The traditional property investment method is buying a home to let out to tenants. Investors can profit from the rental income each year and when they sell the property. It’s usually considered a long term, hands-on and fairly stable investment.

But recent tax and tenancy laws have made long term residential properties a more tricky investment for some. Many investors are now diversifying their portfolios and finding new ways to increase their investment returns.

You can also invest in commercial properties, land or property and real estate companies. There are benefits and drawbacks to every investment type and you should think carefully about what best suits your financial means and goals. Most investors start with one buy-to-let property and aim to expand their portfolio with a variety of investments.

Ways to invest in property

There are a few different options for investing in property: residential and commercial buy to lets, property flipping and investment funds.

Buy to let residential properties

These are flats and houses let out to residential tenants. They’re the most common property investment – there are now 4.5 million privately rented homes in the UK. Most tenancies are long-term Assured Shorthold Tenancies, but you can also let out your property for short term and holiday lets. These involve more risk but can give you much higher rental yields. See our full guide on buy-to-let properties.

Commercial properties

Commercial properties can be shops, offices, hotels or warehouses – any property that’s used for commercial or trading purposes. Tenancies for commercial premises tend to have longer terms and your tenants will usually be responsible for refurbishment and wear-and-tear.

However, investment returns for commercial properties vary with the local economy. You may be at risk of an empty property if there isn’t much demand for the premises or your tenants go out of business.

Property development

You can also buy properties to sell right away, without generating any rental income. Many investors buy units still being built by property developers. These can be much cheaper than a completed property and usually don’t require much work from the buyer. But you won’t have much control over how the property is built and you may find yourself waiting to take ownership as construction projects often face delays.

You could also renovate an older property – sometimes called ‘property flipping’. This involves a lot of work and construction costs can be high. But revitalising a home can often increase its value by tens or hundreds of thousands of pounds. Many investors look for abandoned or derelict properties for the best deals.

Real estate investment trusts

This is your best option if you haven’t got enough capital to buy an entire property. If you invest with a trust, you’re essentially pooling your capital with other investors. A professional fund manager collects money from multiple people and invests the total in properties.

The fund manager usually also manages the properties, and they should maintain a diverse portfolio to reduce your risk. It’s a fairly hands-off investment, but your fund manager should give you regular estimates of your investment returns.

The right investment for you?

Real estate investment is one of the four main investment pathways in the UK. The others are cash, bonds and shares.

Property investment is the most long-term and has the least liquidity of these. This means it’s hard to withdraw your money quickly as cash, because you’ll need to sell the property first.

Investors also need a large amount of capital to buy an investment property. A buy-to-let mortgage can cover most of the cost, but you’ll need to pay about 25% to 40% of the property price yourself.

You should be making a net profit from your rental income by the second year of your investment. You can re-invest these profits into stocks and shares, a pension fund or an ISA.

Getting a mortgage

Most investors will need a mortgage to help finance their property. There are specific mortgages for investment properties, which are different to mortgages for a property you’re going to live in. It’s always best to speak to a professional mortgage advisor to help you find the best deal.

For a residential property, you’ll need a buy to let mortgage. Most buy to let mortgages are interest-only, which means you repay the amount you borrowed when the mortgage term ends. Investors usually have to sell their property to repay the mortgage, but some banks offer repayment mortgages.

The bank will typically lend you between 60% and 75% of the property price. This means you’ll need to provide a deposit of between 25% and 40%. As a rule, you can get lower interest rates if you can provide a bigger deposit.

Interest rates for buy to let mortgages are typically between 3% and 4%. Some banks offer interest rates of 1.5% if you can provide a 60% of the property value as a deposit.

Being a landlord

Being a landlord for a residential property comes with a number of responsibilities. There are a number of legal requirements and local council rules to follow. You’ll also need to put in some work to protect your investment and maintain your profit.

Managing your investment

You’ll need to…

  • Find tenants – although you can appoint an agent to do this for you
  • Draw up a contract (called a tenancy agreement)
  • Maintain interest payments for your mortgage – even if your property is empty
  • Cover service charges for the building if your property is a flat in an apartment block

Protecting your tenants

You’ll need to…

  • Ensure the property and all equipment is safe and in full working order
  • Keep tenants informed about the property’s energy performance
  • Store their deposit in a government-approved tenancy deposit scheme

Property investment has many challenges, but it can also be very flexible, lucrative and personally rewarding. Many investors have become completely financially independent – their entire income comes from their investments and they don’t need to work.

If you’re not sure whether property investment is right for you, speak to a financial advisor.