There are several property investment terms and related real estate terminology that it can be useful to understand when you’re looking to buy an investment property in the UK.
When you’re looking for a rental property you can suddenly become lost in a sea of industry terminology.
Here we share a simple breakdown of the most common property investment terms to help you make better-informed decisions when investing in UK property.
The below is in alphabetical order, if there’s a term we’ve not included that you’d like a simple definition for please do let us know.
The annual return is a measure of how much an investment property has increased on average in a year. The figure is calculated using the total rental income and an estimate of the capital growth over the 12 month period.
An asset class is a broad term for a group of similar investments such as equities or bonds. Property is an asset class.
Assured Rental Yield
An assured rental yield is when an investor will receive a fixed return on an investment property for a set period of time. It is sometimes the case that a new build or off plan property will come with an ‘Assured Rental Yield’.
After the period of assurance, you should continue to earn a strong yield so long as you have purchased a good property in an area that has strong tenant demand.
Below market value
We’ll often talk about securing a property at below market value, what we mean by that is that a property sale price is lower than the current local market average – it’s a good deal.
A buy-to-let is a property that’s been bought with the intention of letting it to tenants rather than the seller living in it themselves. Buyers hoping to buy a property to let it out who need financing will need to obtain a buy-to-let mortgage.
Buy, Refurbish, Refinance (BRR)
The BRR method of investing is a strategy where an investor purchases a distressed property, refurbishes it and then keeps the property to rent it out and refinances against the new improved property in order to fund further investment property purchases.
Capital appreciation (also called capital growth)
Capital appreciation or capital growth is referring to the increase in the market value of an investment property.
Capital Gains Tax (CGT)
Capital Gains Tax is the tax applicable to the profit made on a property at the point of sale. The profit is calculated by comparing the current sale price with the purchase price you originally secured the property for. The official record for this data in the UK is the Land Registry.
Capital repayment mortgage
A capital repayment mortgage is a mortgage where an investor will be paying towards clearing part of the loan each month and also paying part of the interest owed on the loan. Effectively repaying a bit of the capital, the amount you borrowed, on a monthly basis.
This type of mortgage is the most common type of mortgage across much of the country, however, investors often try to secure an interest only mortgage as this will maximize their net yield and their focus is not usually on repaying the loan in full, it will be on earning a strong regular rental income and achieving capital growth over a 5, 10 or 15 year period.
We often discuss diversification and place an emphasis on creating a diverse portfolio, when talking about growing portfolios with investors. Diversification is the process of adding different types of properties in varying locations to your portfolio, it is a sure way to mitigate risk and boost the potential for capital appreciation.
Exchange of contracts
Exchange of contracts is the point at which the two legal firms representing the seller and buyer exchange the signed contracts, the buyer will also pay the deposit money at this stage.
At this point, the agreement becomes legally binding, once contracts have exchanged neither party can pull out without facing a significant financial penalty.
When it comes to property investment, equity is the amount that the investors owns in cash, the remainder of the property purchase is funded by a lender in the form of a mortgage. Equity usually grows as the property value appreciates, whilst the mortgage loan figure remains the same or reduces based on whether you have an interest only or repayment mortgage. When we talk about scaling portfolios we will propose releasing equity from an investment in order to use that cash sum to purchase a further investment.
Freehold is when an owner owns the property and the land that its built upon. It is generally the case in the UK that buyers can purchase flats on a leasehold and houses are sold freehold.
When you are a Leaseholder there will have a Freeholder who will own and be responsible for the land, external and communal areas of a building.
Gearing in property refers to the use of borrowed funds to finance a property investment. This can include taking out a mortgage or other forms of debt to purchase a property or using a line of credit to fund renovations or other improvements to the property.
Gearing can be a powerful tool for property investors, as it allows them to leverage their investment and potentially generate higher returns than they would be able to achieve with their own funds alone. However, it also involves a higher level of risk, as the investor is taking on debt that must be repaid regardless of the performance of the investment.
Investors who use gearing in property should carefully consider their financial situation and the risks involved and should have a solid plan for managing their debt and generating sufficient cash flow to meet their obligations.
The gross yield is the return an investment property will generate, usually the rental income, before deducting the related costs such as management fees. The gross yield is usually given as a percentage figure.
House in multiple occupation (HMO)
A house in multiple occupation (HMO) is the term used to describe a property that is rented out to 3 or more people who are not from the same household but will share facilities such as the kitchen and bathroom. A property rented as a HMO is often called a house share.
An institutional investor is an organisation that will invest money on the behalf of its members. A hedge fund is an example of an institutional investor.
Interest only mortgage
An interest only mortgage is a specific type of mortgage that means a borrower only pays the interest on the loan rather than making a repayment of the loan amount and the interest owed each month.
