Buying Property In The Uk: Costs
The total cost of buying a home in the UK might increase by more than 10 percent due to several additional expenses that go above and beyond the price of your new home. Continue reading to learn about all the expenses youll have to plan for while purchasing and maintaining a home in the UK.
1. Stamp duty: All real estate purchases over £125,000 are subject to this tax, which ranges from 2 to 12%
2. Deposit: You will be required to pay a deposit toward expenditures if you obtain a UK mortgage to purchase a home in the UK, which typically varies between 5 and 40% of the price of the property
3.Mortgage expenses: There are several costs involved with taking out a mortgage to purchase a home, including arrangement fees, booking fees, and valuation fees.
4. Legal fees: Whether you obtain a mortgage or not, you will need to hire a solicitor or conveyancer to work on your behalf.
5. Fees for land registry: To transfer the propertys legal deeds to you, the new owner, land registry fees must be paid.
These are the general costs that youll need to deal with when buying property in the UK. Youll also be liable to pay property taxes. For further information, check out our UK Property Taxes for Non-Residents article.
What Makes A Good Investment Property
When scanning neighborhoods for your first rental, there are a few specific requirements you should be looking for to determine if the property would be a good investment. In a nutshell, you want a house that requires low maintenance, has limited vacancies and allows you to have a good rent-to-value ratio.
Making Money In Rentals
Operating expenses on a new rental property will be between 35% and 80% of your gross operating income. If the monthly rent charged is $1,500 expenses are $600 per month, that’s 40% for operating expenses. Many investors use the 50% rule. If the rent is $2,000 per month, expect to pay $1,000 in total expenses.
To lower your costs, investigate whether an insurance provider will let you bundle landlord insurance with a homeowners insurance policy.
Wall Street firms that buy distressed properties aim for returns of 5% to 7%. Individuals should set a goal of a 10% return. Estimate maintenance costs at 1% of the property value annually. Other costs include homeowners insurance, homeowners association fees , property taxes, and monthly expenses such as pest control, landscaping, and maintenance.
While stocks may offer a 7.5% cash-on-cash return, or bonds may pay 4.5%, a 6% return in the first year as a landlord on an investment property is considered healthy and that number should rise over time.
Don’t Miss: Best Investment Gold Or Silver
Reason #: You Can Handle More Risk While Youre Young
Being young and independent can be pretty amazing. You can make your own rules, live where you want, buy what you want and travel whenever you want. But that can get old pretty quickly, especially if you have other goals in mind.
All the money youre currently spending living the life while living in a crappy apartment could be spent on something else. Saving money and building credit arent impossible and theyre part of what youll need to qualify for a mortgage loan . Your current lifestyle might actually allow you to cut costs in a way that might not be possible later in life when you have larger obligations.
If you can learn how to effectively manage your money, you can come up with enough cash for a down payment.
Is It Better To Buy An Investment Property Or Home First
While buying an investment property is generally considered a savvy investment solution to add to your portfolio, the process does present a few more considerations if youve never gone through a home buying journey before.
Still, theres no set answer on whether buying a home to live in first might be a better choice for prospective investors.
Owning a home and being able to customize it to suit your tastes and needs has always been considered an incredible achievement, offering the kind of security and convenience you wont be able to find living in rented accommodations.
At the same time, the passive income you can generate from an investment property is incredibly attractive for first-time investors, and the tax benefits associated with a rental property can easily swing the undecided toward investing first.
Another reason why homebuyers might choose to invest first is the flexibility that comes with renting out a home, as youll be able to live anywhere you wish while maintaining a positive cash flow throughout.
But while investing in a rental property will give you location independence, a passive income stream, and an enviable addition to your portfolio, those who have never gone through the home buying process before might struggle getting approved by lenders or managing all the responsibilities that come with owning a home.
You May Like: How To Invest In Stocks And Get Rich
Set Up Your Financing
Knowing in advance how much capital you can access, and at what cost, is vital, so start looking for financing early. Some agents won’t even show you properties until you’ve been pre-approved. Ask your lender lots of questions about payments, rates, and terms so you won’t be surprised later. Banks offer very different loan packages, even when the rates are similar, so shop around for one that fits your needs.
Keeping Track Of Repairs
Since youre making income from this investment property, youll be expected to pay income taxes, but the good news is that rental properties offer some great tax benefits. Whether youre hiring someone to make a repair, paying interest on the mortgage or simply driving to your property, theres a wide range of potential deductions.
Words of wisdom: Youll need to make sure you keep track of these expenses which means receipts on the off-chance that the IRS comes knocking. To get the full value of your investment property, you should be making the most of your tax deduction opportunities.
This is another perk of using a management company. Theyll keep track of all of your rental expenses and send them to you in a nice document during tax season. Once again, the amount of time this saves you is worth the money.
