How to Invest in Residential Property


March 1, 2024

Are you considering your first property investment? We’ve put together a beginner’s guide to investing in residential properties.

Buying a residential property to rent out has become one of the most popular investment strategies in the UK. But there’s a lot to learn if you’re thinking about becoming a first-time landlord. Investing in property can be exciting and rewarding, but it also comes with some risks and challenges that you need to know about before starting your investment journey.

This guide explains how to invest in residential property and what you need to consider before making investment decisions. 

What to know before buying a rental property

Are you ready to be a landlord?

The first thing you need to do is figure out if you’re ready to be a landlord. Becoming a landlord can generate a nice income, and it’s easy to see why you may want to invest in the property market. However, being a landlord can be expensive and includes many safety and maintenance responsibilities, such as paying for annual gas safety checks and property repairs.

You also need to know how to find long-term, reliable tenants who understand their responsibilities to you and your property. If you prefer not to have a hands-on role, you can hire a property management company to manage everything for you, including finding tenants, chasing up payments and dealing with issues.

How to decide if a property is a good investment

When looking for a residential rental property, be it a small block of flats or a single-family home, it’s best to focus your search on a location that is desirable and likely to remain that way. In addition to choosing a good location with low crime rates, look for a property close to local amenities, well-rated schools, and numerous places of employment. If these factors stay the same, you can increase the value of your property over time.

Yield (annual rent before expenses/property value) will steer you in a good direction for where to invest. Investment in London residential property, for example. Typically, the further north of England you go, the higher the yield (annual return based on property value). If growth in your property’s value is what you’re after, then history will show that investing in the South could be a better place to start.

Ltd Co. Vs Personal Name

Knowing whether to own your investment property in your name, or via a limited company that you direct, is crucial. Personal name ownership will attract more lenders and potentially lower rates; however, Ltd Co. ownership could provide greater tax benefits.

It’s advised to seek the help of a tax adviser to discuss your plans. Getting it right from the beginning is essential to building a successful portfolio.

How to start investing in residential properties

Choose how to fund your purchase

Buying a property using cash has its advantages, such as owning the property outright and not incurring the costs that come with arranging a loan. It also enables you to purchase a property that a lender won’t usually lend against, plus buying with cash is a much quicker process, and you can make decisions without getting permission from a lender.

Despite all the benefits of buying with cash, financing lets you spread the cost and can get you a greater return. It can also help you purchase a more expensive property than you would be able to if you were to buy with cash. Each lender has specific criteria, so it’s a good idea to compare products across multiple lenders before you take out a finance agreement.

Getting a mortgage on an investment residential property

You won’t be able to fund your purchase with a normal residential mortgage if you’re not planning on living in the property yourself. Instead, you will most likely need a buy-to-let mortgage, which lenders usually provide on an interest-only basis. That means you must pay the interest on the loan amount every month without paying off any of the capital, and then pay back the capital at the end of your mortgage term. 

When it comes to approving a buy-to-let mortgage, lenders typically base their decision on the following:

  • Credit score: The higher your credit score, the better you look to potential lenders. A good credit score also helps you get approval for attractive rates and terms.
  • Deposit: Borrowers generally must put down at least 20 to 25% of the property value. However, some lenders command more if they view you as a high-risk borrower.
  • Landlord experience: Some lenders are willing to offer mortgages to first-time landlords, whereas others insist you have some landlord experience.
  • Rental Stress Testing: Lenders will apply a calculation to your desired loan amount, to ensure the property is always self-sufficient. This calculation differs depending on the product you are looking for but is designed to consider interest rate changes, property maintenance costs and taxes.

You will need to fit certain criteria to be eligible for a buy-to-let mortgage and might need a higher deposit than an experienced investor to get a good deal.

Shop around for the best mortgage rates

If you want a mortgage, it pays to shop around and do some research to find the best deal available. Although one lender may turn you down because you’re a first-time landlord, another might be more than happy to offer you a mortgage. Each lender has its criteria, meaning the requirements may vary, and there might be some that can offer you better rates than others.

Budget for unexpected costs

If something happens and you don’t have the money to fix it, you’ll start eating into your rental income. You never know when something bad might happen, such as a boiler breakdown or water damage from a burst pipe, so you need to budget for unexpected expenses. Setting aside between 20% and 30% of your rental income for maintenance and emergencies can help protect your property investment.

How can Provide Finance help?

If you want to start investing in residential property and don’t have enough money to make a cash purchase, Provide Finance can help you access a large pool of lenders and assess your options to find the right financing solution.

Unlike comparison websites, the Provide Finance platform will instantly match your loan enquiry to specific lenders that fit your needs. You’ll receive real-time application updates and tracking, with the support of our team of experts. By creating your loan enquiry on Provide Finance’s platform, you’ll reach all the relevant lenders on our platform. This guarantees you find the best loan option, helping you save time and money. Create your free account, or submit a contact form, and we’ll get back to you as soon as possible. Alternatively, call us on 0800 7723 180 to discuss how we can support your residential property investing.

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