How to invest in property

You don't need a lot of money to invest in property. This guide looks at your options are and the risks to consider.

Updated

It’s not hard to see why investing in property can be so tempting. Average UK house prices increased by 43% between the end of 2008 and the end of 2018, according to national statistics. This outstripped overall inflation, which saw prices in general go up by 30% over that 10-year period. At the same time, savings rates have not been able to beat inflation over the past decade, so if you invested in cash over this period you would have effectively lost money†

You don’t have to actually buy property to invest in it and there are a range of options for investing indirectly. This removes the hassle that can come with buying physical bricks and mortar, and also allows you to invest smaller amounts. As with any investment though, it’s not without its risks, so you should think just as carefully about investing in property as you would with any other type of investment.

Ways to invest in property

  • The stock market. The best way to get involved if you have no money (okay not literally no money, but there’s more on this further down.)
  • Buy-to-let. Buying a property and gaining income from the rent paid by tenants.
  • Property developing. Buying a property, doing it up, and selling it for a profit.
  • Property ISAs.
  • Land banking.
  • P2P lending.

Why invest in property?

  • Passive income. (if you buy-to-let)
  • Profit when you sell the property. (if you buy a property)
  • Diversify your portfolio. (if investing in property through the stock market)
  • Peace of mind. This is intangible, but some people feel more comfortable investing in property – it’s an asset that you can physically see and understand more easily.

The stock market

If you don’t have the money to buy a house, then the stock market is your best bet. You can get invested in property with as little as £1 with the right investment platform.

Including property in a wider investment portfolio, along with cash, bonds and shares, can also add diversity to your investments and spread your stock market risk.

There are several kinds of property funds and investments available on the stock market. Each comes with its own pros and cons, so you should always consider taking financial advice before you invest.

The main types of property funds and investments include:

  • Property unit trusts or open-ended investment companies (OEICs). These are professionally managed, ‘collective’ investment funds, which pool money from many investors and then invest it in property (usually commercial), or property-related shares. As with most investment products you have to pay a fee for the management of the fund, and this will reduce how much money you make overall.
  • Real estate investment trusts (REITs). These are companies which own and typically operate property (real estate) that generates an income. This could include anything from apartment blocks to office space, and shopping centres to warehousing. Some of these trusts specialise in owning specific types of property, rather than a wide range of real estate.
  • Shares in property companies listed on the stock market. This involves buying shares in individual property-related companies, such as property developers or house building firms.

If you are interested in buying shares or investing in property funds, this can be done through a broker or share trading platform. Read more on these options in Finder’s in-depth guide to making investments

The risks of the stock market

Indirect property investments are affected by the same fluctuations in rental demand and property prices that might affect a buy-to-let property owner.

Property funds can also be forced to stop trading if lots of investors want to sell at the same time for any reason, which means you can’t sell any of your investment until trading starts again.

Buying shares in property companies listed on the stock market also comes with its own inherent risks – wider economic factors or issues with individual business performance could see the value of your shares fall instead of rise.


Buy-to-let property

Buy-to-let property has always been a popular investment area, but if you choose this route it’s essential to thoroughly research the neighbourhood you’re thinking of buying in. This is to make sure there is rental demand for the type of property you’re planning to buy there, and to find out how much rent you can charge. It’s also a good idea to speak to local estate agents about the market before buying.

If you need a mortgage to buy the property, lenders will want to know that your rental income is likely to cover at least 125% to 145% of the mortgage interest, so you won’t be able to take on more than a sensible amount of risk.

For more specific information on this investment area, and to find out how you can get a buy-to-let mortgage, check out Finder’s buy-to-let guide.

The risks of buy-to-let

If you own a buy-to-let property you may be hit by an unexpected rise in mortgage costs, or larger repair and maintenance bills than you were anticipating. You may be unlucky enough to have bad tenants who damage the property or don’t pay their rent, or market rents may not turn out to be enough to cover your costs.

The worst-case scenario is that the property is repossessed if you have a mortgage on it and can’t keep up with the repayments.

Buy-to-let is also a big ongoing financial and time commitment. You need to devote a relatively large sum of money to buying a property – at least enough for the minimum deposit if you’re taking out a mortgage. Then you have to get it ready to let to tenants, as well as get the appropriate safety certificates and insurances in place. You’ll also need to spend time finding tenants, looking after the property and generally managing your investment.

It’s also a lengthy and costly process if you need to sell.

There is no guarantee that you’ll make a profit when you do, especially as the growth in the value of property has been slowing over the last few years, even more so in the south-east of England. However, the longer you keep the property the more likely you are to make a profit, and if you’re in a position to choose when to sell you can wait until it’s a good time.


Property developing

If you’re more interested in buying a property and selling it on at a profit in a shorter timescale, then property developing could be for you. This would usually involve buying a property in need of work, so you can add value to it through your refurbishments and put it back on the market again at a higher price.

Be mindful that if you want to ‘flip’ properties quickly you may have be on hand full-time to either carry out or project manage any large refurbishments – or have a trustworthy team of renovators who can do this for you.

As this type of investment involves buying a second property, you need to be fully committed both finance-wise and time-wise. If you are planning on carrying out refurbishment works yourself be mindful of the limitations of your own DIY skills, and remember that some jobs must be carried out by a professional (such as the electrics, for example). Make sure you budget meticulously, allow a contingency fund for unforeseen overspend, and carefully work out a realistic timescale to finish the renovations.

The risks of property developing

A run-down property may be on the market at a knock-down price, but could have a lot of unknown and expensive things wrong with it, which would eat into any potential profits. Be mindful of the time and financial commitment that property development requires, especially if it’s your first venture in this area and you have a full-time job elsewhere.

Make sure you’re also aware of any tax you may have to pay on profits from re-selling a property that has not been your main residence.

And there is always the risk that if renovations take much longer than you anticipated, the housing market could hit an unexpected downturn in the meantime, affecting the final price you can sell the property for.


Property ISAs

These are effectively stocks and shares ISAs. Your money is pooled with that of other ISA holders and invested in property funds that purchase buy-to-let properties. You benefit from both the rise in value of the properties and the rental income. As it’s an ISA you can invest up to £20,000 a year and won’t pay tax on any gains you make.

The risks of property ISAs

As with other types of stock market investment, the value of shares that your ISA has invested in could go down as well as up.


Land banking

With land banking schemes you buy a plot of land without planning permission, with the aim of making money from the increase in value when it does.

The risks of land banking

This could be a risky strategy as the land may never be able to get planning permission (if it’s protected for example), and many of these schemes are scams. They are also not regulated by the Financial Conduct Authority.


Peer-to-peer lending

You can also invest in property through peer-to-peer (P2P) lending, where a P2P company pools money from its investors and lends it to individuals in the form of buy-to-let mortgages used to purchase residential property.

As your investment is effectively split and lent to a large number of P2P borrowers, and therefore secured on a range of properties across the country, the effect on your investment if one borrower defaults on their loan is reduced.

The risks of P2P lending

You aren’t protected by the Financial Services Compensation Scheme (FSCS) if the P2P company goes bust, which you would be if your money was in a savings account at a bank, for example.

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