23 Feb 2023

Should First-time Buyers Use Property Investment to Gain Capital?

Category: First Time Buyer

First-time buyers are trying to take their first steps onto the property ladder by purchasing their first home. However, while waiting for their dream home to hit the market, they could be earning significant returns.

This article will explore whether property investment is a good idea for first-time buyers and the benefits of doing so.

Author: Sam Whalley

Digital Marketing Executive

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Why should first-time buyers invest?

First-time buyers may have a cash deposit stored in a savings account, which gains around 1 to 3% interest from high street banks. Therefore, it takes a long time to see significant returns. Alternatively, first-time buyers could benefit significantly from high-yielding property investment. This is because a property is one of the strongest forms of investment available. Therefore, first-time buyers are able to benefit from significant returns much sooner.

A buy-to-let mortgage requires a 25% deposit. This is significantly higher than the 5-15% that is generally required from owner-occupier mortgages. However, the value of the investment property does not need to be equal to the property the first-time buyer has saved for. This is because the needs of the potential tenants are not the same as the need of the property owner. For example, the investor may require a 3-bedroom detached home in a central area, so will have saved accordingly.

Instead, the investor could purchase a suburban 1-bedroom apartment, which is considerably more affordable. If the first-time buyer has a 10% cash deposit available for a property valued at £250,000, they will be able to invest the £25,000 into a 25% deposit buy-to-let mortgage for a property valued at £100,000.

How much money is needed?

The benefit of investing before purchasing a first home is additional capital that can added to a cash deposit. As a result of the investment, the buyer will be able to secure a much smaller loan-to-value mortgage once their dream property hits the market. Securing a small LTV mortgage is a huge benefit for buyers as it keeps the cost of interest on the loan low. Furthermore, it may support the buyer if they are trying to buy a home at a higher value.

Meanwhile, the knowledge gained about buying, owning, and maintaining a property will support the buyer beyond their investment. Building up a list of reliable tradesmen and property professionals, such as mortgage brokers, will help once the buyer is on the property ladder.

Useful links:

How to buy BTL property.

Best BTL areas.

Everything aspiring landlords need to know.

What to expect

If an investor chooses to purchase a property in an area benefiting from high rental yields and significant capital growth, they could generate healthy returns. For instance:

If the rental yield of a property is 6% and over the year the property has appreciated in value by 8%, this is what an investor can expect to achieve:

Property Price: £100,000

Yearly Rent based on 6% yields: £6,000

8% Capital Appreciation: £8,000

Total income generated from rental yields and capital growth: £14,000

Therefore, landlords could expect to achieve £14,000 in gross income. Please note, this figure excludes other expenses which may occur such as maintenance and repairs.

Are there any risks?

The UK property market is incredibly stable, so risks are minimal. If an investor is purchasing a property in a strong area, they are unlikely to lose money on the initial investment. However, the risks involve the chosen property. If the property is not in a good condition, it may cost a significant sum to make it suitable for tenants. This can be avoided by instructing a snagging expert to visit the property beforehand.

Another potential risk is struggling to attract tenants, which leaves the property vacant. The investor will not be benefiting from a return during vacant months. Therefore, using a property management service can be beneficial, as they are able to keep the property tenanted and make sure it is well maintained. Furthermore, a management service will be able to keep track of the finances, to make sure the investor is earning the maximum return possible.

How to exit the investment?

Once the investor has achieved their goal, they can exit the investment by selling the property. To do this correctly, the investor should instruct the management company to notify the tenant. This must be done with due notice and according to the terms of the tenancy agreement. However, if the investor aims to sell the property to another property investor, they can do this during the tenancy period.

In most cases, it is advised that the investor sells the property via an investment agency. They will be able to get the best price for the property and guide the owner through the exit strategy. Getting the most out of the investment is vital if the main objective is to maximise the return on investment.