Investing in property isn’t only about buying a home to live in or rent out – there are several different ways to put money into bricks and mortar, and you don’t necessarily need a big lump sum to get started.
The best option for you will depend on your investment timeframe, the amount you have to invest and your financial goals.
Here, we explain some of the main ways you can invest in property, and the pros and cons of each.
Buy to let
Putting your money into a buy to let property is one of the most obvious ways to make money from bricks and mortar, with the hope being that it will not only provide you with a regular income from rent, and also potential capital appreciation over time. However, investing in physical property to let out to tenants can involve a lot of work, and is not without risk.
Many landlords like the idea of owning a buy to let property as it’s a tangible asset, unlike stocks or funds. If you prefer to be less hands-on when it comes to managing the property, you can enlist the help of an estate agent to take responsibility for dealing with tenants and handling paperwork.
Of course, there are downsides too. Buying a property to let is a big financial commitment, particularly if you end up taking out a buy to let mortgage to cover the purchase. Mortgage rates have risen sharply in recent months following a series of increases in the Bank of England base rate. Even though rates have finally started to come down, life is still tougher for landlords and their tenants, whose rental payments also go up to cover higher borrowing costs.
Buy to let mortgages also typically require a larger deposit than a regular mortgage, usually equivalent to at least 25% of the property value, and lenders will need to be confident that the income generated from the rent you’re charging will be more than enough to cover your repayments. Learn more in our article Understanding buy to let mortgages.
There are plenty other costs to factor in when investing in a buy to let property. For example, you’ll have to pay al 3% Stamp Duty Land Tax (SDLT) surcharge when you buy an additional property in England and Wales. If you live in Scotland, you’ll have to pay an extra 4% Land and Buildings Transaction Tax. Read more in our article Stamp Duty explained.
Any profits could be eroded by the tax you’ll pay on rental income, and other outgoings you’ll incur, such as mortgage and maintenance costs.
Another risk of buy to let is that you can’t predict with certainty what’ll happen to the property market, and price falls in the area could see the property lose value. You could find that you cannot let or sell the property for as much as you would like, or struggle to let or sell it at all.
You also should be well aware of your responsibilities as a landlord before diving into buy to let, so you know what to expect and are aware of how much of your time it can take up. Read our article What are my responsibilities as a landlord? for the full breakdown.
To learn more about the ins and outs of letting a property and whether it might be right for you, check out our article Is buy to let a good investment?
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,250 reviews.
Holiday lets
Investing in a holiday home is another way you could make money through bricks and mortar.
You’ll have an investment that could improve your quality of life if you are able to use it occasionally, and also provide you extra income.
Furnished holiday lets typically provide greater income than buy to let property investments, although this income is often seasonal, and there may be lengthy periods when the property is sitting empty. That said, depending on the property’s location, you can often charge per week the same as the amount you’d receive in rent per month from a buy to let property.
Holiday lets are classed as a business rather than an investment, and as such the tax rules differ to those which apply to buy to let properties. However, rules came into effect last year which mean holiday let properties must have been rented out for 70 days of the year in order to qualify for business rates. They must also be available to rent for a minimum of 140 days. Further rule changes are due to be implemented next year, so that holiday let investors who are higher rate taxpayers will face a cut in the income tax relief on their finance costs as relief will be restricted to just 20% from 6 April 2025 in line with long lets.
Owning a holiday home often involves a lot more work than a conventional buy to let property. For example, you will need to have the property cleaned between stays unless you are willing to do this yourself. If the property is some distance away from where you live or even in another country, you may have to hire someone more local to help manage it. Holidaymakers typically have high standards, and you’ll have to be prepared to deal with any negative feedback or issues.
You’ll also need a special kind of mortgage for a holiday let, as you can’t use a residential or buy to let mortgage. These are called holiday home mortgages, and are typically only available from specialist lenders. These mortgages require a sizable deposit, and you’ll need to show that you have enough income to cover repayments during the quiet months. You’ll still pay the 3% Stamp Duty surcharge on a second property, too, which can add a substantial amount to your buying costs.
