What Is an Investment Property?

We all want to earn money.

Money is often the gateway to a happier life, with the ability to afford luxury items and holidays across the globe.

While many of us opt for the traditional route of working 9-5, others use their money differently and choose to invest.

Investing is an excellent strategy if you want to know how to generate passive income and become financially independent. By putting some finances into an asset, we can make huge gains and replace our primary income. It sounds great on paper, but is this reality?

Well, there’s a tonne of investment strategies out there that can genuinely net you huge gains when done right. One of these strategies is real estate.

Real estate is a fantastic way to earn money in 2021 and beyond, but it can be complicated with several things you need to consider before starting your investment journey.

In this guide, we will be discussing the ins and outs of real estate investment.

We will answer several key questions, including: What is an investment property? What is an investment property loan? What type of property is best for an investment? What is positive gearing an investment property? What is a good cap rate for an investment property and what is a good rental yield for an investment property?

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What is an Investment Property? 

So, what is an investment property?

An investment property is real estate that has been purchased for the purpose of earning income. You can earn income through both rent and capital gains. Examples of investment property include residential buy to let, student accommodation, houses of multiple occupancies, and more.

Is property good investment vector - making passive income from property Is property good investment vector - making passive income from property

Why is Real Estate a Good Investment? 

As an investment strategy, real estate is one of the most fruitful. Not only is the sector experiencing some of the highest growth levels in history at the moment, but you can also earn two types of income when you invest.

In real estate, you earn money through rental income and capital gains.

  1. Rental income: The money you earn monthly and yearly through rent.
  2. Capital gains: The increase in the price of the property over time.

This is what makes property investment so ideal. Not only can you earn consistent income every month for decades, but you can also sell the property after an extended period for a huge pay-out.

Manchester castlefield during sunset Manchester Castlefield during sunset with view of Beetham Tower

Let’s look at this in practical terms.

One city worth considering when looking for a real estate investment is Manchester.

The North West city has experienced some of the highest capital gains over the last two decades. It far surpasses the average growth levels in the UK.

At the turn of the century, property prices in Manchester were worth around £43,750. 20 years later, the average property is valued at £205,067 – a 368.7% increase in value.

Using the latest rent values from Zoopla, we can see that if you bought a property in Manchester in 2000, and sold it in 2021, you would have earned £284,160 in rent and £161,317 in capital gains – all while doing absolutely nothing for it.

This is real estate at its best – buying property at an affordable price and holding onto it for decades before selling.

You may think you’ve missed the boat for Manchester property, with prices already at the £200k mark. However, judging by how much prices have grown in 2021, and how much prices are expected to grow in the coming years, there’s still massive scope to make a huge investment.

Should I Invest in Real Estate in 2021?

Judging by how much prices have grown in 2021, and how much prices are expected to grow in the coming years, there’s still massive scope to make a huge investment.

Daniel Williams, RWinvest

What Makes a Good Property Investment? 

Different types of property have their own pros and cons. To understand what type of property is the right one for you, you’ll need to understand what makes a good investment first.

In property terms, a good investment is real estate that is affordable, has high market growth potential, high rental yield, and is located in an area with high rental demand.

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Rental Yield



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Rental Demand



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Positive Gearing



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Cap Rate



Rental Yield 

Rental yield is one of the most important aspects of property investment. It is usually the first thing investors evaluate before investing in an area.

Rental yield is the return on investment you get through rental income. It’s calculated by dividing your yearly rental income by the original purchase price of the property and then multiplying it by 100.

For instance, taking the average UK rental income (£11,808) and dividing it by the latest UK House Price Index figures (£249,309), the average UK rental yield is 4.74%.

That means you will see a 4.74% return on your investment every year through rental income.

To get the best investments, you will need to find areas with the highest rental yields. That means a location that has high rental income and low property prices.

Chart of average prices, yields and rent in Liverpool, Manchester, Birmingham, Leeds and London Chart of average prices, yields and rent in Liverpool, Manchester, Birmingham, Leeds and London

What Is a Good Rental Yield for an Investment Property? 

