manage if you're based in another country.
- Ensure you get good, honest, legal advice. Foreign property laws often vary from those in the UK and falling foul of them could cost you a lot of money, or even your property.
- If you buy off-plan, never hand over instalments without viewing (ideally yourself or someone you trust) the construction progress of your property.
- Never feel pressured into buying by persuasive salespeople. They're probably on a fat commission and couldn't care less whether the property actually meets your requirements.
- If you're planning to rent the property then check out the local market. What rents do similar properties achieve and what are typical occupancy rates? Also factor in the costs of renting.
- You'll probably need to pay income tax on any rental income back in the UK. Check whether you'll be liable for any local tax and whether this can be offset against UK tax due.
- The notion of owning your own holiday home can seem idyllic, but in practice it could be a lot of hassle and do you really want to holiday in the same place for the next 20+ years?
- How easy is it to get to the property? If it's more than a couple of hours from an airport you might find it restricts rental opportunities.
- Don't buy a property just because it's cheap. You've got to enjoy visiting and staying there - if you don't then chances are potential renters won't either.
- Get a breakdown of all purchasing costs, including local taxes, legal fess and agent commissions (in some countries both the buyer and seller pay commissions).
- Don't believe agents who tell you the property is a great investment. Do you own homework and analysis.
- If you plan to retire to the property what would it really be like living there? Living in the area full-time could be very different to a two week holiday.
- Use a currency exchange service to get the best deals when buying local currency to make the purchase.
- You may need to take out a Will in the country where the property is based to safeguard your interests.
- Make sure the property is properly insured.
- Beware timeshare properties, the industry is full of unscrupulous salesmen.
Unless the property is your main residence, you'll almost certainly end up paying tax on it at some point.
||Yes, on rental income
||Yes, on rental income
||Yes, on rental income*
|Capital Gains Tax
||Yes, unless the property is your main residence
||No, but local taxes may apply.
|* Unless you're non UK tax resident. You might also be liable to tax in the country where the property is based.
How can I buy property?
If buying property as an investment, your first decision should be whether to buy a physical property or invest via a fund. Funds offer the benefit of a low initial
investment, reduce risk by spreading your money across many properties and usually allow you to sell simply and quickly. However, most property funds invest in commercial
property, with options for residential property being very limited. You'll also have to pay fees to the fund manager, reducing your potential return.
When buying physical property, you'll need to decide whether to buy direct from an owner, via and agent or at auction. The property might already exist, or may not yet
be built (known as 'off-plan') The property may also be owned as 'freehold' or 'leasehold'.
Direct from OwnerEstate AgentAuctionOffplanFreeholdLeasehold
The Internet has made it far simpler for property owners and developers to advertise their properties direct to potential buyers. The attraction for them is cutting out
estate agents and their commissions. As a buyer there's less benefit unless you can get a good deal on the property due to the seller saving on agent commissions, or you're
buying in a country where buyers pay agent commissions too. The main reason for buying direct is simply that the property you like is being sold this way.
There are several types of popular property funds:
Almost all property unit trusts invest in commercial property, either in the UK and/or overseas. This might be through buying physical property, shares in property companies or a mix of the two.
While a convenient option, bear in mind you may incur an initial 'spread' (effectively a charge) of up to c5% to cover the costs of buying property (stamp duty, agent and legal fees). But, provided there's a
buyer the fund group can pass your units on to when you sell (rather than cancel the units), the costs incurred in buying property will usually be transferred to the new buyer. However, if there's more sellers than buyers then expect to bear the brunt of the property purchase costs and in extreme
circumstances for the manager to suspend dealing while they sell some properties to fund the redemptions.
When a fund invests the shares of property companies (including REITs) the volatility and correlation to stock markets is likely to be higher than physical property.
Find out more about unit trusts here.
Click below to display some of the more common property jargon:
|Chain||A succession of buyers and sellers who are reliant upon one another to complete buying or selling properties. A delay on one will have a knock on effect along the chain.
|Commercial Property||Property from where someone can run a business, e.g. offices, shops and factories.
|Conveyacing||The legal process for transferring ownership of a property from the seller to the buyer.
|Deeds||Legal documents proving ownership of the property.
|Freehold||When you have absolute ownership of a plot of land and all buildings on it.
|Land Registry||A government office responsible for recording the ownership of land.
|Landlord||Someone who owns a property and rents it to a tenant.
|Leasehold||You own the property for the duration of a lease, after which it reverts to the freeholder.
|Offplan||Committing to buy a new-build property before it's completed.
|Property Stamp Duty||A tax levied when purchasing a property.
|Real Estate||Another word for property.
|REIT||Real Estate Investment Trust, a type of investment company that invests primarily in property.
|Rental Yield||The amount of annual rent received from a property divided by its value.
|Residential Property||Property where someone can live, e.g. a house.
|Tenant||Someone who rents a property from a landlord.
|Yield Compression||Refers to falling rental income yields on commercial property. Usually caused by rising property values.