How to Make Money from Property Investment
For many investors, making money through real estate is a popular strategy to put their money to work. While there is no get rich quick scheme in the housing market, with the right knowledge, processes and properties, it’s possible to not only make money but to build wealth. If you’re looking to understand more about how to make money from property investment, in this article we explore some of the main ways property investors make money, how to ensure you invest for profit and some of the key elements you will need to consider before embarking on any investment opportunity.
Investing in real estate requires research and due diligence. It’s important to understand the local housing market and the different types of properties as well as investment strategies that are available. So let’s get started.
What are the Main Ways to Make Money from Property Investment?
First, let’s take a look at how to make money from property investment.
When “flipping” a property, an investor buys a home in need of repairs, undertakes renovations with the aim of adding high-return in a short time and sells the property for profit. As an investment strategy, if done right, flipping a home can be a great way to make money from real estate investment.
The first element to success is to buy low and sell high – generally, the cheaper you can purchase the property, the higher the likelihood that you will turn a profit. However, flipping is something that requires time and knowledge and the risks can be high. You’ll need to be able to identify properties with the potential to deliver high return, have a sense of a property’s underlying cost and value and have the necessary skills to undertake renovations or the contacts to oversee a crew to do so. If you underestimate the renovation costs, it’s possible to lose money. Property renovation also tends to take a lot of time – from securing the property to getting planning approval to finding suppliers and contractors and time spent overseeing the work if you’re managing the project yourself. Investors that focus on flipping will generally need to have money on hand to fund the renovations.
Finding financing can be difficult, as most lenders are not keen to finance a property that has yet to be renovated.If you’re able to secure financing for your project, it’s important to remember that the lender will likely require a contingency fund for unanticipated repairs or expenses. Finally, it’s important to think about the market you’re working in and how long it will take to sell a property after its been renovated. If prices are declining or the market is slow, it could take longer for your investment to pay off.
While flipping can be a good investment for some, considering the work involved, knowledge required and time it might take to complete renovations, keep in mind that it can take a while before you see a return on your investment.
Buy-to-let is one of the most popular investment options and, if you’re wondering how to make money from property investment, this is one of the strategies most likely to result in a steady income and profit.
With buy-to-let, an investor purchases a property and rents it out, ideally aiming for a monthly rent that will cover ongoing costs such as a mortgage and wear and tear, and ideally have some money left over as profit. You may be able to use the rental income as proof of income when applying for a loan. You should consider how much you can afford in terms of the mortgage payments and how much rental income you would need to cover those costs.
As one of the most traditional routes to make money from property, there are a few different options – from a single let that you rent out to one tenant or family to a HMO (House of Multiple Occupation) where a property has more than one tenant, each with their own contract, as with shared student accommodation. HMOs tend to be slightly more complex to manage but generally bring in higher rental income, although it’s possible to hire a property management company to handle things like contracts, rent and repairs if you do not want to manage the property yourself.
Overall, embarking on a buy-to-let investment strategy is more likely to generate steady income over flipping a property. However, it’s important that landlords know the regulations and laws that apply to a buy-to-let property, the responsibilities they have to their tenants and any health and safety measures they need to have in place. Investors should also note that any rental income is taxed like regular income and can affect your tax bracket. Even with buy-to-let there are possible vacant periods between tenancies where you’ll still have to pay the mortgage, and there is always the possibility of not being able to find tenants or being faced with rental arrears.
It’s also important to factor in the cost of repairs and maintenance when considering buy-to-let investments, as these costs can quickly add up. This is especially true when it comes to older properties, where the wear and tear of tenants can take its toll.
Another way to make money from property is to rent out a holiday home. Many travellers prefer renting a home over staying in a hotel, and in a popular holiday destination or sought-after tourist area, it’s possible to make a decent profit.
If you rent out a furnished holiday home for more than 210 days per year, it is classed as a business, and you can deduct expenses and other costs before tax assessment. The rent you can command for holiday rental properties is often much higher than for a normal rental property, especially in peak times. However, investors need to be aware that holiday rentals are often seasonal and may be vacant for much of the year, meaning that overall they might make less profit. Holiday homes may also require a lot of work from the investor such as cleaning between guests and taking bookings, which can also add to the overall running cost and investors also need to be aware of laws regarding short-term rental platforms before listing their property.
