Most investors know that property is a key component of any sensible investment portfolio. UK property has been an effective and robust way to store value, generate income and protect against inflation due to long term factors that keep demand high and constrain supply. These include population growth, limited land for building and tight planning regulations. It’s also allied to a robust and well-organised legal system, which has developed over hundreds of years.

In this series, we’re exploring the four ways you can gain exposure to the UK property market. We’ll weigh up and pros and cons of each type of property investment, so you can make an informed decision as to how you can incorporate this asset class into your investment portfolio

Become a buy-to-let landlord (direct property investment)

Perhaps the most well-known way to invest in property is buy-to-let: you own a property outright and become a landlord, collecting rent from tenants. You manage the property so that your yearly takings in rent exceed the cost of owning the property, and you may eventually be able sell the property on for a profit years later, if prices have risen.

One of the benefits of buy-to-let is that you have complete control over the entire process; you can choose which sort of property to buy, where to buy it and how to manage it once you’ve acquired it. The buy-to-let market in the UK is huge, however, there are a number of drawbacks to being a landlord which investors need to be aware of.

Firstly, you need a considerable sum to undertake the investment. And it’s not just the cost of the property you need to think about – there are survey and solicitor fees, fees for the mortgage (which needs to be a buy-to-let mortgage since residential mortgage lenders will only lend to owner-occupiers), special contents and building insurance, and the cost to ensure the property meets all safety regulations before it can be considered suitable for tenants. Read more about the nine costs landlords need to consider.

Second, anyone who has bought their own home is familiar with the process of acquiring residential property; there are many factors that need to be considered, and finding a good buy-to-let property is not that easy. Questions such as location, property style, condition and block management fees can all have a strong bearing on the ultimate financial performance of the investment. Many investors find it is simply more convenient when it comes to ongoing management to buy a property near to where they live. Although this can make life easier, it can over-expose you to property price falls in the local area.

Buy-to-let properties are also highly concentrated in terms of the risk of that particular property not performing as you hoped. Void periods, unexpected repair costs, difficult tenants, or local economic changes can all impinge upon the profitability of the investment.

Individual “part time” buy-to-let landlords frequently underestimate the costs of managing a property, and the net rental yields achieved are usually substantially lower than the gross yield would suggest. Private landlords in London, for example, will rarely achieve net yields in excess of 2.5% of capital employed, and even in the northern regions, for standard residential property, net yields will rarely exceed 4-5%.

Don’t forget to take the time-cost of managing buy-to-let properties into account. All too often landlords can find themselves spending their weekends and evenings on repairing damages, advertising and finding tenants. You can employ an agency to do all this for you, but it will come at a price.
 

You can invest in the shares of companies who develop or invest in property themselves, or pool money with other investors via a property investment fund. An advantage of investing in listed companies or funds is that you can generally invest within your SIPP or ISA, therefore deferring or shielding tax.