Have you heard the term ‘investment property’ and wondered what it means? Wonder no more: as the name indicates, it’s a property bought as an investment, rather than as a home for your family. Just like investing in, say, unit trusts, it’s about putting money into a long-term asset that helps you grow your wealth.

But in this case, you’re buying a physical property. You can use this asset to provide regular income while also increasing its value, but it also comes with extra responsibilities that other assets don’t have.

This isn’t an investment you simply pay by debit order every month and then forget about: property needs to be monitored and maintained continually, so don’t consider it if you don’t want to be a hands-on investor. You’ll also need to spend quite a bit of money before you can start generating income from your investment, which is something else to consider when you’re deciding if investing in property is for you.

What is investment property?

In a nutshell, an investment property is any property you own in addition to your primary residence, which you can rent out as a residence or business premises. The rent you collect every month provides income, which allows you to pay off the loan and maintain the asset. If you’ve done your calculations right, there should also be some left over for you to spend as you like.

For as long as property prices are still rising, this asset is also increasing in value. That’s why property is seen as an important part of any diversified investment portfolio: returns are usually quite predictable, because property values and rental prices tend to rise year after year. It’s seen as a safe investment choice.

But also remember that you’re assured of receiving regular income from rental only when the property is occupied – whenever you have no tenants, you’ll be paying the costs on your investment without earning income from it. So, along with monitoring and maintenance, marketing will also be on your to-do list.

Is it for you?

If you’ve read this far, presumably you are:

• curious about investment property,
• looking to invest some of your income in long-term wealth, and
• confident that you qualify for the financing you’d need.
   

If you’re satisfied on those 3 points, the major question to ask yourself is: are you interested in an investment that requires constant care and attention if you want its value to rise with or above the market? Your tenants need to be vetted properly, the property needs to be maintained in a condition that attracts tenants, deposits and rent must be collected on time, the property needs to be inspected regularly, and tenant liability for certain damages needs to be established – as a property owner, you might be dealing with your investment 7 days a week.

You may be able to handle all this yourself, if you have the DIY skills to manage the maintenance and the right admin, accounting and billing programs on your computer. Or you could parcel out jobs, from tenant vetting and book-keeping to repairs and maintenance, among local small businesses – but the costs will eat into your rental income.

It may be simplest to hire a managing agent, who takes care of finding and vetting tenants, handling any problems with payments, and taking care of repairs and maintenance. This comes at a cost, too – typically 10% of the month’s rent, which you need to factor into your calculations. But you might consider it a worthwhile business expense, if a managing agent spares you the nightmare of unoccupied property, or tenants who don’t pay. It would be a disaster to buy the ideal investment property and then be left with mortgage repayments you can’t afford because there’s no rent coming in.

How to buy an investment property

You can take out a home loan to buy your investment property on most of the usual terms. So, you’ll pay a predetermined amount every month for a set period, at an interest rate that fluctuates based on the prevailing lending rates, unless you negotiate a fixed interest rate. You’ll undergo the same credit and affordability checks as you do with any other loan application.

A deposit is preferred but not always mandatory when you apply for a loan to buy your primary residence, and this is also the case when you get a loan to buy an investment property. Having a deposit will translate into a lower monthly repayment amount, making the loan more affordable for you.

Important considerations

As with all your financial decisions, do your homework before you jump into the buy-to-let market. Your best move is to speak to a trusted financial adviser who can walk you through the process and help you avoid any pitfalls. This includes doing a proper due diligence on the property and the area that it’s in. You don’t want to buy a property that may lose appeal because of surrounding developments or outside factors, and you don’t want to overpay for the location.

Lastly, it’s important to understand the financial implications of purchasing property for investment purposes during a period of low interest rates, and the impact on your financial circumstances, should interest rates start to increase.

A professional adviser can also make you aware of all the costs involved, to be sure you’ve included them in your calculations. For instance, you mustn’t ignore the tax implications. Not only will you be taxed on the extra income from the rent, but additional taxes apply if you decide to sell an investment property. This in turn may determine whether you should buy in your personal capacity or set up a company for the purchase. Talk to an expert to figure out how these options fit into your long-term financial plan. 

Investment property doesn’t appeal to every investor, and it may not always be the easiest way to grow your wealth. But if you manage the process carefully, it can provide steady monthly income while your asset increases in value.