Buying property can be a good way to invest your money for the longer term. We’ve all spent a lazy morning in front of Homes Under The Hammer and thought to ourselves, “I could do that”.
But does investing in property really turn a profit every time? Tying up your capital in bricks and mortar means you don’t have that cash to invest in other options like stocks and shares.
However, if you’re savvy about buying property for profit, you could make a much bigger return in a shorter time than other long-term investment routes.
So, what should you do? This guide to buying property for profit will outline the things you need to think about before you invest – as well as some tips on which property types to buy if you decide it’s the right financial strategy for you.
- Things to consider before buying
- Where and what should I buy?
- What kind of property should I invest in?
- How do I buy property for profit?
Things to consider before buying
Is investing in property right for you?
Firstly, you must consider whether investing in property is right for you.
Ask yourself these questions:
1. Can I afford to have a lot of money tied up for some time?
If you’re planning on renting your house out it will mean your money is tied up and, unlike some other forms of investing, it can take a long time to access your money.
2. Can I wait to sell the property?
The longer you own a property, the better the investment (usually). However, if you think you want to ‘flip’ a house quickly, what will you do if you can’t find a buyer?
3. Do I have the time and energy to manage it?
If you’re renting your property out to maximise the returns, you’ll need to put in a lot of time and energy, too. Can you afford that – or a management agency – or would a profit from a quick sale suit you better?
4. Do I know what the costs are?
Buying property has a lot of fees attached, from mortgage arrangement fees to conveyancing charges. After you own the property, you may need to complete renovation work, pay to extend the leasehold, cover mortgage payments during empty months on a rental property… You need to work out all of the costs before you decide to invest.
5. Do I know the risks?
As with all investments there is also risk: property prices and demand for rented accommodation can rise and fall so there are no guarantees.
If, after saying yes to the questions above, you feel investing in property is right for you then you should, if possible, have a diverse portfolio of investments so when the housing market slows down you don’t feel the pinch. In other words, don’t put all your money in property, and certainly don’t put it all into one house.
Other investments you might have include shares, bonds, gold and even art. Here at Moneymagpie we’re always saying that you need to spread your bets. It’s always good to have another source of income so you can wait out the slow periods and make the most of having a long-term investment.
Should I buy a house to flip or a house to rent out?
‘Flipping’ a house is what you’ll see on property auction programmes like Homes Under the Hammer: you buy a property in need of renovation, complete the works, then sell for a profit.
Alternatively, you can buy a property to become a landlord.
Make sure you know which one you want to do before you get a mortgage: the rates and fees are different depending on whether you intend to make the property a buy-to-let investment.
Property tycoon Ian Samuels recommends that if you want to make the most money from your property, you should be buying to let. “House flipping is harder and more expensive than you might think,” he says. “It requires deep pockets, and, even if you make a quick burst of money, buying to let is likely to be the most profitable in the long term. This is particularly true when you consider the cost of Capital Gains Tax each time you sell a property.”
It’s also worth noting that, if you’ve rented out your property for a period of time before you sell it, you can get some relief on your Capital Gains Tax bill. You’ll get additional Private Residence Relief on the time you lived in the home before or after you let it out, too.
There’s always going to be a demand for rental accommodation. Even though mortgage providers are now finding ways to open the market for first-time buyers, such as with student mortgages, costs are still prohibitive for many. Other people prefer to rent over buying, as it gives more freedom to relocate for work or family needs.
What key things should I consider when buying a property to make profit?
You’ll need to consider a fair few things before you decide to buy a property if you want to make a profit from it.
1. What’s the current market like? With political turmoil such as Brexit, the housing market is unpredictable: buying to rent a property out before you sell it could provide a buffer so you don’t suffer huge losses if house prices drop.
2. Where is it located? Places close to local amenities, public transport links, and good schools will always do well for both rental and ‘flipped’ properties.
3. Who do you want as tenants? Families tend to stay put longer, to keep children in the same schools – but professionals may only want short-term tenancies, which could suit you if you’re planning to sell up fairly quickly.
