Property investment, predominantly residential buy-to-let options, offers an appealing means of generating passive income through capital growth and monthly cash flow. However, finding the optimal properties and locations requires in-depth knowledge of the market and an understanding of current trends. This guide provides a comprehensive 5-step guide on making money from property, focusing on residential buy-to-let developments.
How to Make Money in Real Estate in 5 Steps
Below is a summary of 5 crucial steps for making money off property investment. We recommend sticking around long enough for an overview of how UK property tax works.
Table of contents:
1. Choosing the Right Location for Capital Growth
Choosing the right location is critical to maximising your returns from buy-to-let properties. Investors should look for up-and-coming areas where property values and rents are rising.
Some of the best places for capital growth in the UK currently are:
a. Major Cities
Cities like Manchester, Birmingham, and Liverpool are attracting companies and young professionals, driving up demand for rental accommodation. Property values in city centres and surrounding areas have increased much faster than average.
b. University Cities
Cities with large student populations, e.g. Manchester and Liverpool, typically see high demand for rentals and solid capital growth. Even in economic downturns, student numbers remain stable. However, be aware of seasonal variations in rental income and the additional property wear and tear from student tenants.
c. Transport Hubs
Areas located within a 30-minute commute of major transport hubs like international airports and high-speed rail stations are often excellent for buy-to-let investments. Easy access to transportation infrastructure supports strong rental demand and above-average price growth.
d. Up-and-Coming Regeneration Areas
Run-down areas targeted for regeneration and infrastructure improvement by local councils frequently experience rapid changes that lead to increasing property values and rents. Identifying these areas early and investing before major projects are completed can mean significant capital gains.
2. Finding Undervalued Properties With High ROI Potential
One way to make money in real estate is to find undervalued properties with high return on investment (ROI) potential. Identifying UK investment areas poised for growth and properties below market value requires diligence, but the rewards can be significant.
Here are 3 tips to help identify the suitable properties for investment:
a. Review local property data.
Examine sales data from the last several years to determine average prices for different property types in target locations. Look for listings well below these averages, which likely represent undervalued assets. Check rental rates for comparable properties to ensure potential yields meet or exceed your investment goals — the higher the yield and the greater the room for capital growth, the better.
b. Inspect properties in person.
Once you’ve identified potentially undervalued listings, schedule viewings to inspect the properties firsthand and look for structural damage or necessary that could justify a lower asking price. Take note of desirable features, like spacious rooms or outdoor space, that could command higher rents. Negotiate the best possible price based on repair needs.
However, making time to inspect a property may not always be possible, especially if you’re an international investor buying property as a non-UK resident. You can save yourself this stress by working with property investment experts. They’ll look for properties with higher potential for good yields, so you don’t need to go through the learning curve or inconvenience — contact your wealth manager today to get started.
c. Consider refurbishing or developing.
Undervalued properties sometimes require complete redevelopment to maximise returns. If you have the skills and resources to renovate a rundown property or construct new housing, the rewards may be well worth it. However, development projects require substantial capital and involve additional risks, like cost overruns or bureaucratic delays. For inexperienced investors, purchasing a move-in-ready property development may be the wiser choice.
Conducting thorough due diligence on both areas and properties is essential to finding undervalued assets with solid growth potential. With research, analysis, and prudent decision-making, identifying diamonds in the rough and transforming them into highly profitable investments is achievable. However, you can save yourself the stress by investing through property experts — you don’t need to worry about buying and refurbishing properties; you can always have new-build properties in the best location when you make a 20% downpayment. Contact your wealth manager now to get started.
3. Financing Your Investment Property
Making money with real estate involves a substantial upward investment. If you’re a UK resident, the options are straightforward since mortgage firms will provide you with the capital to get started — provided you have a good credit score. However, the case may differ for a nonresident or foreign investor — mortgage firms are more sceptical about giving loans to non-UK residents. That’s why property investment experts often provide mortgage assistance as part of their services.
To finance an investment property, you have several options to consider:
a. Cash Purchase
Paying for the property in cash is ideal, as you own it outright without a mortgage. However, only a few investors have enough cash on hand to buy a property upfront. If you have the means, a cash purchase gives you complete control and the best return on your investment.
b. Buy-to-Let Mortgage
A buy-to-let mortgage allows you to borrow money from a lender to fund the property purchase. You’ll pay interest on the loan to rent the property to cover your costs. Depending on the lender, buy-to-let mortgages typically require a 20–40% deposit. Shop around at different lenders for the best interest rates. Your wealth manager can also help you with the best mortgage provider, especially if you’re a non-UK resident.
If you own a property, you can take out a second charge mortgage on your current home to finance the deposit and fees for your investment property purchase. The second property then acts as additional security for the lender. However, exercise caution when going down this route, as it puts both of your properties at risk if you default on the loan.
Determining how to finance your investment property is crucial to your success. Consider your financial situation and risk tolerance, and explore all options to find one that suits your needs. With an appropriate financing strategy in place, you’ll be well on your way to building your property portfolio.
4. Managing Your Rental Property Effectively
Making money from property requires thorough portfolio management. To effectively manage your buy-to-let property, you must implement prudent policies and procedures to ensure maximum returns. As an investor, you aim to maximise revenue while minimising costs and risks.
The following best practices will help you achieve effective property management.
a. Conduct thorough tenant screening.
Tenant selection is one of the most critical aspects of managing rental property. Strictly evaluate potential tenants to find responsible, trustworthy individuals who’ll pay rent on time and properly maintain the unit. Check references and credit scores, verify employment, and consider requiring a higher security deposit for riskier applicants. Choosing reliable tenants will minimise headaches and lost income from non-payment or evictions.
b. Set clear expectations.