It is also important to consider the location of the holiday home. A property near a beach or popular tourist attractions will often command a higher rental rate than one in an area with less attractions. However, investors should also be aware that areas popular with tourists may have stricter rules regarding short-term rentals, so it’s important to research local regulations before investing. Additionally, investors should factor in the cost of insurance for their holiday home as this is usually higher than for a traditional rental property due to the increased risk of theft and damage from guests.
When considering how to make money from real estate, investors should not only consider how much cash they have to invest, but the time they have to invest, too. Buy-to-let can be a great way to generate passive income, which comes in every month, and it’s possible to get a property management company to handle most of the day-to-day running. On the other hand, flipping a property or owning a holiday home may require an investor to be much more hands-on to successfully generate profit.
How do Investors Make a Profit on a Property?
Appreciation is the increase in a property’s value when you come to sell, also known as capital gains. Real estate tends to increase in value over time, and by investing in the right property, you’re likely to generate profit when it comes time to sell.
The majority of money and wealth property investors generate is from appreciation – although the cash flow generated from rental income is also important and rents can increase over time, too. The key to gaining money from capital appreciation is to be knowledgeable about the property market in the area you are looking to buy and identify places where property prices are set to increase – often in towns or cities undergoing regeneration as this is usually a strong indicator of property value increase. Right now, some parts of the UK present a more optimistic outlook on capital growth than others. For example, cities in the north such as Liverpool and Leeds are undergoing extensive regeneration and house prices are on the rise while properties still remain relatively affordable, making them ideal for investors looking to get started.
Buy-to-let is a popular way to make money from an investment because there are two types of returns – as well as capital appreciation, landlords can also make money from the monthly rental income.
With a rental property, one of the most important things to consider is whether the investment will deliver decent rental yields – around 5% is a good benchmark, as anything lower will limit your ability to turn a profit (find out more about rental yields in this guide). Areas with a high population of young professionals or students can deliver yields that are even greater.
When researching potential properties, it’s important to consider the location and whether or not it is a desirable place to live. Good transport links, access to shops and schools, as well as any local amenities such as parks can all add to the appeal of a property. Even if these features are present, it’s worth considering how much competition there is for rental properties in the area – if there is too much competition then this could affect your ability to secure tenants, or keep them for long periods of time.
How to Make the Most Money from Real Estate
When you’re looking into buying and selling a property for profit, savvy investors can do well to consider following:
Purchase a Neglected Property
One way that may help you to maximise your profit is to purchase a property that needs work. While proces tend to be lower for properties that need renovations, you need to consider whether you want to limit this to minor improvements such as decorating, or pursue something that needs significantly more work. Regardless of the state of the property, it’s always important to factor in renovation costs. Renovations can be stressful and time consuming, so while you may be able to secure a bargain, it may not be the right avenue for all investors.
Get a Bargain
Buying low and selling high is the ideal and obvious way to make money from a property. While not always straightforward, occasionally you can get lucky by finding a homeowner looking to make a quick sale or find something at a great price if you are willing and able to move quickly.
Convert a Property into a HMO or Flats
While a single let is a way to make monthly passive income, converting houses into flats or having a HMO is a great way to increase rental income and make more money from a property. With multiple tenants, HMOs tend to offer more rental income for an investor, just be sure to consider the profit after income tax.
What to Consider When Trying to Make Money from Property
Appreciation is a key way to make money from a property and to maximise the potential profit you should carefully look into the appeal of the location, the surrounding development of the area, rental demand and any home improvements that may help you boost a property’s value. When it comes to appreciation, you also have to factor in the economic impact of inflation. An annual inflation rate of 10% means that your pound will only buy about 90% of the same goods the following year, and that includes property. Generally, real estate almost appreciates at a rate higher than the rate of inflation, so unless the area of your property is in becomes undesirable, it’s still likely you can make a profit.
Finally, be sure to assess your level of risk. For example, flipping a property often comes with much higher risk, particularly for those that are inexperienced. Similarly, while HMOs may bring in more monthly income, they can be more complex to manage and have the added pressure of needing to secure multiple tenants. You should always be aware of the knowledge you need to ensure you make money from a property. Our AW Academy Guides can be a great starting point.
When considering how to make money from property investment, whether flipping, buy-to-let or a holiday home, there are plenty of ways to ensure your property makes a profit. If an investor chooses the right property with good rental yields and potential for appreciation, they put themselves in the best position to generate money from property. To find out more about how to generate money from property investment, get in touch with our experts.