So, what is a good rental yield for an investment property?

Typically, a rental yield between 5 or 6% is considered good.

Luckily, there are plenty of top UK property hotspots that deliver far higher rental yields than the UK average.

Let’s look at five of the most popular UK investment locations: Liverpool, Manchester, Birmingham, Leeds, and London.

As you can see, despite London having a considerably higher rental income, it has the lowest rental yield due to the overwhelmingly high house prices. This means you will wait even longer before you can start profiting off your investment.

This is why London is now considered one of the worst investments for real estate. For the price of one London property, you could buy on average five in Liverpool – that would make your yearly income just under £50,000.

Pairing this with the fact Liverpool, Manchester, and Leeds have the highest future growth predictions of 28.8% and 28.2%, and it’s easy to see which locations are worth considering.

If you want to learn more about rental yield, check out our guide to “what is a good rental yield?”

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Rental Demand 

Another vital aspect to consider before choosing your property type is rental demand.

Naturally, you will want as much demand as possible, so your properties constantly remain inhabited and earn you money.

Void periods (property not earning income due to no tenants) can be really damaging for an investor, especially if you have a buy to let mortgage or a loan to pay. Therefore, you will want an area with a strong renting demographic to make the best investment possible.

Perhaps the most important age group to consider, then, is young people.

Often referred to as generation rent, those aged between 18-40 often struggle to afford houses now due to hiking prices. Instead, they are increasingly renting as part of a lifestyle choice.

Increase in rental demand vector illustration Increase in rental demand vector illustration

With that in mind, there are some obvious cities with a high population of young people, but that also offer high rental yields.

Two of the most popular options are Liverpool and Manchester. The cities have a combined student population of over 170,000, with 37% of the total city population between 18-34 in Manchester, and 42.3% of the population under 30 in Liverpool.

This has dramatically impacted rental demand, with a Zoopla report finding that the current ratio between supply and demand for property in Manchester is around 1:5.

These figures are good news for investors. It means they can make a substantial investment in residential and student property while drastically reducing the chance of void periods.

It’s not just rental yield and demand you need to consider, though. It’s also important to understand positive gearing and cap rate.

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What Is Positive Gearing an Investment Property? 

So, what is positive gearing an investment property?

Positive gearing, or cash flow property, is when you receive more in rental income than you spend on the property. Possible expenditure includes loan repayments, property management fees, interest, and general maintenance.

This essentially means you are earning more than you are losing on a property. Having an increased source of income is great news as it allows you to pay more on your mortgage or even save up and buy another property.

Mortgage lenders will love positively geared property, as they will feel more confident lending cash if you can prove you can comfortably cover costs.

One downside of positive gearing, though, is the increased income tax you will pay.

Negative investment gearing Illustration Negative investment gearing Illustration

What Is Negative Gearing in an Investment Property? 

Negative gearing, or capital growth property, is when your monthly expenses on a property exceed the amount of rental income you are earning from tenants.

While this sounds bad, depending on your strategy, it may be incredibly fruitful. That’s because negatively geared investments are often expected to increase in value over time. These capital gains are expected to cover any short-term losses you experience.

Typically, though, most landlords will want positive gearing properties to remain financially stable. After all, if you lose a primary job, you will feel safe knowing your property is paying for itself.

Mortgage lenders will love positively geared property, as they will feel more confident lending cash if you can prove you can comfortably cover costs.

Daniel Williams, RWinvest

Liverpool waterfront with office buildings, docks and walk promenade in sunny weather Liverpool waterfront with office buildings, docks and walk promenade in sunny weather

What Is a Cap Rate? 

If you want to branch out into the commercial property world, cap rate is a solid metric to consider.

Cap rate is the percentage of return on your investment while factoring in monthly costs and expenses. This figure is calculated without mortgages in mind, which means cap rate gives you returns expected from just a cash purchase. It is calculated by dividing a property’s net operating income by the current market value and multiplying by 100 to get a percentage.

Mainly used in USA real estate but becoming increasingly popular in the UK, cap rate gives you a rough indicator of the potential of return on a commercial real estate investment. It allows you to compare different property assets without considering the potential unknown of mortgages.