Read Also: Investment Property Vs Primary Residence Interest Rate
A Three Step Guide To Buying Your First Investment Property
Investing in property, especially in Australia, is incredibly popular – and its easy to see why. Property, while undeniably an expensive investment, is an extremely safe asset with strong potential for capital growth. Unlike the emotional journey of buying a home of your own, the decision to buy a property for…
Investing in property, especially in Australia, is incredibly popular and its easy to see why. Property, while undeniably an expensive investment, is an extremely safe asset with strong potential for capital growth.
Unlike the emotional journey of buying a home of your own, the decision to buy a property for the purpose of investment is much more strategic, complex and can often feel overwhelming. When done right, property investment is the gateway to financial freedom and flexibility.
Weve pulled together a short guide to help you navigate the path towards buying your first investment property.
Step one Understand your goals
Property investment is highly sought after as a form of passive income, however, it is often compared to running a business for you must ensure the property remains profitable while providing a desirable product to your customers, the tenants. As such, its important to get it right from the beginning.
Once your goals are clearly defined, they will form the foundation for your investment strategy. Your goals will guide your thinking around time-frame, location, property type and the all important price point.
Ready to invest?
Income Tax Calculator: Estimate Your Taxes
4. Assemble A Team
When considering a first investment property, be sure to have a team of advisors and contractors at the ready. They can effectively support your real estate goals and answer questions on sustainable market rents, rent-ready repairs, after-repair value and also review restrictions, for example, short-term lease allowable, hold time before renting, etc. A real estate professional can save you both money and headaches over the short and long term. – Sheryl Houck, eXp Realty LLC
5. Leverage Auction Websites
Consider looking at auction sites. We anticipate seeing online sites rise as a way for buyers and investors to discover and research properties more easily. For investors looking at the burgeoning single-family residential market, online auctions allow them to bid remotely, reduce travel costs and expand options with virtual access to properties nationwide. – Miriam Moore, ServiceLink
6. Educate Yourself
Real estate investing is not passive. Get educated, ask a lot of questions and don’t rely on a single source for answers. Run all your own numbers and proformas from scratch, rather than relying on anyone else’s, and include taxes, maintenance and all fees and carrying costs. There are investment associations in every metropolitan area as well as many online resources. – Robert Jafek, Boomerang Capital Partners
7. Know Your Goals
8. Start Locally
9. Keep It Simple
10. Plan For The Future
11. Know There Are No Perfect Deals
12. Consider Target ROI
You May Like: Dave Ramsey Real Estate Investing
Is Rental Property The Right Choice
Well cover the basic steps to buy rental property in just a minute. First, its important that you consider whether buying a rental property is the right investment for you.
Earning rental income may be categorized by the Internal Revenue Service as a passive activity, but real estate investments often require active involvement– as well as a willingness to accept a certain amount of risk in exchange for a higher level of potential reward.
Even real estate investors who hire a local property management company may still need to remain involved in the oversight of their investments. For example, investors may be asked to authorize certain improvements or repairs and to regularly review monthly and year-end financial statements, such as the income statement and net cash flow report.
Despite best tenant screening processes, an investor may end up with a tenant who pays the rent late or needs to be evicted. Lost rental income and the added cost of an eviction can quickly eat away at potential profits and overall returns, and overseeing an eviction process can be time consuming.
Notwithstanding the associated responsibilities, a good investment property can provide the perfect trifecta of recurring rental income, long-term appreciation in property value, and tax benefits through deducting operating and owner expenses, and depreciation.
But savvy investors always think through the potential risks and rewards of investing before making their move.
Repairs & Carrying Costs
When you flip houses or buy rental properties to renovate, you need to know exactly how much repairs will cost. It sounds easy on the surface after all, contractors give you a written price quote, right?
The problem is that contractors are notoriously difficult to work with, and renovations rarely go as smoothly as planned. Often, contractors over-promise and under-deliver, in terms of both costs and timeline.
For your first investment property, stick with relatively minor cosmetic repairs. Then, budget an enormous cost overrun reserve to handle the inevitable hiccups. Just dont tell the contractor about it, or theyll find an excuse to spend it.
Get at least three quotes from licensed contractors, and be extremely clear about the repairs you want. When you leave room for interpretation, you leave room for contractors to charge you extra later.
And dont forget that renovation costs themselves are only the beginning. It also costs money to own the property while it sits vacant undergoing repairs. These carrying costs, or soft costs, include the mortgage, utilities, taxes, insurance, and permits.
For your first deal, budget 50% extra as a reserve for renovation costs, plus a 50% cushion for your estimated carrying costs. By managing your contractors attentively, you can avoid spending any of it, but as a new investor, you should budget for mistakes when working with contractors.
