How much does it cost to invest in property?

They say an Englishman’s home is his castle; they could also say an Englishman’s second home is his income, or at least it was during the heyday of buy-to-let.

But the continuing housing shortage has led to a government crackdown on multi-property ownership. We want to take a look at the current state of play and see if there are any affordable alternatives.

The buy-to-let entry fee

According to the Land Registry, the average residential property price in England is currently £237,662.

Assuming a buy-to-let mortgage deposit of 25%, that means you’ll need to have £59,415 to hand just for starters.

There will also be an arrangement fee which will usually be in proportion to the interest rate; in other words, you will pay a higher fee for a better rate. They can come in anywhere from £1,000 up to £5,000; for the purposes of illustration we’ll plump for £2,000.

The Stamp Duty on this second property will be £9,383, and don’t forget you’ll be paying the estate agent and a surveyor; we’ll hope for the best and allow £2,500 for them.

Initial repairs to a property to get it into a lettable state cost an average £5,750, which could obviously be a lot more if you’ve bought somewhere which, in estate agent speak, “requires some attention”.

So before you even start, you’re looking at an investment of just over £79,000.

Later, of course, there’ll be regular licensing and management expenses along with occasional extra costs for maintenance and repairs. And remember, some experts recommend you factor in 2 months of void periods to your annual budget.

New tax legislation is also playing its part in making buy-to-let an increasingly costly investment.

Are there other options for property investors?

The casual observer might think that with all the disincentives in place around residential housing, property investment is no longer a realistic prospect.

But there is a huge commercial property sector, and it is just as accessible to private investors as it is to the corporates.

One great advantage of commercial property is that no Stamp Duty is charged below a purchase price of £150,000; nor is Capital Gains Tax due when you sell the property on.

There are plenty of categories of commercial property, such as shops, offices, garages, cafes and warehousing, but there are two which are head and shoulders above the rest in terms of investor reward.

Student and tourist accommodation

Industry experts have acknowledged purpose built student accommodation to be Britain’s highest-yielding property investment every year since 2011, while serviced apartments are proving so popular with travellers around the UK that they have replaced hotels as the fastest-growing asset in the hospitality sector.

Higher education and tourism are two of our most successful industry sectors, and both have been on upward trajectories for some considerable time; record numbers of students and tourists are all in need of accommodation and will be for years to come.

Can you afford a student property?

The great thing about student accommodation blocks is that they usually consist of 100+ rooms. By selling these individually, a reputable developer will be able to spread land and building costs across a high number of owners keeping purchase prices down.

And if that developer adopts a policy of relying on long-term rental growth to make a profit and so chooses to retain the freehold, this works even better for each investor.

It means exceptional build quality and the highest standards of property management and maintenance, because the developer’s interests are perfectly aligned with the owner’s; both want the property to retain maximum appeal to tenants and buyers alike long into the future.

The best student property investments will give you long leasehold ownership of your unit and will deliver a NET annual income of 8-10% for a contracted 10-year period – from prices as low as £45,950.

And, for £33,000 less than our earlier example, you will have no further outgoings during those 10 years – no service charges, no ground rent, no maintenance bills, no nothing.

Because the developer has installed an onsite management team, you won’t have any responsibilities either; all repairs and replacements will be taken care of for you, along with all letting, collection of rent and delivery of income.

Your 10-year fixed income period can be transferred to a new buyer, making your property not only a highly saleable asset, but also a means for you to generate as much as 40% capital growth.

There are cheaper student properties on the market, but they will offer lower income for a shorter term and will therefore be much harder to sell on.

Does the same apply to serviced apartments?

Indeed it does, although the entry level is currently £88,000. However, one of these properties will deliver NET yields of 10-12% for your 10-year term. It’s an equally effortless investment with the same major resale benefits.

Next steps

Do some further research – James Harrington, Business Development Manager at sector specialists Emerging Property urges prospective investors not to be guided solely by purchase price: “When you’re shopping around for student accommodation or serviced apartments, don’t accept less than 8% NET yield, and do insist on a 10-year income term. Anything less and you could find yourself lumbered with a property that nobody wants to take off your hands. Whenever you buy property, your first consideration should be your exit strategy.”