New UK property investors essential guide

This guide is aimed at new or would be UK property investors. It’s based on well over a decade of hard experience.

They say hindsight is a beautiful thing, but if I’d known this lot before investing in my first property, I’m pretty sure I’d be rich by now.

That’s not to say, my property investments haven’t done OK. They have. It’s just to say they could have done better. A lot better.

Let’s get into it.

When will house prices drop?

Lots of first time buyers worry that house prices are about to drop.

Understandably I guess. Not wanting to see prices crash the minute you’ve bought a house is sensible. The idea of waiting for houses to come on sale also appeals to just about everyone.

But there’s a problem. This is market timing. And in case you haven’t heard, market timing is more difficult than brain surgery.

if anybody could do it repeatedly they would be rich beyond belief.

You’d never hear from them. They’d be too busy drinking cocktails on the beach.

The idea of just sitting with cash in the bank for the next crash sounds great. However, in practice it is likely to cost you money.

Think about this for a moment. 2008 was the biggest real estate crash in recent history if not all time. The stock market was intrinsically linked to the real estate on a global scale.

But here’s the thing, average prices only crashed 20%.

20% may sound like a lot, but based on data from the Halifax house prices increased 20% in just two years from Jan 2020 to December 2022. Easy come easy go. Then easy go, easy come!

The biggest drop in recent history was eradicated in a couple of years.

The point being, prices do drop double figures from time to time, but they also increase by double figures from time to time.

(That said, the most convincing property market timers out there are probably the 18 year cyclists – They believe you can market time the land cycle).

Is it worth investing right now?

Have a look at the following charts:

House prices 1984 – 2023

Source: Halifax & Bank of Scotland via Trading Economics

House prices – recent 5 years

Source: UK government

I hope you can see that over the long term prices go up, but in the short term they could go down. On occasion, they have been known to go down hard and fast.

But in practice, nobody knows when crashes are going to happen. You just have to be prepared that they might.

How do you do that?

• By being in it for the long term. Contrary to what a lot of so called property gurus would have you believe, real estate investment is not a get rich quick scheme. Not by a long shot. You should run a mile from anybody claiming otherwise. That doesn’t mean you can’t get rich. Many landlords are extremely wealthy. It just means it’s a gradual process that takes time.
• Don’t invest beyond your means. In other words, don’t borrow more than you can easily afford to pay back.

As long as you are in it for the long term and can afford to make your mortgage payments, a crash in prices doesn’t really matter. All you have to do is wait for the market to recover.

That said we’ve got a few property valuation tips below to help in the decision making process.

How to value a house

If you don’t know how to value a house, you can use the following tips to give you a basic idea of whether or not you should go ahead with a purchase at a particular time.

• Gross yield – The gross yield is the annual rent divided by the house price. Say you expect £6K annually from a house costing £100K. The gross yield is 6% ({6/100}x100). As a general rule of thumb 6% and above is great, but anything below 4% isn’t. Plenty of experienced investors will buy with lower yields if they are positive the house has potential for outsized capital gains, though.
• Housing to income ratio – This is the number of years of an average salary required to buy the average house. If the average salary was £25K and the average house price was £100K then the ratio would be 4:1. This is the average. However, right now, the current UK house price to income ratio is 9:1. This indicates it could be an expensive time to buy.
• Similar prices – These days the big online portals like Rightmove and Zoopla let you look at similar house prices and previous sold for prices. If you are buying something that’s priced lower than similar properties in the area you could be getting yourself a bargain. Similarly, if the price you are paying is either less than the previous buyer paid or hasn’t gone up as much as other similar properties then you could be getting a great deal.
• Catalysts – Is there a catalyst that could increase the value of the property in the future? And if there is one, is it being priced in. Examples being, a new school or transport link being built in the area. These kind of area improvements can add instant value to the right house.
• Improvements – Is there an improvement you can make that will add value to the property? New bathrooms and kitchens come to mind.
• Mortgage Repayment vs Rental yield – If your mortgage repayments are substantially lower than your rental income you are in a great position. As long as the rent exceeds your mortgage payments the house will pay for itself.

Tax on rental income

All rental income is taxable. In other words, you must inform HMRC how much rental income you receive each year.

You usually do this by completing a self assessment tax return. There are three ways to do that.

First you can spend hours filling out the forms by hand. (You can download them here).

You can use software to do the same job in half the time (We recommend GoSimpleTax which you can try for free here)

You can get a professional to do everything for you (We’ve talked about how to find a good one here).

How much income tax you pay depends on your total taxable income. That may include your salary, rental income and any other forms of income you may have.

Your first £12,570 of income is tax free (provided that you don’t earn more than £125,140 in a tax year).

You pay 20% on income between £12,571 and £50,270. You pay 40% on income between £50,271 and £150,000. And you pay 45% on earnings of more than £150,000 a year (Income Tax bands are different in Scotland).

You can read more about this here.

Can first time buyers invest?

First time buyers often find it more difficult to get a mortgage. That doesn’t mean you can’t get a one, though. It just means the conditions of your mortgage might not be quite as good as they would be otherwise. We’ve talked more about mortgages here.

As long as you’ve got a steady job and are able to make your mortgage payments buy to let could be a great use of money.

This is due to two key reasons.

• More often than not you can rent a better property than you would be able to buy so you could live in a nicer house in a nicer area if you rented.
• Investing in one or more rentals gains exposure to the housing market so that you can grow your wealth.