4. Can you afford the repairs and maintenance on the property? These will be ongoing, even if they’re not major works, and can eat into profit.
5. What other developments are planned in the area? Check the planning permission applications for the local area. Large new housing developments could affect your property price or potential to rent out. Other things, such as new music venues, can also drop property prices. On the flip side, town regeneration plans can significantly increase the value of a property in a short space of time.
Where and what should I buy?
With London’s property bubble unaffordable for most, there could soon be (hopefully!) a drop in the house price value. This means it’s not a good place to invest.
Look outside of London at key areas for economic output, high employment figures, and great transport links. Newcastle, Cardiff, York, Leeds, Manchester, and Liverpool all offer much better value than London but have a high demand for both property buyers and renters. Properties in Scotland near cities like Edinburgh can also be great investments – but be aware that the purchase process is very different to the rest of the UK.
Huge regeneration projects in Manchester, and the Wirral Waters Scheme in Liverpool, mean the north-west of the UK is becoming a powerhouse in its own right. The ripple effect will extend out to regions with transport links to these cities, such as Stockport, and that means house prices will continue to rise for a while.
However, if you live in London, buying a property elsewhere comes at a different kind of price. If you’re renovating your new property to flip it, you’ll need to spend a lot of time away from home to do this. If you want to rent out the property, you’ll be far away to manage it – and may need to pay a management agency, instead.
What kind of property should you invest in?
Your intention with the property affects what type you should buy. If you want to rent it out, a two-bedroom apartment is a good investment. This property type appeals to a wide range of people, from young couples to new families, first-time buyers saving their deposit to fresh-out-of-university graduates, older professionals or retired people. The broad appeal means it’s unlikely you’ll struggle to find tenants.
If you want to buy a property to live in or flip for profit, look instead at a three-bedroom family home. Semi-detached and detached properties do best, especially if they have a garden space, too. Small renovations, such as extending a kitchen by even a few metres, can add thousands to the resale value.
Whichever property you buy, make sure you check the freehold or leasehold. A freehold property is totally yours – but a leasehold means you’ll have to pay maintenance charges or ground rent. The most common properties with a leasehold are apartments, as communal areas and building structure need to be maintained.
Check how long you’ve got left on your leasehold or freehold, too. Some mortgage lenders won’t let you borrow for a short-dated leasehold. For example, Washington council is currently selling off one- and two-bedroom former council properties for as little as £15,000 (yes, really!) but the leasehold is short, so it’s likely only cash buyers could make this purchase. However, at a rental price of £300pcm (£3,600 per year) you’d return your full investment in just five years.
That is why, as with other investments, investing in property is a long-term venture and should, where possible, be part of a diverse portfolio.
How do I buy property for profit
We’ll assume you’re not buying the property to live in: you either want to flip it or rent it out. To do this, you’ll need to:
1. Assess how much you can afford to put down for a deposit.
2. Make a budget for house purchase and maintenance fees (mortgage arrangement, conveyancing, etc)
3. Decide whether you want to purchase a buy-to-let or second property to flip
4. Speak to a mortgage broker to find the best deals and get an Agreement in Principle
5. View properties and find one you want
6. Get a survey done – then budget for repairs or negotiate on the offer price
7. Complete the purchase process
Just kidding – once you own the house, you’ll need to carry out all renovation and repair works. Make sure you leave plenty of time and cash in your budget for unexpected repairs. For example, you may find that the house needs new pipes when you’d only wanted to put in a new bathroom suite!
To be eligible for buy-to-let mortgages, you need to be a property owner already. You’ll need to meet other eligibility requirements too – check out our mortgage guides here.
Buying property for profit can mean you’ll see huge returns – if you’re willing to play the long game OR take big risks (such as buying a rundown auction property and doing it up to sell on). It takes a lot of time investment, too – so if you want to grow your wealth without being quite so hands-on, check out our other investment guides to find a less time-intensive way to financial security!
*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.