UK Property Investment Options for Investors

What are the UK Property Investment Options for Investors? Investors keen to get into the UK property market have a few options, from commercial and residential property to buy-to-let and holiday lets. Each investment comes with pros and cons, and which is right for you depends on your investment goals, your appetite for risk, and how you plan to finance your investment.

UK property investment options for investors in:

1. Residential property

The easiest way to start a property portfolio is to invest in your own home or buy a second home. The UK property market has long been seen as stable; it’s already weathered the uncertainties of Brexit and looks set to do the same with the pandemic. Savill’s forecast that UK property will grow in value by 15.1% on average by 2024, with the highest regional rises seen in the North West (24.1%) and Yorkshire (21.1%).

Investing in residential property is seen as a safe bet by many; property prices have consistently risen across the UK for many years now, and investors who aren’t relying on rental income to pay the mortgage are taking on less risk. However, unlike other kinds of property investment, there’s no second income gained from buying yourself a second home, which means it’s a cautious investment both in terms of risks and returns.

2. Commercial property

Commercial property offers another solid opportunity for investment. Buying commercial property offers investors relative security in that most UK leases on commercial property average around eight years; this means investors can enjoy eight years of guaranteed monthly rental income. Average yields across all sectors of commercial property have remained stable at about 5% since 2015, with retail offering slightly higher yields at 5.7%. However, commercial properties often require a bigger initial investment than other property types, pricing many investors out of the market.

3. Buy-to-let property

Buy-to-let property has traditionally been one of the most popular kinds of property investments in the UK. Buy-to-let investors enjoy gains from growth in property value over time as well as a regular rental income when the property is occupied.

However, the buy-to-let property has taken a knock in recent years due to various changes made to buy-to-let tax calculations. Landlords now pay tax on all revenue they make from buy-to-let property, as opposed to simply being taxed on profits. A 3% stamp duty surcharge has also been added to any purchases of second homes including buy-to-let properties. Both of these changes have made some landlords rethinking buy-to-let investments, although most buy-to-let properties still offer strong yields year to year.

Investors might be surprised to hear that the best yields are seen in areas like Scotland and Northern England, where property prices are considerably lower. While rental rates are much higher in London, purchase prices are proportionally even higher, which means yields are actually lower. Some of the best BTL yields in the UK are found in Rochdale (9%), Blackpool (8.6%) and Glasgow (7.96%).

• Buy-to-let-car investment opportunity

4. Holiday lets

Holiday lets offer a new opportunity to investors and landlords who are turning away from buy-to-let properties. Holiday lets are offered for short-term stays and are usually charged at a higher rate than long term buy-to-lets. Investors considering a second home can also use their holiday as a second home throughout the year, provided they follow certain occupancy restrictions.

Average yields for holiday lets vary greatly throughout the UK; it probably goes without saying that the best areas to invest in holiday lets are those areas with frequent visitors – usually scenic tourist hot spots and city-centre locations. As is the case with buy-to-let properties, often the best yields are found in locations where property prices are relatively low but visitor levels are high.

Figures released by Luxury Cottages, a premium rental agency in the UK, have revealed that some of the top locations for holiday let rental yields in the UK include postcodes in Pembrokeshire, Gwynedd, the Suffolk Coast, the North Yorkshire Moors, and Merseyside. Most of these postcodes are rural areas near scenic tourist hot spots like national parks, although northern cities such as Liverpool can also boast high holiday let rental yields too.

Before investing in a holiday let, investors must bear in mind the differences between this type of investment and buy-to-let investments. While holiday lets can offer great returns over the course of a year, income is more seasonal and shorter-term lets leave investors more exposed to periods of unoccupancy. Property managers also charge more to manage holiday lets because of the extra work involved, including cleaning between guests and preparing contracts on a more regular basis.

Financing your investment

Your options for finance will depend on which type of property you plan on investing in.

As most people already know, residential properties – property which you are buying for personal use can be financed using a regular mortgage. There are plenty of options available in terms of mortgage products on the market, with almost all lenders offering them.

Financing any property you intend to make money from – including commercial property, buy-to-lets, and holiday lets – requires a different kind of mortgage. These mortgage products usually require a bigger deposit and charge a higher interest rate than personal mortgages.

Buy-to-let mortgages are pretty straightforward. Your lender will assess the value of your property and the average rental yield and calculate your mortgage from there. Buy-to-let mortgages are usually interest-only, and interest rates are a little higher than for personal mortgages. A 25% deposit is usually required, but higher deposits of 40% or more could secure you better terms.

Holiday lets are usually considered to be riskier investments than buy-to-lets by lenders, which means you can’t finance a holiday let under the same mortgage as a buy-to-let. Lenders now offer specific products aimed at investors purchasing holiday lets, most of which require a deposit of at least 30% or more. These mortgages usually have slightly higher interest rates once again, and most lenders will require you to show that your expected annual income from the holiday let exceeds 125% of the annual mortgage interest.

No matter what kind of property you’re interested in investing in, it’s important to run through the numbers to ensure that your investment will bring in profits and at least cover the cost of your mortgage payments, even during low-performing years. Remember to always make conservative estimates on rental yields and occupancy rates to avoid disappointment down the line.

By Jo Smith – Contributor  26/08/2020