John Carter Property Services can work with you on all types of property investment. Here are a few points for consideration. Think about the investment strategy that meets your objectives. There are advantages and disadvantages to each investment type, and we list these under each section.
BUY-TO-LET
When buying a property to rent out, money can be made by
- The monthly rental income over costs
- The growth in the capital value of the property over time
The basic principle is a regular income, with the aim of further gains over time.
PROFESSIONAL SINGLE LETS
Renting out a property as a single unit to a working individual or family.
The vast majority of property investors stick to normal buy-to-let.
Pros:
- Clear to understand and not complicated to get started
- Obtain mortgages quickly, compared to other types of buy-to-let
- Takes up little management time – or a letting agent is natural to find
- Forecast and predictable returns, as long as you make an adequate allowance for costs
Cons:
- Returns aren't as high as some other types of buy-to-let
HMOs
An HMO is basically a “house share” – where a property is rented out room-by-room to unrelated individuals.
Renting out a property by the room tends to generate more revenue than letting it as a whole. For example, you could take a three-bedroom house with two reception rooms, create a fourth bedroom, and rent out each room for £400 per month. As a single property, you might only get £1,000 – so the HMO makes £600 more in rent per month.
Generally, there are higher costs: HMOs tend to be let furnished with bills included, plus there's likely to be more wear and tear. Management is more time-consuming too, which means either higher letting agent fees or more involvement from the landlord.
You should be aware that councils are taking more action to regulate theses lets by tightening up existing regulations, increasing the types of HMO that need to be licensed, and refusing permission for new HMOs to be set up in some areas.
Pros:
- Higher yields than single lets
- Diversified income streams: if one tenant stops paying, there's still income from the others
Cons:
- More intensive management required
- More regulations to comply with
- Harder to get a mortgage than for a single let
STUDENTS
Student lets are just a sub-type of HMOs – but are worth considering separately, because the student market has its own characteristics.
Generally, the management of student property is 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, they'll usually be on one joint contract – so if one student leaves, the others will have to continue paying their share of the rent.
The challenge is that traditional student house-shares are coming under pressure from new purpose-built student accommodation. Increasingly, students (particularly international students) are attracted to high-spec city centre flats with lots of facilities. This has made traditional student houses hard to let in some locations.
Pros:
- The increased revenue of HMOs, with less management overhead
- A predictable student “cycle.”
Cons:
- Pressure from purpose-built accommodation in some areas
HOUSING BENEFIT TENANTS
The terminology around housing benefit is varied. It's calculated using something called Local Housing Allowance (LHA). In some areas, it's been rolled into Universal Credit (UC), and people (tenants included) still refer to it as DSS.
You'll see all these terms mentioned, but all mean the same thing: renting to tenants who have their housing paid for by the local authority.
The positive of this tenant type is that the rent paid by the local authority is the same for all (for example) two-bedroom properties in the same area, so you know exactly how much you can charge.
The downside is that the tenants can be (but aren't necessarily) trickier to manage, and councils tend to pay the housing benefit to the tenant – who may or may not pass it to the landlord.
There are ways around many of the challenges, and it can be a high-yielding strategy – but it's best approached deliberately, with a willingness to put time and effort into finding the right tenants and building knowledge about the workings of the benefits system.
Pros:
- High yielding
- Predictable levels of rent
- High tenant demand
Cons:
- More specialist management required
- Properties tend to be less desirable and benefit from less capital growth
HOLIDAY LETS
A holiday let is, as the name suggests, a property that's rented out short-term to holidaymakers. You'll also hear about “serviced accommodation”, which is the same thing but aimed more at business travellers in urban areas.
There's a lot of crossover in the two terms, and the model is the same: the only difference is the type of customer you target.
This type of short-term accommodation can be fantastically profitable if you achieve a high level of occupancy. For example, for a seaside cottage, it'll be easy to fill up the summer months – but the real money is made if you manage to fill up the rest of the year, albeit at a lower nightly/weekly rate.
The downside is that the work is near-constant, with marketing and frequent changeovers of occupancy to deal with. It's also challenging to find a mortgage that will allow short-term lets – so with reduced leverage, Return On Investment may be lower even with higher rental income.
