Introduction to Property Investment Strategies
Ask any property investment company and they’ll tell you that one of the most important things to consider, if not the most important thing, is a strategy. You need to have a clear plan of where you’re going and what you’re looking to achieve.
At its most fundamental level, there are only two property investment strategies. You buy a property and rent it out or you buy a property and sell it on for profit. That’s it. The thing is, if you scratch just below the surface, it gets a lot more complex. If you want to start seeing serious success, you need to look deeper.
It’s difficult to quantify the perfect property investment strategy for you. Everyone is different and everyone will invariably have different measures of success. What we can do is give you some inspiration, tell you some common property investment strategies and how you can adapt them to fit your short-term, mid-term and long-term goals. Property investment, as with any investment, comes with risks. Here we explore all of the options when building an investment strategy including the pros and cons.
Take our quiz at the end to see how your preferred strategy matches up with like-minded property investors.
What is a Single Let Property?
A single let property is where you have a house or apartment that you let out to a single tenant – whether that’s a family or an individual. Single let properties are one of the most common Buy-to-Let assets because they’re relatively simple to get up and running.
First, find the perfect location. Second, find the ideal tenant. Third, do the maths and ensure that everything adds up. Fourth, keep the tenant happy and ensure a consistent stream of rental income.
In terms of tenants, you’ll commonly be looking at families and working professionals. This is especially true if you’re investing in a city-centre property, where workers want to be near the office and desirable amenities.
Investing in a single let property is popular because its one of the most simple ways to get into the property investment market. There’s a lot to be said for the classics and many landlords earn excellent returns by having a portfolio of single let investment properties.
Tips: Location is a vital indicator of success. By finding a great location, you improve the chances of finding a happy, motivated tenant, you can ensure a great rental income and if the area is up-and-coming, positive capital growth is never far behind.
- Easy to understand
- Simple to manage when partnered with a letting agent
- Potential for good rental yields
- Capital appreciation overtime when holding the property
- Lower returns than other Buy-to-Let opportunities
- Risk of losing tenants
- Single lets can have a higher turnover of tenants which can lead to void periods
What is HMO Investing?
A house in multiple occupation (HMO), sometimes known as a house share, is a property investment where each room is rented out to an individual tenant.
As you’d imagine, HMO’s are popular as they allow for higher rental income. A bigger property can have rooms converted into bedrooms, creating the potential for more tenants and thus more money.
Unfortunately, a by-product of more tenants is more time spent managing the property. There’s also the potential for more wear and tear. The more tenants, the higher the chance the property may need maintenance down the line.
That said, the higher rental yields mean this type of Buy-to-Let has grown in popularity over the last few years, especially in the capital and larger regional cities.
Quick investment tip for HMO property investments: Most HMO’s are let furnished and usually have bills included to avoid any confusion. Consider this if you’re looking at this investment strategy.
- Higher potential rental income
- Diversified rental streams – if one tenant leaves, you still have others to avoid void periods
- Capital appreciation over time when holding the property
- Increased chance of necessary maintenance
- Harder to find a mortgage
- Tighter regulations than Single Let
What is a Student Property?
A student property investment is basically a house in multiple occupation aimed solely at student tenants. As far as Buy-to-Let property investment strategies go, this is similar to a single-let or HMO but focuses on a completely different market.
Many investors choose a student property investment because it will typically have a predictable, consistent stream of rental income.
Management is generally easier as landlords know that each tenant will be signing up for a certain period of time and they’ll always be a stream of new students to take their place.
If you buy into popular stereotypes, the idea of housing several students may turn you away, but the potential for income is considerable.
Quick investment tip for student property investment: Invest in student hotspots. Ensure you have long-term demand as voids on student property can hurt your bank balance.
- Increased rental income
- Predictable cycle of tenants
- Consistent stream of tenants looking for accommodation
- Potential for more wear and tear
- Challenging market with purpose-built accommodation
What is a Buy-to-Sell Strategy?
