Best property investment strategies

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There are various property investment strategies for those who want to add bricks and mortar to their portfolios. In this article, we look at the ways to invest in property.

Below, we cover:

This is module five of Investing for Intermediates, a course that gives you practical tips for investing. If you prefer to watch rather than read, check out our video guide to property investing below. 

1. Single buy-to-let investments

Property is popular with investors for three main reasons:

  1. Investors can own a tangible, physical asset
  2. Property as an asset can rise in value and then be sold for a capital gain
  3. Property can provide a regular return through rent

At its most basic form, you can invest in property by buying a house, flat or other building that you let out to tenants.

You would either buy the property outright with cash, or with the help of a mortgage, and hope it increases in value by the time you come to sell.

Becoming a buy-to-let landlord has long been popular with people looking to get a higher return on their savings at a time when interest rates are so low – as they have been since the 2008 financial crisis. 

But managing a BTL property can be stressful and time-consuming. The government has also made tax changes that have made buy-to-let less attractive.

These changes include the 3% stamp duty surcharge on buy-to-let and second properties, and the phasing out of mortgage interest tax relief.

Pros:

  • You own a physical asset. 
  • You could earn a stable income through rent.
  • The property may rise in value over time, so you can sell it at a profit.
  • Insurance can cover you against damage to the contents or building.

Cons:

Risks:

  • Tenants may cause damage to the property, putting you out of pocket.
  • They may not pay the rent and it can take months to evict tenants.
  • Property prices don’t always rise.
  • Government legislation may affect the value of your home. For example, the cladding confusion has led to a large number of flats in the UK being down-valued.

How to calculate rental yield

When considering property as an investment, investors often look at rental yield. This is the annual income you receive in rent, relative to the purchase price of the property.

Rental yield: Annual rental income ÷ purchase price x 100

Thinking of buying a property? Follow these tips to make sure you don’t pay too much for a house

2. Buy-to-sell investments

A buy-to-sell property investment often involves a process described as “flipping”. Here, you buy a rundown property with the aim of doing renovations or refurbishments and then selling on the property quickly for a higher price.

Ideally, you will know the local market and understand what sort of property is in demand.

Pros:

  • There is the potential to make money quickly.
  • You could learn a lot and pick up new skills.
  • You will have the satisfaction of overseeing a successful project.

Cons:

  • Paying tradespeople to do renovation work is expensive and will eat into your profit.
  • You may have to pay capital gains tax if your profit is above £12,300.

Risks:

  • Expenses may come out higher than you expect as it’s likely more work will be required than you think. Advice website Homeowners Alliance says property owners should set aside 10% extra for unexpected additional costs.
  • You may struggle to sell the property, potentially leaving you paying out monthly costs to cover the mortgage, insurance and other bills.

There are various property investment strategies for those who like the idea of owning a tangible asset

3.  Rent-to-rent investing 

A rent-to-rent investment is when you take over the running of an investment property from a landlord who is looking to offload the responsibility of property maintenance and finding tenants.

You pay the landlord a guaranteed monthly rent, and a deposit upfront, just like a typical tenant. The aim is that you sublet the property, charging higher rents to your tenants and making a profit yourself.

Example of how rent-to-rent investing works

  1. You find an empty rental property.
  2. You offer the landlord a guaranteed rent in exchange for them accepting a below-market rent – say £800.
  3. You let the property to tenants for £1,000 a month.
  4. Or you could offer short-term rentals as a holiday let, earning perhaps £1,500 a month.
  5. If you do this with five properties, you could earn £1,000-£3,500 a month.

Pros:

  • It’s an easy way to become a property investor. You won’t have to buy the property itself and won’t need to apply for a mortgage or pay stamp duty.
  • The model is easy to replicate, and you could quickly manage multiple properties.

Cons:

  • It may take time to find willing landlords.
  • You may struggle to find suitable tenants.
  • If turning the home into an HMO (see below), you will face more upfront costs that includes applying for a licence.
  • You will have to manage ongoing maintenance.
  • You don’t own the property, so miss out on any capital appreciation.

Risks: 

  • If the tenants don’t keep up with the rent, you will still be required to make your monthly payments.
  • You may be liable for damage to the property caused by tenants.

4.  Student property investment 

Student property investment is when you invest in purpose-built student accommodation (a housing block targeted at students), or private houses and flats with the intention of finding student tenants. 

There are about 600,000 purpose-built student rentals in the UK, according to data from property consultancy Knight Frank.