So, what costs do you need to consider? To get as accurate a figure as possible, try and be thorough when thinking about your monthly expenses. This includes rental income, property management fees, maintenance and repairs, and others.

Let’s say you have a total net income on a property of around £12,000, and the property price is £249,309. That means you have a cap rate of 4.8%.

Cap rate for property investment is 4-10% illustration Cap rate for property investment is 4-10% illustration

What Is a Good Cap Rate for an Investment Property? 

So, what is a good cap rate for an investment property?

Typically, anywhere between 4% to 10% is a reasonable cap rate for real estate.

It’s important to keep in mind that cap rate isn’t the make or break of an investment – it’s a useful rough indicator to see how total expenditure could affect your income. Many investors will willingly invest in a property with a lower cap rate if the property is found in an area with a high commercial rental demand. Factors like rental yield, market growth, and demand are still essential features worth considering.

Now that you know what makes a good investment, it’s time to evaluate the types of properties you could invest in.

What Type of Property Is Best for an Investment? 

With real estate, there are plenty of options to choose from when you want to invest. Each property investment strategy has a whole host of pros and cons. Here are some of the most popular strategies you can choose from.

Residential & Student Buy to Let Properties

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Commercial Buy to Let & Buy to Sell Properties

Overall, for beginners, if you’re asking, “what type of property is best for an investment?” residential and student buy to let should be your main options.

Passive income illustration Passive income illustration

Fees to Consider 

We’ve covered why you should invest in real estate, what makes a good investment, and what property types to consider. What’s next?

Well, before you start your investment journey, it’s important to consider monthly expenses.

Real estate isn’t just purchasing a property; there are several other fees you need to keep in mind to ensure you can afford the venture.

These fees can include solicitor fees, survey fees, insurance, stamp duty land tax, property management costs, and general maintenance and taxes.

It’s vital to do your homework before any venture and understand all these additional factors and costs.

If you want a deep dive into the property world and want to find out “how much money do you need to invest in property in the UK”, be sure to read our guide.

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Liverpool Prices from £92,950

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300m away from new £1b Royal Hospital

Mortgage illustration of house as a piggy bank Mortgage illustration of house as a piggy bank

How to Invest 

Hopefully, you’ve now worked out what property type you want, what area you want to invest in, and are financially ready for an investment. Now, it’s time to actually invest.

There are two extremely popular ways of financing your investment, each coming with its own set of pros and cons.

Firstly, you can get a buy to let mortgage or a loan.

If you’re asking, “what is an investment property loan?” there are many options available including a buy to let mortgage.

Buy to let mortgages are great if you can’t afford to buy a property upfront. With average house prices surpassing the £250,000 mark for the first time, the likelihood of investors able to afford a lump cash sum as high as this is increasingly low.

Illustration of an animated man calculating expenses Illustration of an animated man calculating expenses

This mortgage type is quite different from typical residential mortgages. They often command a higher deposit, typically 25%, and require you to earn over £25,000 a year.

Buy to let mortgages also usually can’t be used on off-plan properties, meaning you may be missing out on big savings if you rely on a buy to let mortgage.

Alternatively, you can invest through a property investment company.

Property investment companies are a great way to make savings on a property. They typically have excellent relationships with developers and because of this can offer massive savings on off-plan properties.

Likewise, they allow you to cherry-pick the best units in a new-build property, often located in thriving property areas.

Finally, they can even deliver assured rental returns, making the investment a lot safer than buying a property from an auction.

Whatever your decision, investing in real estate is a fantastic venture to consider and could net you a tremendous profit when done correctly.

Don’t miss out and start your property investment journey today with RWinvest – the UK’s leading property investment company.

Daniel Williams, RWinvest

Invest With RWinvest Today 

We hope you enjoyed our guide to “what is an investment property?”

The next step in your property journey is to invest, so why not consider investing with us?

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Disclaimer: This guide was made in March 2021. Figures mentioned about the property market are subject to change and may no longer be accurate when you read.

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