Property

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.

If you don't want to use the property yourself you could try and rent it to someone else to provide an income. The amount of annual rent you receive divided by the value of the property is known as the 'rental yield', e.g. a property valued at £200,000 providing annual rent of £8,000 yields 4%.

Bear in mind that you'll need to deduct the costs of maintaining the property, as well as service charges (common with flats) and letting agent fees if applicable. If you took out a mortgage to buy the property then deduct the monthly payments from your profit too. Also be aware that there may be periods when you receive no rent because you can't find a tenant. Use our Property Rental Yield Calculator to estimate the yield on a property.

The rental agreements on commercial properties tend to be much longer than those on residential, typically 10 years or more versus a year.

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!

Refers to property from where someone can run a business. The most common examples are offices, shops, factories, warehouses, hotels and pubs.

While some companies own their premises, most don't, meaning there's a big commercial property rental market. Traditionally, rental income produces the lion's share of overall commercial property investment returns.

The commercial property market tends to be more stable than residential, but it's not immune from a downturn. In a difficult economic climate tenants (i.e. companies) may go bankrupt, properties may stay empty for long periods and rents may fall.

Holiday homes may be in the UK or overseas and are usually bought with the intention of staying there a few weeks a year and renting it out for the rest of the time.

These are often quite emotional investments, especially as many owners dream of spending a lot more time in the property when they retire. It's therefore important to ensure your heart doesn't rule your investment head if buying for investment purposes.

If you're buying overseas you need to be aware of legal and currency risks. Both could severely dent your investment if you're not careful.

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.

While estate agents tend to be loathed, often with good reason, a good agent can be worth their weight in gold. A professional agent should have an intimate knowledge of the local area, useful if you don't, and help when negotiating with the seller. Of course, you may not trust them, but as a buyer there's little risk using an agent provided their fees/commissions are paid by the seller (this is normal in the UK). The worst that could happen is that they encourage you to pay too much for a property (avoid this by doing your own research on the property's market value) or you lose out to another buyer due to the agent's inefficiency.

The attraction of buying at auction is that you could grab a bargain because sellers are often keen/desperate to sell (which usually means a low reserve price). However, you risk buying a money pit if you don't carry out thorough checks on the property beforehand, sometimes difficult as there's often only three to four weeks between a property being listed and the auction itself. This means you'll have to pay for a survey and organise funding etc. in advance (even though you may not win), as once the hammer falls you'll need to pay a deposit there and then (usually 10%) and pay the balance on completion (usually within 28 days). Buying at auction can be daunting, but provided you do sufficient preparation and don't bid beyond a price you think is reasonable then you might bag a good deal.

Buying off-plan means committing to buy a new-build property before it's completed, often when it's still on the drawing board. You'll usually have to put down a 10% deposit and pay the balance when the building is complete, although some developers might ask for payment by instalments as the build progresses. You could profit from buying off-plan if prices rise between the time you pay the deposit and completion (when you pay the balance), but you could also lose out if prices fall! Some developers will allow you to specify fixtures and fittings, useful if you wish to customise the property to your own taste.

Freehold means you have absolute ownership of a plot of land and all buildings on it. Most houses and some commercial properties are sold as freehold, but it's rare for flats. As a freeholder you can do anything to the land subject to planning regulations. Other things being equal, a freehold property is usually worth more than a leasehold.

Leasehold, which most most commonly applies to flats and some commercial properties, means you own the property for the duration of a lease, after which it reverts to the freeholder. During the lease the leaseholders pay a 'ground rent', usually nominal, to the freeholder. New leases are often granted for 999 years, although existing leases on properties are usually a lot shorter. Short leaseholds, typically those less than 100 years, tend to hit property prices as they're disliked by buyers. Leaseholders may have the option to join together and buy the freehold.

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.

Real Estate Investment Trusts (REITs) are basically companies formed to invest in property. Unlike unit trusts, REITs can borrow money to invest (known as 'gearing') which increases your potential return or loss depending on performance. For example, if you invest £1,000 the REIT might borrow and additional £300, giving you a total of £1,300 exposure to the underlying properties.

Because REITs are companies listed on stock markets, their performance tends to be more correlated to stock markets than physical property. The value of a REIT based on the price of its shares ('market capitalisation') may also be different from the value of the property it owns ('net asset value'), meaning you could pay more than the value of the net assets (a 'premium') or less (a 'discount'). The upshot is that REITs can be rather more volatile than physical property, although they can still offer a cost effective route to long term property investing.

Most pension providers offer a property fund option, or at least a managed fund that partly invests in commercial property. If your pension is a Self-Invested Personal Pension (SIPP) then you'll also have access to property unit trusts and REITs, as well as the possibility of buying physical commercial property. Buying physical property within a SIPP is really targeted at business owners who wish to hold their premises in their pension. This can offer tax advantages, but the shine may be dulled by the costs and impracticalities of doing so.