How to invest in property in the UK

Investing in property can be a lucrative way to generate an income plus you may benefit from substantial increases to its value overtime too. But how much does it cost? What are the different ways of investing in property and what should you beware of?

Angela Kerr Director, Editor

KEY INFORMATION

How to invest in property: Summarised

• Investing in property can give you a regular income plus your investment could grow substantially over time if house prices increase.
• A good target for return on investment on property in the UK is 5%-7%.
• Costs of buying an investment property can be high and it could take months or years to start making a profit.
• Changes to tax rules have made property as an investment less lucrative in recent years.
• There are alternatives to buying bricks and mortar such as investing in property funds.

Why invest in property?

There are a number of reasons why people invest in property including:

1. Rental income: Investing in property can generate a monthly income.
2. Capital growth: Assuming house prices go up, the value of your investment could increase significantly over time.
3. Helping family members: The average first time buyer deposit in 2024 was £61,090, according to Halifax. So many parents and family members are looking at property investment to help their children get their own home.
4. It’s easy to understand: Unlike with some other investments, some people feel happier investing in property because they understand how it works.

What are the ways of investing in property?

The different ways of investing in property include:

1. Buy to Let

Buying a property to rent out is a common way to invest in property. Some 4.6 million Buy to Let properties are being rented in the UK, according to research by Finder. If you’re not a cash buyer, you’ll need a Buy to Let mortgage. Buy to Let mortgage rates tend to be higher than on standard mortgages, you’ll usually need a bigger deposit and the amount you’ll be able to borrow is based on how much rent the property can generate. However, changes to tax rules and increases in Buy to Let mortgage rates have made it less favourable in recent years.

Get an idea of how much you could borrow with our Buy to Let mortgage calculator.

2. Property development

This means buying a property and selling it on for a profit, usually after refurbishing it – you may also choose to extend it. You can get house renovation mortgages designed to cover the cost of the property and the money to pay for the renovations – find out more by speaking to a fee-free mortgage broker. But you’ll need to research carefully to make sure you’re clear about the potential costs. Start by reading our guide Builders’ quotes: Where do I start?

3. Investing in a holiday let

Buying a holiday let in the UK means you could get good returns on your investment and a property that you can enjoy too. If you don’t have the cash to buy a holiday home to let out, you can get specialist holiday let mortgages. Holiday lets have become an attractive alternative to Buy in Let in recent years as they can often be let for much more than normal rental properties. Find more information in our guides: Buying a holiday home in the UK and Holiday let mortgages.

4. Buying property abroad

While buying a property abroad means you can potentially have a holiday home in the sun that you can rent out when you’re not using it. Plus, you may choose to live there when you retire. But buying property abroad comes with its own set of challenges, especially if you don’t speak the language. So having expert advice in all aspects of the purchase will be crucial. So, for example, it may make sense to use a UK bank that operates in the country where you want to buy a holiday let is. A mortgage broker will be able to advise you.

5. Investing in a property fund

Once you’ve looked at the costs of buying a property, see how this compares to investing in a property fund. For example, a Real Estate Investment Trust (REIT) gives you exposure to property – and the yields associated with it – via a stock market investment vehicle. This might be a good choice if you don’t have a large amount to invest. The other attraction of a fund is you can access your money far quicker should you need it.

However, any type of investment carries risks, so we advise speaking to an independent financial advisor (IFA) before taking the plunge. Find out more about getting an Independent Financial Adviser (IFA). Find an expert adviser and book a free initial consultation through our partners at Unbiased.

How much do you need to invest in property in the UK?

If you’re considering investing in a Buy to Let in the UK, there are a number of costs you’ll need to consider:

• Deposit: Unless you’re a cash buyer, you’ll need a Buy to Let mortgage if you’re investing in a property to let out. You’ll usually need a minimum deposit of at least 25% to get a Buy to Let mortgage. So on a property worth £300,000, you’d need a deposit of at least £75,000.
• Stamp duty: If you’re buying a property worth more than £40,000 and the purchase will result in you owning more than one property, you’ll need to pay the Additional Stamp Duty Rate in England and Northern Ireland. Since 31 October 2024, the stamp duty rate for additional properties is 5% higher than for standard rates. For example, if you’re buying a £300,000 house and it will be your only property, your stamp duty bill will be £2,500. But if you’re buying an additional property as an investment you’ll need to pay the Additional Stamp Duty Rate, taking your stamp duty bill to £17,500. The rates are different in Wales and Scotland. Find out more in our guide Stamp Duty: Who pays it? When? And how much?
• Conveyancing fees: You’ll need a conveyancing solicitor to handle the legal side of buying your investment property. Find out more in our guide to Buy to Let conveyancing.
• Surveys: When you buy a property, we always advise getting a survey done so that you’re informed about the condition of the property before buying. It’s more money to shell out but it could save you nasty, and costly, surprises further down the line – the last thing you’ll want is for your property investment to turn out to be a money pit. Costs vary but a RICS Level 2 Survey on a £300,000 house may cost around £600-£700. Find more information in our guide How much does a house survey cost?
• Having a financial safety net: You should also have cash set aside to cover maintenance costs and mortgage payments in case your property is empty for a period.

There are other costs you’ll need to pay, including landlord insurance and mortgage fees – read on for more on these.

Where are the best places to invest in property in the UK?

Prime locations to invest in property in the UK include London and major cities like Birmingham, Manchester and Leeds. Areas close to universities can also be good places to look, although you’ll need to jump through more hoops if you’re letting out a house in multiple occupation (HMO).

When you’re considering an area, you’ll want to think about the demographic of people who would rent your property and which types of property are most popular. Try speaking to local estate agents to see if they can give you any advice on this. Also use our Rent Calculator to get an idea of how much rent you could charge based on your property type, location and local demand.

Is buying a new build a good way to invest in property?

When you buy a new build home, they can dip in value, especially in the early years. So buying a new build may be a good way to invest in property if you can buy at the right price and it’s a good rental property that you intend to keep for the longer term.

Pros and cons of investing in Buy to Let property

The advantages of investing in a Buy to Let property include:

• Do it right and you could get a healthy monthly income
• You could also benefit from decent house growth over the years
• It could be a way of buying your children a house

Downsides of investing in a Buy to Let property

• Buy to Let mortgage rates have increased in recent years. Plus, you’ll often pay high arrangement fees.
• The costs involved in purchasing a property all add up. Your investment will have to work very hard to recoup what you have to spend getting it up and running, especially in the first couple of years.
• Prepare for unexpected costs, such as if the boiler needs replacing. Also, if you’re unlucky you may face the problem of unreasonable tenants. Even if you use an agency if you have problem tenants, it can still drain your time and money.
• Selling your Buy to Let can take a long time if you want to cash in. Also, changes proposed under the Renters’ Rights Bill have implications for landlords, for example, it proposes that selling a property cannot be given as grounds for possession in the first 12 months of a new tenancy.
• Plus, you’ll usually need to pay capital gains tax if you’re selling a Buy to Let property

What’s the difference between Buy to Let and homeowner mortgages?

Buy to Let mortgages work differently to traditional residential mortgages. The affordability calculations are based on the rental income of the property rather than your salary, (although you’ll usually also need a minimum salary of £20,000-£25,000). Most lenders want the rent to cover at least 125% of the mortgage repayments. They also expect at least a 25% deposit. Get an idea of how much you could borrow with our simple Buy to Let mortgage calculator.

Buy to let mortgages rates can be more expensive than standard residential mortgages and arrangement fees can be high too – they’re often calculated as a percentage of the loan. So these could cost you £1,000s. So it’s important to make sure you get the best deal. Find out more in our guide Buy to Let mortgages explained.

Bear in mind that most landlords choose interest-only Buy to Let mortgages to keep the monthly costs down, but there are risks to this. Read our guide What is an interest-only mortgage?

Here at the Homeowners Alliance we would strongly recommend you use a fee-free mortgage broker to help you find the best Buy to Let mortgage as there are several specialist lenders that you may not be aware of and a broker will be able to help you navigate the market.

Get fee free Buy-To-Let mortgage advice from our award winning mortgage partners at L&C

The risks of property investing  

A number of variables could affect how your property investment performs.