Read more about this kind of investment in our article Holiday let or buy to let: which is better?
Shares and property funds
If you don’t have a large lump sum to put down as a deposit on a buy to let property or holiday let, or you want an investment that requires little upkeep, you could consider investing in property shares or funds rather than putting your money directly into bricks and mortar.
These can form part of a balanced investment portfolio, provided you’re comfortable with the risks involved. Read more in our article Is investing right for you?
Shares
You may decide that you want to invest in individual shares in property companies, such as building and construction companies, property management, or commercial property firms.
This effectively means buying part of a company or several companies and becoming a shareholder in these businesses, in the hope they perform well over time and your shares rise in value. Bear in mind however, that there are no guarantees, so you must be comfortable accepting the risk that you could get back less than you put in. As a shareholder, you might be entitled to dividend payments which can be reinvested to increase your returns, or paid out as an income. Dividends are basically a slice of company profits paid out to shareholders, and are typically paid a few times a year.
You can shield up to £20,000 of your investments from the taxman each year with a stocks and shares ISA. Read more about how these work in our article Everything you need to know about ISAs.
Find out more about how shares work in our article Savings accounts or shares – which is the best option?
Property funds
A property fund pools your money together with contributions from other investors, and has a manager who makes investments on your behalf. They will usually invest in dozens of commercial properties, such as office spaces, retail, and leisure facilities, rather than residential property companies.
These types of investments typically perform better when the economy is doing well and there’s plenty of demand for business space. However, during a recession, commercial property investments may not be so lucrative, as demand for these spaces falls when the economy is stagnant.
Beware that property funds come with particular risks as you may be prevented from withdrawing your money if the investment performs poorly. This is typically because the fund simply cannot rent or sell enough assets quickly to give you your money back. This was a common problem during the pandemic, when a lot of UK commercial properties stood empty.
Real estate investment trusts (REITs)
Real estate investment trusts are a kind of investment trust which mainly invest in commercial properties. To be eligible to be a REIT, a company must earn at least 75% of its profit from property rental and must distribute at least 90% of its property rental income to investors.
A REIT’s share price is determined by market demand, and can move either above or below the value of the assets it holds, known as the Net Asset Value, or NAV. If the price rises above the value of the fund, it is set to be trading at a premium, but if it falls below it is said to be trading at a discount. Demand for REITs tends to reduce when interest rates and borrowing costs are rising, and grow when rates are falling and it’s cheaper to borrow.
Find out more about how investment trusts work in our guide How do investment trusts work?
Property development
You could try your hand at property development if you’ve plenty of money to invest and you’re willing to do up property to rent out or sell on. You’ll usually pay less for a property that needs a lot of work. However, with the right renovations and refurbishments, you could potentially make some big financial gains when it comes time to sell or let to tenants.
However, don’t underestimate how much property improvements can cost. Renovations usually require plenty of time, money and effort, whether you are doing the work yourself or hiring builders. The cost can also rack up if any unexpected problems arise, and if you’re not careful, your development project could end up a money drain. There aren’t any guarantees that you’ll be able to sell the property on either, at the price you want. If the property market takes a tumble while you’re doing a property up, this will also impact on your sale price.
You should ensure that you thoroughly understand a property’s issues and exactly how you’re going to solve them – including how much each step will cost – before you think about fixing it up.
There are a number of different ways to finance property development, such as equity release, remortgaging, or a refurbishment loan. Read more about equity release in our equity release section and about paying for home improvements in our guide How to pay for home improvements.
What’s the best kind of property investment for me?
Ultimately, the right property investment for you will depend on your financial situation, time you have to spare, your skillset, and your goals.
For example, buy to let or property development may be suitable for you if you’re willing to put time and effort into your investment, and you have a large lump sum to invest as your deposit.
However, if you’re seeking a property investment that will add to your lifestyle as well as providing returns, then a holiday let may be more suitable. Alternatively, if you’ve less money and time available and you’re seeking a long term profit, property funds or shares may be a sensible choice as part of a diversified investment portfolio.
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