How to start investing in property
Owning a property portfolio is a great way to build wealth and achieve many financial goals. But how to start investing in property when you have no experience and limited funds can be daunting. In this article I will provide simple steps and options to get started.
What you’ll need to start investing
There are two essential things that you must have before you can start to invest:
- Cash for a deposit
- The ability to obtain a mortgage
Cash for a deposit
To purchase a property with a buy-to-let mortgage, you will generally require a deposit of 25%. In addition to that you’ll also have purchase costs, such as stamp duty, solicitor & broker fees, and other setup costs. These costs will typically equate to another 5%. Therefore, as a rule of thumb, you’ll generally need cash to cover around 30% of the purchase price.
If anyone starts talking to you about “no-money-down deals”, beware! The fact is you need money to invest.
The ability to obtain a mortgage
The main criteria for a BTL mortgage is the property itself and its ability to generate enough rent to cover the interest payments by at least a certain amount. However, your personal situation still needs to meet some basic criteria.
In general, if you have a clean credit history and are in employment earning at least £25,000 per annum, you should have access to plenty of options. If you are self-employed, you will generally require two full years of completed accounts.
For anyone with a low income, irregular work, or a history of credit problems, you might find obtaining a mortgage is more challenging. If you currently don’t own your own home, so are a first-time buyer as well as a first-time landlord, the mortgage market is also tricky and the rates you pay will be higher. I would therefore always recommend having a conversation with a mortgage broker first to understand your options.
The bad news first…
According to the ONS, the average UK property price at the end of 2021 was £275,000. That means that to purchase the average property as a buy-to-let, you will require around £82,500. That’s a big chunk of cash, and how to start investing in property with limited funds is usually the biggest challenge. However, there are some options to consider.
How to start investing in property
The “average” property may seem out of reach when you are just starting out. However, these are some ways to get started without huge amounts of cash.
Look at cheaper locations
This one is blatantly obvious, but if you start in a cheaper location then your money will go much further. There are still properties in Northern cities of the UK that cost less than £100k. That means a cash pot of £30k is required for a buy-to-let, which is much more achievable.
The good news is that Northern cities are currently experiencing the most growth and will also return the highest rental yields. That means that by searching further afield, you are not compromising potential investment returns. In fact, you are optimising!
As things stand at the start of 2022, the top performing city in the UK is Liverpool. Property owners there have seen values grow more than 10% over the past year. Yet the average price is still below £150k, which would require half the cash of the average UK property overall.
Investing starts at home
If you are a first-time buyer, a great way to get started is to treat your first home as an investment.
You don’t pay any stamp duty as a first-time buyer (up to £300,000). That means that the cash required for fees is much less. Also, when negotiating with a seller you are chain-free, which can be an attractive proposition and help to seal a deal. Both points apply for a first-time buyer whether you purchase as a BTL or as your own home.
However, the biggest advantage when buying your own home is that you can borrow a higher percentage of the property value. Mortgage lenders will typically lend up to 90%, which means a much smaller deposit is required. Based on that, you could purchase the average UK property of £275,000 with a cash deposit of as little as £27,500 and minimal fees.
Be aware that the loan amount will be limited to a multiple of your earnings. This is typically 4.5x your gross annual salary, although some lenders may lend slightly more. You will also usually be required to take a repayment mortgage, rather than interest only, so repayments will be higher.
Create your own value
Once you own your first property, look to add value if you can. It could be as simple as a cosmetic uplift by repainting each room and replacing carpets. Or it could be that you replace and upgrade a tired, dated kitchen or bathroom. Some properties may even have scope to extend in future if your budget allows.
This strategy works especially well if it’s your own home. You can learn as you go along, and you’re under no time pressures. It’s also far more convenient to refurbish the place where you live than to have to travel to a separate property that you’re renovating.
This can be like rocket fuel to kick start the growth of your portfolio. It means that in the first few years, not only are you benefitting from natural market growth, but you’ve potentially created extra value on top. Then when you come to either move home or remortgage, there’s additional equity in the property to help move you to the next step.
Flip your way up the ladder
If you have chosen to start with buying your own home, over time the market value will increase, and hopefully you’ve added some extra value yourself as well. That means you’ll now have more equity in your property than when you started.
One option you have at this point is to sell your property, purchase a bigger property, and repeat the process of adding value. You can repeat this several times, effectively flipping your way up the property ladder.
A big advantage of flipping your home in this way is that you don’t pay capital gains tax on your own residence. That’s a massive cost saving over doing a flip strategy alongside your own home.
This strategy is great for building up equity, but eventually you’ll want to invest in BTL properties that also generate an income. You then have two options to access the capital that you’ve built up inside your property. One is to downsize, move to a cheaper home, and use the surplus equity as a deposit on a BTL. Another is to remortgage and release equity for a deposit, providing you meet affordability criteria.
All the above!
The best way to get started is to use a combination of these strategies.
You may not be able to afford to buy in the location where you currently live, but you could afford to buy in cheaper areas. You may not want to live somewhere else long term but moving away temporarily can be a sacrifice worth making. Many people move away to university for a few years, so doing the same to start a property portfolio is no different. Since the pandemic, remote working opportunities are commonplace. This provides more options to benefit from location freedom to invest in starting your portfolio.
For example, the average home in Liverpool costs approximately £150,000. With a 90% residential mortgage you would require just £15k deposit and a few thousand in fees. This is a lot more achievable. Last year the market there grew in value by over 10%, but to be cautious, let’s say it grew by just 5% per year in future. Within two years, the equity within the property would have more than doubled, and that’s without adding any value yourself. That’s quicker than most people could save, and it’s a 100% return on investment over that period.
All these strategies work, and all can be good options for anyone wondering how to start investing in property with limited funds. In fact, I have personally used all these strategies myself during my own journey.
I started by purchasing my own home, added value with a refurb, and released equity to purchase a buy-to-let. Several years later, I sold the property and downsized. This allowed me to release more capital to invest, and I also moved location temporarily to maximise growth. I now invest in cheaper locations remotely, as well as locally for diversification.
Property investment can have such a positive impact on our lives and provide great security for our families. It will require some hard work and sacrifices initially, but anything worth achieving usually does.
If you’re not sure how to start investing in property and would like help or advice, please get in touch. I offer free consultations to help you understand how to get started, whatever your situation. Please send me a message if you would like to know more.