• House prices and demand: Your capital return is dependent on house prices going up, while your income depends on how much rent you can charge, and both are reliant on a steady, or increasing, level of demand for your property.
• Long-term investment: You need to be ready to invest for the long-term in order to make sure you earn back what it has cost you to purchase your Buy to Let and to allow time for your returns to be smoothed out.
• Increased mortgage costs: If you need to take out a mortgage to invest in property, then if mortgage rates increase, it risks putting a serious dent in your returns.
• Reduced tax perks: Landlords can no longer deduct mortgage interest payments from their rental income before calculating their profit, this has been replaced by a 20% tax credit.
• Risk of future tax changes: In 2024, many landlords started selling their Buy to Lets, anticipating increases to capital gains tax on property when selling would be announced in the Budget. While no increases affecting property were announced, there’s no guarantee that changes to CGT or other taxes won’t change in the future that will make Buy to Let less lucrative.
• Unforeseen circumstances: Even if the property market is booming, there could be issues with specific properties that cause problems. For example, the recent cladding crisis couldn’t have been predicted by the people that invested in those properties.
• Property prices could fall: It’s not guaranteed that property prices will always go up.

Need tax or financial property investment advice? Our partners at Unbiased connect you with the right advisers.

What’s a good return on investment for property in the UK?

A good target for a return on investment from property in the UK is around 5%-7%. But this will vary by location and property types. For example, it may be lower in London.

Is it possible to get a Buy to Let mortgage as a first time buyer?

If you’re a first time buyer but can’t afford to buy a home where you live you may consider purchasing an investment property in a cheaper area and letting it out. It is possible to buy a Buy-to-Let as a first time buyer. However, not all lenders will offer Buy To Let mortgages to first time buyers so it’s a good idea to speak to a fee-free mortgage broker. They’ll know which lenders will be most likely to accept your application. See our guide to Buy to Let as a first time buyer.

Also, if you buy an investment property as a first time buyer you’ll miss out on first time buyer stamp duty relief – this means first time buyers purchasing a home up to £425,000 in England and Northern Ireland do not have to pay any stamp duty, while for homes worth £425,001 to £625,000 they’ll pay 5% stamp duty on the value above £425,000. However, £425,000 is a temporary threshold and this will revert to £300,000 in April 2025.

Property investment for beginners: How to get started

1. Choose your type: Firstly, you’ll need to decide what type of property investment you want to make and how you’ll fund it.
2. What’s the yield? If you’re hoping to buy a Buy to Let, you’ll need to calculate the yield. The annual yield is a simple sum – it’s just the rental income as a percentage of the what you paid for the property. For example, a property with a £10,000 annual rental income that cost £200,000 has a 5% yield. You can use our handy Rent Calculator to get an idea of how much rent you could charge based on your property type, location and local demand.
3. Do your research: Take a look at the properties you are considering investing in and check what similar properties are currently renting out for.
4. While if you’re planning to buy a property, get work done and sell it on for a profit, you’ll need to be armed with quotes of how much the work could cost and also get an idea of how much you’re likely to be able to see it on for, minus and fees and charges you’ll have to pay. Similarly, if you’re buying a property to rent out, factor in any costs to get it up to scratch.
5. How much time do you have? Finding and vetting tenants for a Buy to Let can be time consuming. Getting an estate agent to look after this for you makes like easier, but you’ll pay for their services. We’ve partnered with OpenRent which offers a much cheaper alternative. They offer a full tenancy creation service called Rent Now for just £74 which includes everything you need to rent out your home: gas & electricity safety certification, inventories, photography, and insurance.

What recent tax changes affect property investment?

Mortgage interest income tax relief

In the past, landlords could offset mortgage interest and Buy To Let mortgage arrangement fees against their income tax bills at up to 45% for the highest earners. However, this tax relief was phased out between 2017-2020 and has been reduced and capped at 20%. This has affected higher tax-paying landlords most. Cash buyers and investors in the 20% tax band are least affected.

Capital Gains Tax

It was widely rumoured that capital gains tax when selling an investment property would be hiked in the 2024 budget. However, this did not happen. However, for capital gains tax advice, we recommend you speak to a financial adviser.

How an IFA can help

Before you invest in additional property, regardless of the reason, we would also advise that you speak to an independent financial advisor (IFA). They can take a look at your overall financial health and help you work out if you can afford to invest in property and if it is the best way to achieve your aims.  They can also advise on capital gains tax implications.

Find out more about getting an Independent Financial Adviser (IFA). Find an expert adviser and book a free initial consultation through our partners at Unbiased.

Frequently Asked Questions