When property is the best investment

Oftentimes property investment makes sense when you can tick off these three boxes:

• UK house price to income ratio is low
• The house has a gross yield of six or above
• Some catalyst in the future will mean you can get greater capital gains than average.

Property investment companies

Some people prefer to invest without actually buying anything.

Instead they get exposure to the bricks and mortar through an property investment company.

Usually, this is for one or more of the following reasons:

• You don’t have enough for a deposit
• You don’t want to have too much money concentrated in one thing
• You don’t want to have any work to do

If that’s you then investing through a property company could be a great alternative.

There are three key types of these:

• Small companies that you can invest your money with directly
• Crowd funding companies
• Large publicly traded companies

Unless you have insight or experience in the industry it’s usually better to go with publicly traded companies.

The problem with the other two varieties is that it’s difficult to get an idea how good they are. There are also bad actors in the space that you need to avoid.

On the other hand publicly traded property investment companies have to conform to all kinds of standards and practices.

This lowers your risk of things going wrong.

This type of company is usually called a Real Estate Investment Trust (REIT). REITs hold buildings that make money for their shareholders.

These buildings could be residential, commercial or both. You can find REITs that specialise in warehouses, offices, shopping centres, apartments, hospitals, hotels or all of them together.There are various advantages of REITs:

• 90% of a REITs taxable income is paid out in dividends
• REITs spread your money over lots of different properties
• Anybody with an investment account can buy REIT shares in a couple of mouse clicks
• You can sell your REIT almost instantly
• You can invest as much or as little as you like. Some of the more famous UK REIT shares are trading for less than a fiver right now.
• You don’t have any work to do
• Your property investments are being managed by a team of professionals.

Large UK real estate companies

The two biggest companies who buy properties to generate income in the UK are Land Securities and British Land.

Both of these hold lots of different types real estate and come with all the advantages listed above.

However, for most people most of the time, an index fund or ETF that holds property may be a better way to gain exposure to the property market.

The two leading property ETFs (both from iShares) invest in both of these REITs, but also hold many more property companies.

These UK Property ETFs spread your money over hundreds of property companies and thousands of buildings.

You can read more about them here.

There’s also the option of going global with international versions.

How to come up with a rental income estimate

UK rental properties are often priced based on their potential rental income.

As the price is set by the estate agent there’s a very easy way to come up with a rental income estimate.

Simply ask the estate agent selling the property how much the property generates.

You can always get a second opinion by asking other agents who operate in the same area.

And if you have some time on your hands, a quick search online should give you a good understanding of what similar properties in the area are achieving.

Should you buy a property through a limited company?

Buying property through a limited company will depend on your exact situation. How you invest in property, your income and your plans going forward are key.

That said, if you fall into one of the following groups setting up a limited company for your property investments might just make sense.

High Income Tax Payers – If your taxable income is greater than £50,271 meaning you are classed as a higher rate tax payer placing your property investments within a limited company structure will usually save you money.

Those with an eye on their heirs – Wrapping your buy to lets in a company structure may make sense if you intend to pass them on to the next generation. The bigger your portfolio the bigger your tax savings are likely to be.

Growth investors – Taking money out of the business is subject to tax. This means, if you are investing with a focus on growing your wealth (not spending it) a company could be the right choice. Money kept within the business can be left to grow.

Flippers – There is a different kind of property investor out there worth mentioning here. One who likes to make money by trading properties. They buy low with the intention of selling high for a quick profit. To avoid paying too much tax, it nearly always makes sense to do this through a company.

When to use a property sourcing company?

Short of time? Don’t want any work to do? Then a property sourcing company could suit you.

These are companies that will find houses for you.

But let’s get one thing clear. There’s no point using a property sourcing company if you only intend to buy one or two properties.

Why? Well, in short, decent sourcing companies are harder to find than decent houses.

The best property sourcing companies tend to be individuals. There are no recognised big players that everyone trusts.

Don’t get me wrong. It’s not hard to find a property sourcing company. The difficulty is finding one that’s good and that doesn’t overcharge.

You don’t want to get cheated or give your money to somebody who doesn’t know what they are doing.

Additionally, paying too much in fees when you purchase a property can crucify your investment returns.

That said, if you plan on purchasing lots of properties and don’t have time for sourcing properties yourself then a property sourcing company would fit the bill.

You just need to put some initial work in at the beginning to find someone trustworthy that doesn’t charge the earth.

Online property forums and facebook groups have people offering property sourcing, but make sure you do your due diligence.

Lots of people will sell you the dream of being able to find amazing houses that will make you rich. But let’s face it, if these houses were that good do you really think they’d let you buy them?

In my experience, the best property sourcing service comes from individual investors.

I’m talking about property investors that specialise in a particular niche. That way, they can pass you the odd one that comes up that doesn’t measure up to their specific requirements.

An example may be an HMO (house in multiple occupation) investor who focuses on income rather than capital gains. If a nice city centre apartment came their way, they could pass it on to you for a small commission.

Is there a property sourcing company alternative?

And there’s one final thing worth mentioning. A letting agent can make an excellent alternative to a property sourcing company.

At the end of the day, they get paid if you buy a property through them. This means it’s in their interests to help you find what you are looking for.

Just tell them you’ll buy through them and use them as a letting agent and they’ll likely jump through hoops to find you something suitable.