Also Check: Best States For Multifamily Investing
So You Want To Be A Landlord
Buying investment property and acting as a landlord can be a good way to earn income, but requires a commitment of time and money. After choosing the right property, prepping the unit, and finding reliable tenants, ongoing maintenance is required.
Maintenance and upkeep costs can decrease your rental income. There’s always the potential for an emergency, such as roof damage. Investors should plan to set aside 1% of their property’s value for repairs.
Rental property owners can manage the property themselves or hire a property manager, who typically charges between 8% and 12% of collected rents. Although costly, a property manager can provide a wide range of services including arranging maintenance and repair work, screening new tenants, and handling late rent payments.
Additionally, rental property owners need to know the landlord-tenant laws in their state and locale. Both tenants and landlords have rights and obligations regarding security deposits, lease requirements, eviction rules, and fair housing laws.
It is important to protect a real estate investment. In addition to homeowners insurance, rental property owners can purchase landlord insurance, which covers property damage, lost rental income, and liability protection in case a tenant or a visitor suffers an injury as a result of property maintenance issues.
Have You Investigated Potential Tax Deductions
When you own an investment property, you can often claim a tax deduction on a variety of expenses related to the property during the time that its rented out, or available for rent.
Such items include but arent limited to things like:
- Advertising costs
- Borrowing expenses, including loan interest charges and fees
- Council rates, land tax and strata fees
- Building depreciation and the loss of value over time in fittings and fixtures like ovens, dishwashers, carpets and hot water systems
- Repairs, maintenance, pest control, cleaning and gardening costs
- Building and landlord insurance
- Phone costs and stationery
- Accounting and bookkeeping fees.
Note, travel undertaken to inspect the property is generally no longer a claimable expense in Australia. See other things you can claim on the ATO website.
You May Like: How To Invest In Physical Gold And Silver
Have You Looked At Your Credit Report Lately
If youve got a credit card, mobile phone plan or utility account, theres probably a credit reporting agency out there that has a file with your name on it.
With that in mind, before you start inspecting properties, be sure to check your credit history, as a tarnished credit report could affect your ability to get approval on a loan.
Positive Gearing Property Investment Strategy
Positive gearing is the second type of gearing-related strategy.
This is when, instead of making a loss, the income from a rental property covers the expenses incurred in holding the property and delivers some extra cash flow.
In other words, you are making a profit from your investment property, and you have the added benefit of the option of using some surplus income to reduce the size of your loan.
The problem isthose investors looking for cash flow are thinking about the here and now, rather than the long-term, and while buying cash flow-positive properties may solve a short-term problem, in general, it wont give them the long-term results they hope for, because in general, this type of property does not deliver strong capital growth.
I can understand why many beginning investors look for cash flow.
Theyre looking for cash flow to give them choices, but need they to build an asset base first and then can move to positive gearing or positive cashflow investments.
They may achieve this by lowering their loan-to-value ratios, maybe through commercial properties, or maybe by buying shares.
At Metropole, we help our clients develop substantial retirement income, in other words, cash flow from their investments but these stages must occur in the right order.
The three stages of building wealth through property are:
Read Also: Prosper Peer To Peer Lending Investing
Smart Investors Remember These Three Things
Buying your first investment property can be intimidating, but once you understand the basics, use them to guide you as you buy your second, third, or even tenth investment property.
However, even the most seasoned real estate investors make mistakes and encounter unexpected turns in the market. Its important to remember to always do your homework. This isnt your homeits an investment, which is why decisions should be based on numbers and not on emotions.
Buying an investment property could be your ticket to long-term financial stability, but its not for the faint of heart. If you have the capital for it, do your research and think critically about your decisions before you invest. You dont want to lose that capital and end up less financially stable than when you started. With these principles in mind, anyone can make a good investment.
Want to learn more? Check out these articles:
Vet The Property Carefully And Make An Offer
Once youve found the perfect location, sorted out all your finances, and consulted with lenders and realtors, your next step will be finding the perfect property to purchase and making an offer.
As a general rule of thumb, first-time investors should avoid fixer-uppers unless you can be entirely sure youll be able to carry out the extensive repair work yourself or rely on an incredibly inexpensive team.
The perfect property for a first-timer is a home priced just slightly below market, located in an up-and-coming area, and needing only minor repairs, so you can comfortably set aside upward of 30% of your rental income to take care of unexpected emergency repairs.
Before making your offer, consider what your total operating expenses are going to be, keeping in mind that they could end up being as high as 80% of your gross operating income. Then, calculate your likely ROI. A simple formula to follow if youre unsure whether the property would be a good investment is to take 50% off your rental income in order to determine how high expenses are going to be and to then adjust your bid accordingly.
Keep in mind that your initial proposal might be rejected, so its worth reaching out to as many lenders and real estate professionals as you can and improve your bidding price to move the process along faster.
Don’t Miss: Changing Second Home To Investment Property
