The not so hidden costs of property investment in the UK – Part One…

Initial Investment

With house prices increasing by over 73% in the 10 years to January ‘23, and the steady growth in rental rates, residential property investment in the UK is a lucrative venture for many. It has been for a few friends, clients and for me personally.

At Engage we believe in diversifying investments, and this can include property, but there are many factors to consider when investing in property. It’s important to get the full picture and build realistic expectations of your investment return before embarking on the journey.

Here we’re taking a closer look at the initial, upfront costs involved in getting you onto the investment property ladder.

Buy-to-let mortgages demand a bigger deposit

If you don’t have the capital to purchase the property outright, you will need a buy-to-let (BTL) mortgage. The minimum deposit is usually 25% of the property's value (although it can vary between 20-40%).

This is likely to be a significant initial outlay of capital to start your property venture. For a property valued at £500,000, this means you’ll need approximately £125,000 upfront.

And that’s before you’ve considered Stamp Duty (Stamp Duty Land Tax, SDLT), fees, legal costs and other potential expenses.

Location, location, location

Investors might have a smaller budget and look for properties in more affordable areas. However, knowing and researching the location and how that property market functions is really important. This will take time (think what cost you attribute to your time) but getting it wrong could mean you struggle to rent or sell the property for what you had expected and calculated.

The 3% additional Stamp Duty on second properties

When it comes to second properties or a property bought through a company, buyers will pay 3% additional Stamp Duty. This is on top of the tiered Stamp Duty tax structure. Properties valued from £0 to £250,000 will pay 3%, 8% on the next £675,000, 13% on the next £575,000, and 15% on anything above that.

That’s £27,500 tax on a £500,000 property.

Initial Fees

the mortgage application fee, surveys and the solicitor costs for the purchase can run in to many £1000s, and will depend on the type and complexity of the purchase.

And while it will cost more to have a more extensive survey, rather than the standard basic one, it may save you money in the long run if issues are flagged now rather than after completion.

This means that in reality, your £500,000 property is actually likely to cost you well over £530,000 before any renovation costs.

Renovation, development or initial repair costs

Even experienced property developers expect their actual build costs to be higher than their initial expected costs. Costs can easily rise by 10 or 20% in some cases depending on what unknowns are found during the works, so it’s worth factoring this in to ‘working capital’.

By understanding these costs upfront and conducting thorough research, investors can make informed decisions and start to navigate the ‘not so straight forward’ property investment market.

Part 2 in the series will follow shortly and take a closer look at ongoing costs, as well as income tax and capital gains tax.