Pros:
- Very high yielding if occupancy is high
- No possibility of having to evict, as tenure isn't secure
- Better tax treatment than for single lets
Cons:
- Lots of work, with constant marketing and changeovers
- Very difficult to find a mortgage that allows it
BUY-TO-SELL
Buying to sell, also known as “flipping”, couldn't be more different from all varieties of buy-to-let. There's no steady income or long-term growth: the aim is to make a profit by buying at one price and selling at another…and that's it.
As such, you could think of it as “trading” rather than “investing”. The fact that the product is property is almost by-the-by: the model is no different from fixing up and selling on cars, computer equipment or anything else.
The big attraction of flipping is that you can generate meaningful amounts of cash quickly: a successful 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.
And the downside is the same thing: the property won't continue to make money every month, so you're only generating income when you're completing projects: as soon as you stop working, the money dries up.
The two keys to a successful flip are buying the property at the right price in the first place and keeping the refurb costs within budget. It's not easy for an amateur to do (however Homes Under The Hammer might make it look), but can be highly lucrative if you find the right former.
Whether buy-to-sell makes sense for you will depend on your goals.
Pros:
- Ability to generate quick lump sums
- No need to deal with tenants and maintenance
- No need to worry about the long-term health of the property market
Cons:
- No residual income: you only make money as long as you're executing projects
- Hands-on, intricate work with lots of aspects to manage
- Could be forced to sell at a loss if you get it wrong: can't be bailed out by rising prices in the long term
COMMERCIAL PROPERTY
Hands up: I don't have any commercial property experience – so if it's something you're interested in, you'd be better off finding other resources.
I've always been put off by the fact that while everyone needs somewhere to live at all times, commercial property is more subject to the whims of the economy – and if you lose a tenant, it can take a long time to find a new one.
However, it undoubtedly requires less ongoing work: leases are for multiple years and tend to be “fully repairing and insuring”, so if you've got a tenant with a stable business there isn't a lot to do.
There are also tax advantages, and a pension can own commercial property – so it could well become more popular in the coming years.
Pros:
- Tenancies tend to be longer-term
- Tenants are responsible for maintenance
- Can be held within a pension
- More generous tax treatment than residential
Cons:
- Tends to be harder-hit at times of recession than residential property
- Voids can be longer
- Mortgages are always on a repayment basis and may be lower loan-to-value
NICHE “INVESTMENTS”
There are a couple of strategies that are used in a tiny number of cases compared to buy-to-let or buy-to-sell, but are worth knowing about because they're talked about a lot in the property education community.
I put “investments” in inverted commas, because investing implies deploying capital in search of a return – whereas these strategies are specifically designed to work for people who don't have the cash to invest.
RENT-TO-RENT
As the name suggests, rent-to-rent 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 this to be used in conjunction with an HMO strategy. As we saw earlier, a property rented room-by-room will usually generate more rent than a whole property – so it's possible to rent an entire property, sub-let it by the room, and keep the difference between the two (after costs).
Alternatively, it's possible to find landlords who are willing to rent properties at a discount in exchange for 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 a number of years, then re-renting the property at the market rate.
Pros:
- A way of generating income from the property with limited cash input
- Can get started quickly (if you can find the right opportunities)
Cons:
- No long-term capital growth
- Usually not enough margin to employ a managing agent, so hands-on
- Hard to find landlords who want this kind of arrangement
LEASE OPTIONS
Lease options are similar to rent-to-rent, but the investor also has the “option” to buy the property for a fixed amount for a set amount of time.
For example, a property is worth £100,000, and an investor takes the option to buy it for £110,000 at any time in the next five years. In the meantime, they take over the owner's obligations and expenses and rent the property out.
It came to prominence during the recession, when properties were in negative equity. The owners were unable to sell for a high enough price to clear the mortgage balance, so may have been willing to agree on a future price and “wash their hands” of the property in the meantime.
Now the market is stronger, there are fewer opportunities for lease options – but they're still popular in some areas.
Pros:
- A way of generating cash, with the possibility of capital growth
- Limited money needed to get started
Cons:
- The owner could attempt to back out of the deal, so the option can only be enforced by an expensive legal battle
- Hard to find landlords who will agree to this arrangement
- Usually not enough margin to employ a managing agent, so hands-on
CONCLUSION
Every investor will have their own biases, but you should never let anyone tell you that there's a right or wrong way of doing property.
Every strategy has its pros and cons, so the only right way is doing what's right for you. Decisions are based on an individual's priorities, goals, other commitments.