Once you’ve selected tenants, establish clear rules and expectations in a written lease agreement. Outline rent payment terms, proper notice before accessing the unit, pet policies, noise restrictions, and maintenance responsibilities. Educate tenants on emergency procedures and provide relevant contact information. Lastly, review policies in person with tenants when possible and address any questions to promote understanding.
c. Conduct regular inspections.
Schedule periodic inspections of your rental units, both announced and unannounced. Check for any unauthorised occupants or pets, signs of damage or excessive wear and tear, and ensure proper cleanliness and functioning of appliances and systems. Inspections allow you to address issues early before they become more significant problems. They also signal tenants that you’re actively managing the property.
d. Stay on top of maintenance and repairs.
Well-maintained properties are more valuable and appealing to tenants. Establish a schedule for routine maintenance like yard care, gutter cleaning, and pest control. Respond promptly to repair needs reported by tenants to avoid loss of rent or legal issues. When making massive changes that require external contractors, obtain multiple bids from licensed and insured firms. And don’t forget to keep detailed records of all maintenance and repair expenses for tax purposes.
e. Increase rent gradually and strategically.
As operating costs rise over time, rent increases are necessary to maintain cash flow. However, raise rent cautiously to avoid losing long-term tenants. Evaluate the local rental market to determine reasonable increases, typically 2–5% annually. Provide tenants ample notice of any rent hike, at least 30–60 days. Also, consider offering multi-year lease renewals with fixed modest rent bumps to promote tenant retention.
With diligent oversight and prudent management, your buy-to-let property can provide stable income and healthy returns over the long run. However, many property investors opt to use a property management service to manage their properties effectively. They’re experienced in the property industry, save you time and trouble, and charge a modest fee — Redstone, for example, charges only 10% of the rental value.
5. Tax Considerations for Real Estate Investors
Taxes are essential obligations, and you’re not exempted when making money from property. As a real estate investor, you must consider the tax implications of your properties to maximise your returns.
Several factors will determine your tax obligations and how much you owe each year, including:
a. Property Type
The type of property you own impacts your tax liability. Residential rentals like single-family homes and apartments are taxed differently than commercial properties such as office buildings or retail space. In many boroughs across the UK, residential real estate qualifies for tax benefits that commercial properties do not.
b. Income and Expenses
Your rental income and expenses also affect your taxes. Income includes rent payments, laundry and vending machine revenue, and other money from tenants or the property. Costs encompass mortgage interest, property taxes, insurance, maintenance, utilities, and property management fees. Your income minus eligible deductions determines your taxable profit or loss each year.
As a building ages, its value declines due to wear and tear. Depreciation allows you to deduct a portion of the property’s cost each year to account for this decrease in worth — this reduces your taxable income and lowers your tax bill. You can depreciate residential buildings, as well as furnishings and equipment. The method and rate you use depend on your location and property type.
d. Capital Gains
When you sell an investment property, you may incur capital gains taxes on the profits. The tax rate for residential property can be either 18% or 28% on any profit beyond your tax-free allowance. However, you can avoid paying capital gains if it’s your primary residence via the Private Residence Relief.
Real estate investing provides many tax benefits compared to other asset classes. However, tax rules vary significantly based on location and circumstances. Consult with your wealth manager to develop a customised strategy that maximises deductions and minimises your obligations each year. With prudent planning, you can build wealth through real estate while keeping more of your returns.
Frequently Asked Questions
Can you make money from property?
Yes, property investment can be very lucrative if done correctly. One of the best ways to make money from real estate/property is through buy-to-let investments. Buying residential properties to rent out to tenants can provide both capital growth and regular rental income over the long run.
What type of property is best for making money?
For buy-to-let investments, apartments and houses in up-and-coming neighbourhoods are ideal. Look for properties in areas with solid infrastructure and job growth that are still affordable, as these will likely see strong capital appreciation over time. One- to two-bedroom units are most manageable to rent out and manage. Newer or recently renovated properties also require less maintenance and can charge higher rents.
In addition to location and property features, consider the local rental market. Aim for areas where renters outnumber homeowners; low vacancies indicate high demand. Study historical rent prices to ensure there’s potential for rent increases, which will boost your returns over time. Work with real estate investment experts to identify neighbourhoods that meet these criteria.
Can property make you a millionaire?
Yes, property investment has the potential to make you a millionaire over the long run through capital growth and accumulating equity. The key is buying strategically, holding properties for the long term, and using leverage responsibly.
To understand how to make money from houses to become a millionaire, consider the following strategy:
Put at least 20–40% down for buy-to-let investments to get a reasonable mortgage rate, then let tenants repay the loan over time. Your equity will build up as the loan balance decreases and property values increase. Refinance when interest rates drop to pull some of this equity out tax-free. Use the cash to buy more investment properties and repeat the process.
Over decades, continual capital growth and paying off mortgages can turn an initial investment of about $200,000 into over $1 million in equity. Add in accumulated rental income, and total returns can far surpass that amount. With the right strategy and patience, property investment has the potential to make you a millionaire — contact your wealth manager to start now.
With careful planning and following the critical steps outlined in this guide, buy-to-lets can be highly lucrative investments for making money from property. Capital growth and rental income rewards await you if you research, find the right location and property, get the best mortgage deal, and manage it well. To save yourself the stress and enjoy maximum return on your investment, contact your wealth manager today!
Disclaimer: Any information API Global provides does not constitute financial advice and is for educational purposes only.