If you’re new to property investment you’re probably feeling bewildered by all the different approaches, choices and decisions you need to make.
That’s where we can help. At it’s simplest there are two key strategies to property investment: buy a property and rent it out or buy a property and then sell it on for a profit. Depending on your objectives there are a lot of nuances, so it’s best to have a helping hand to guide you through.
Here at Prideview Group our team of commercial property consultants are here to help you every step of the way. But first we outline the key investment strategies and the commercial property advantages and disadvantages, so you can have some information to hand in advance.
Buy To Let
By buying a property to rent out, you aim to make money in two unique ways: the growth of the capital value of the property over tie, or the monthly rental income in excess of costs.
There are lots of different varieties to consider, but they all share the same basic model: regular income, with the hope of accruing gains over time.
Professional Single Lets
This encompasses the more traditional buy to let route: renting out a property as a single unit to a family or working individual.
At its core, the most crucial detail here is to get your calculations right, buy in the right place, get a tenant in, and make sure they’re able to pay the rent.
The advantage are its easy to understand and get started, easy to get mortgages for, takes up little management time and has more predictable returns, as long as you make allowance for costs.
Yes, there are disadvantages – the key one being that returns aren’t as high as some other types of buy-to-let.
An HMO is essentially a house of multiple occupancy, where a property is rented out room-by-room to unrelated individuals in a type of house share.
It tends to be more profitable to rent out a property by the room than single lets because there are diversified income streams: if one tenant stops paying, there’s still income from the others
There are also higher costs to take into account though: management is more intensive and time-consuming, which means either higher letting agent fees or more involvement from the landlord, and HMOs tend to be furnished with bills included too, so there’s likely to be more maintenance and repair issues.
Despite this HMOs generally offer a higher yield – and as a result, they’ve grown in popularity over the last five years. As a consequence, councils are taking more action to regulate them though and its harder to get a mortgage than for a single let.
Student lets are an extension of HMOs but are worth understanding as a separate issue, because the student market has its own characteristics.
The management of a student property is generally more predictable because they sign up for a set amount of time and you know exactly when they’ll be moving in and out. Also, there’s the benefit of them being on one joint contract, so if one student leaves, the others will have to continue paying their share.
However, increasing numbers of students (particularly international students) are attracted to more purpose-built high-end city centre flats with access to lots of facilities, and in some areas, this has made traditional student houses hard to let.
Housing Benefit Tenants
The language and terminology around housing benefit can be complicated to understand.
Many people (tenants included) still refer to it as DSS, which refers to the old Department of Social Security, which was responsible for benefit payments in the UK until 2001 and the name simply stuck. They all effectively mean the same thing: renting to tenants who have their housing paid for by the local authority.
The advantage of this tenant type is that the rent paid by the local authority is the same for all properties with the same number of bedrooms in the same area, so you have predictable levels of rent. This method can also be higher yielding than a private renter would pay for the same property. The disadvantage is that student tenants can tend to be trickier to manage so demanding more specialist management time. Councils also tend to pay the housing benefit to the tenant, who may or may not pass it to the landlord.
Holiday lets are generally properties that are rented out short-term to holidaymakers. Serviced accommodation follows a similar model but is aimed more at business travellers in urban areas.
This variety of short-term accommodation can be highly profitable if you ascertain a high level of occupancy. A seaside cottage would be easy to find tenants for in the summer months, for example, but the real money is made if you manage to fill up the rest of the year at a lower rate.
There is a better tax treatment than for single units with holiday lets though and there is no possibility of having to evict as the tenure is not secure.
The disadvantage is that the work is intensive with frequent changeovers and marketing to deal with constantly. It’s also hard to find a mortgage that will allow short-term lets, so with reduced leverage, your return of investment may be lower even with higher rental income.
Buy To Sell
Also known as “flipping”, there’s no long-term growth or steady income here: the goal is to generate a profit by simply buying at one price and selling at another. As such, you could think of it as trading rather than investing.
The big attraction of this strategy is that you can generate quick lump sums: in fact, a fruitful project could make tens of thousands of pounds in a matter of months, rather than a buy-to-let property just making a couple of hundred pounds per month. There’s also no need to deal with tenants and maintenance and no need to worry about the long-term health of the property market.
The disadvantage is that there’s no residual income: the property won’t continue to make money every month, so you’re only generating income when you’re executing projects. It’s also hands-on, complex work with lots of aspects to consider and you could be forced to sell at a loss if you get it wrong.
Commercial property tends to be longer-term and tenants are responsible for maintenance, so if you’ve got a tenant with a stable business there isn’t a lot to do. There are also more generous tax treatment than pensions, and commercial property can be held within a pension.
However, it can be hit harder at times of recession than residential property, voids can be longer, and mortgages are always on a repayment basis and may be lower loan-to-value
This type of investment is essentially one of a kind and very exclusive.
It may be sector-specific, for example, a day nursery investment. The advantages of a niche investment could be the benefit of a strong performing sector, but conversely, this could be a negative if this sector performs poorly.
This involves renting a property from a landlord then renting it out to a tenant, with the profit being the margin between the two rents.
It’s common for rent-to-rent strategy to be used in conjunction with an HMO strategy. A property rented room-by-room will tend to generate more rent than a whole property, so it’s possible to rent a whole property, sub-let it by the room, and keep the difference between the two after costs have been deducted.
Alternatively, it’s possible to find landlords who are willing to rent properties at a discount in exchange for the certainty of income and a lack of hassle. Rent-to-rent would then work by paying the landlord a reduced fixed level of rent for several years, then re-renting the property at the market rate.
The advantages are that it requires a limited cash input and you can get started quickly with it, but the disadvantages are there is no long-term capital growth, there is usually not enough margin to employ a managing agent, so it is quite intensive. It is also hard to find landlords who want this kind of arrangement.
There are similarities here with rent-to-rent, but the investor could buy the property for a fixed amount for a set amount of time.
This type of strategy became popular during the recession when properties were in negative equity.
Now the market is stronger, there are fewer opportunities for lease options, but they’re still popular in some areas as they can be a good way of generating cash, with the possibility of capital growth and need limited cash needed to get started
The disadvantages are the owner could attempt to back out of the deal, so the option can only be enforced by an expensive legal battle. It is also hard to find landlords who will agree to this arrangement and it is usually not enough margin to employ a managing agent, so it can be very intensive.
Want To Take The Next Step?
The options and evaluation laid out here is a guide only. Every strategy has its benefits and pitfalls and it really depends on your goals, other constraints and priorities when deciding which one to follow.
If you’d like help understanding any of the different strategies, please contact a member of the Prideview Group.