And despite the coronavirus pandemic causing disruption to in-person tutoring, about 90% of students are still choosing to live away from the family home, according to the latest National Student Accommodation Survey

Pros:

  • High demand with an average of three students chasing every room
  • Tend to be in prime locations, close to town centres and local amenities.
  • Income tends to be higher than with many other investment properties, as there are more individuals paying rent.
  • When purpose-built, typically comes with management and maintenance included, so less hassle for the investor.
  • You should receive rent for the whole property even if one person moves out. 

Cons:

  • Tenants likely to be short-term, you will be looking for new tenants every year or two.
  • Potential for more damage and wear and tear compared to a property that is let to a family, as there will generally be more people in the property.
  • May be unoccupied between June and September, as students go away for the summer holidays. This could mean reduced or no rent over these months.

Risks:

  • Reduced demand for university due to high tuition fees, and the lowering of the threshold at which student loans have to start being repaid from employment income
  • Investors should be wary of unregulated schemes. An example is A1 Alpha Properties, which the Serious Fraud Office suspects fraudulently misled investors into purchasing leaseholds for student accommodation. The company promised investors fixed annual returns of up to 10%, but went into administration leaving investors out of pocket. The scheme was unregulated, meaning investors couldn’t apply for compensation from the Financial Services Compensation Scheme (FSCS).

5. HMOs (Houses of Multiple Occupation)

An HMO (house of multiple occupation) is where a minimum of three tenants live in a property and they are not from one household or family. The tenants will share bathroom and kitchen facilities. HMOs are commonly occupied by students, but they can appeal to anyone looking to rent a room in a shared house.

Pros:

  • Typically cheaper for people whose housing options are limited.
  • Demand is increasing due to record-high house buying costs.
  • Rental yields can be higher than with a standard buy-to-let property, as there are more rooms being let out to tenants

Example of property yield in HMO vs standard house*

  • Property: 3-bedrooms with a downstairs living space as an option for a 4th bedroom
  • Purchase price: £320,000
  • Rent for letting entire house to one family/household: £1,100 pcm / £13,200 per year
  • Rental yield: £13,200 / £320,000 x 100 = 4.1%
  • Rent for letting rooms individually through an HMO:  £400 x 4 = £1,600 pcm/ £19,200 per year
  • Rental yield: £19,200 / £320,000 x 100 = 6%

Above shows the difference a landlord could receive in income from an HMO vs a standard BTL property. However, these figures do not include mortgage costs, maintenance, insurance, letting agency fees and other expenses.

*Figures used from example property in the Home Counties, using data from Rightmove 

Cons:

  • HMOs are subject to stricter regulation than ordinary buy-to-let properties. For example, fire doors must be installed.
  • Maintenance costs likely to be higher and HMOs require more management time.
  • You will probably need a licence from your local council.
  • HMOs require specialist mortgages, they aren’t covered by a standard BTL loan.

Risks:

  • The risk of overcrowding is higher, leading to a greater danger of fire and other damage, which could lead to hefty costs
  • Fines for non-compliance with HMO rules are unlimited and could easily run into thousands of pounds if you do not keep up with legislation.

Should I invest in HMOs or a pension? We evaluate the pros and cons of each.

What is a real estate investment trust (REIT)?

Reits are a good way for everyday investors to access the commercial property market. They must return the majority of their income to investors in reliable, and generous, dividends.

Laura Hoy, equity analyst at Hargreaves Lansdown*, says retail properties have been affected by the coronavirus pandemic, and this could continue in the year ahead.

But she adds there are still opportunities for investors in the sector.

“The shift toward online shopping has been undeniably gaining speed and that will continue to weigh on the bricks and mortar contingent. In our view, Reits focused on warehouse space are the best of the retail bunch as they play an important role in e-commerce and switching costs are relatively high, meaning their tenants tend to be more reliable,” she says.

There are ethical property investments. The World Economic Forum says buildings are responsible for 20% of the world’s carbon emissions.You could fund the development of sustainable, eco-friendly buildings that produce lower emissions. 

You could invest through a peer-to-peer lender that raises finance for new, sustainable properties. 

Or invest in a Reit that focuses on sustainable developments. Home Reit, for example, provides accommodation to homeless people across the UK.

Find out more about other ethical investment ideas.

Next in our Investing for Intermediates course: Alternative investments.

Investing for Intermediates course:

  1. Investment strategies 
  2. Market trend analysis
  3. How to pick stocks
  4. Investing in dividend stocks
  5. Property investment strategies
  6. Alternative investments

*All products, brands or properties mentioned in this article are selected by our writers and editors based on first-hand experience or customer feedback, and are of a standard that we believe our readers expect.

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