An investor would take an interest only mortgage to lower the monthly mortgage payments, increasing their net yield.
When investors buy a property in an area that has strong capital growth there is less onus on repaying the mortgage as the capital appreciation, in most cases, far outweighs the amount an investor might pay off on the loan.
Income tax is the tax applicable to the income you receive in the UK and includes income from a rental property you might own.
Leasehold means that as a property owner you will own the property for a certain length of time, the period of time is referred to as the ‘tenure’. A lease gives you the right to occupy the property for the full length of the lease – new build properties are usually sold with long leases of over 100 years and in some cases initially leases are 999 years long.
This is where one party agrees to lease a property from the owner for a fixed period of time, paying a pre-agreed fixed monthly, quarterly or annual fee, and in return, they are able to use the property for whatever they wish, which in most cases is to sub-let the property.
The Option part of ‘Lease Option’ refers to the second party having an option to buy the property from the owner within a fixed time period for a fixed price regardless of the market value at the time of purchasing. Often these option agreements would be assignable and are then sold on for a profit.
In real estate, the term leverage is referring to using money borrowed from a lender to buy a property. Taking a mortgage to buy an investment is leveraging your cash input. Leveraging can be an excellent tool for investors to increase their profits and grow their portfolios.
Limited Company (LC)
A Limited Company (LC) is a privately owned organization. A limited company limits the amount of liability that the company’s owners/shareholders undertake.
The legal structure used to set up a limited company ensures that the liability of company debts if limited to each owner’s stake in the company whether that stake is by way of investments or commitments.
In property, the term loan-to-value (LTV) ratio is used to demonstrate the ratio of a loan to the value of the asset being purchased.
This ratio is often used by banks and lenders when looking at mortgages.
For example, if the property being purchased has a total purchase price of £100,000 and the loan to value is £80,000, the loan to value would be 80%.
The higher the loan to value to more risky the loan is for the lender.
The net profit is the actual profit an investor will make from a property following the deduction of associated costs of selling.
The net yield is the rate of return, usually the rental income, generated by your investment property less the associated costs such as the management fees.
Off plan property is one that is yet to be built or is in the process of being built and is not yet completed – as you cannot see the property physically in its final form, you would be buying the property off plan.
Open Market Value
The open market value of a property is the realistic price that you could sell for in the current market climate.
A portfolio in property investment terms is a collection of properties belonging to an individual, company or held within a trust.
Rent to Rent
A Rent to Rent arrangement is where the owner of a property agrees to rent to another party for a fixed time period for a set monthly rate.
In return, the second party are solely responsible for the upkeep of the property maintenance, and regardless of the occupancy of the property, they are still liable to pay the monthly rent to the owner.
Unlike a Lease Option, there is no agreement in place that allows the second party to ever purchase the property.
Return on Capital Employed (ROCE)
The return on capital employed (ROCE) is a profitability ratio that measures how effectively a company is using its capital over a period of time.
This metric tells you how much profit is generated by each pound (or another unit of currency) that is employed.
Return on Investment (ROI)
The Return on Investment or ROI as people often say is the annual profit (the income less the costs of running) that is generated by a property, divided by the cash you put into the property.
When we talk about scaling your property portfolio we mean growing the number of assets owned. Many investors might own one investment property, but the team at Thirlmere Deacon are usually called upon to help investors take the next step and scale their property portfolio.
Seed capital is the term used when referring to the money initially raised to begin a project.
Serviced accommodation is the name given to fully furnished properties which are available to let on both a long-term or short-term basis, but not as an assured tenancy – serviced accommodation is more akin to the set-up of a hotel but is a home-from-home setting.
Serviced accommodation will often have a broader range of facilities including a full equipped kitchen and are generally larger than a hotel room equivalent.
Stamp Duty Land Tax (SDLT)
Stamp Duty Land Tax is a tax applicable in the UK to all property purchases and is payable by the buyer. The applicable rates vary depending on the value of the property and investment purchases must pay an additional 3% surcharge.
A void period is an amount of time during which a rental property does not have a paying tenant meaning that during this period the property is not generating any rental income. Buying a modern and appealing investment property which will attract tenants and working with a reputable management agent who will professional long-term tenants are two ways in which you can greatly reduce the possibility of a void period.
Understanding property investment terms
Being armed with simple explanations for some of the most commonly used property investment terms can allow you to make informed decisions and not be sidetracked by terminology and real estate jargon when considering options for investment in the UK.
The team are always happy to help simplify any definitions, hopefully, this property investment glossary has provided some useful breakdowns of industry terms.
To discuss your plans for property investment in the UK or to seek further explanation on certain property investment terms, please do get in touch.
2024 UK Buy-to-Let Guide