Flipping a property is simply buying a house or apartment, renovating it quickly and selling it for a profit. In terms of property investment strategies, this is completely different to Buy-to-Let. Here investors will not rely on rental yields or long-term growth, choosing instead to focus on short-term gains.
The main attraction of Buy-to-Sell is the amount of money that can be made quickly. You can buy and sell in a matter of months rather than the long-term timeframe that comes with a Buy-to-Let strategy.
This is also the downside of Flipping Property. This type of investment only makes money when you’re working. There’s no passive income, just the money you make on the sale.
The most important things to keep in mind when looking at Buy-to-Sell is location and budget. You need to ensure that you buy at the right price, in the right place and keep any refurbishments or maintenance within your budget.
Quick investment tip for flipping property: Run all the numbers in advance. Don’t get caught out with hidden costs with means delaying the flip.
- Quick process that’s well suited to short-term goals
- No tenants or maintenance to deal with
- Less dependant on the long-term health of the property market
- No passive income – You make money when you work
- Complex management and hands-on work
- Can result in a loss if done incorrectly
What is Off-Plan Property?
An Off-Plan property investment is the purchase of a residential property that has not been built yet.
Off-Plan properties are new-build developments that are not ready for tenants and bought prior to completion.
This type of investment is popular because of three main reasons:
- The potential for capital growth between purchase and completion.
- The opportunity to buy at a lower initial cost than if the property was completed.
- The fact that it’s a guaranteed new development.
As an investor, you would buy a property unfinished, wait for completion, research the market and decide whether to rent or sell. This offers flexibility in strategy, although it requires a lot of management and due diligence.
As always, growth isn’t guaranteed. Investing in Off-Plan property is entirely dependent on the market, particularly if you’re hoping for capital growth during the build period. Be sure to research the area and the market conditions before diving in.
Quick investment tip for off-plan property: Get in early and snap up the best units.
- Discount on initial purchase
- Potential for capital growth during the build period
- Flexibility in strategy
- Advanced strategy that requires management and due diligence
- Cash often necessary for deposit
What is a Rent-to-Rent Strategy?
Rent to rent is the process of renting a property from a landlord to rent out to a tenant. Many investors adopting similar property investment strategies use Airbnb to find tenants for short periods at a high level of rental income. For example, if a ‘rent to rent’ investor manages to negotiate guaranteed income for the landlord of £800pcm for the property and charges £100 a night on Airbnb, the break-even point is only 8 nights of the month. Anything above this is profit for the investor.
Quick investment tip for rent to rent investing: Ensure you have strong demand for the property in question.
- Little to no upfront capital
- High profits and good cash flow
- Easily scalable
- Easy exit
- Risk of negative cash flow if no tenant is in place
- Hands-on investment with moving parts
- More regulation around this type of investment to come
What is a REIT?
A real estate investment trust (REIT) is a company that finances, manages and owns real estate with the purpose of generating returns.
Following a mutual funds model, a REIT allows individual investors to earn dividends from real estate investments without financing them upfront and requires no management.
A REIT is traded in a very similar way to typical stocks and shares, leaving investors to adopt a buy or sell position.
REITs are useful for investors that want a shorter-term investment, because while they offer shorter returns than a traditional investment, they’re very liquid.
- Liquid asset
- Initially offer diversity
- Consistent dividends
- Lower ceiling for returns
- Lower growth
- Dividends taxed as regular income
Building a Sound Property Investment Strategy
Building a sound property investment strategy is a decision that you should make as early as possible in your investment journey. There’s a number of different strategies beyond buy/sell and renting and it’s important that you identify one that will help you meet your goals.
Map Out Investment Hotspots
While you may choose to go for an established location with immediate returns, there’s also a lot to be said for emerging locations with plenty of future potential.
Successful investors will regularly review where rental demand is at its highest. Competition can often be intense in popular, up-and-coming areas so it’s vital to pinpoint the locations with vast potential quickly.
Mapping out these hotspots can help you quickly decide on what location best suits your strategy. Don’t forget to also research nearby developments or regeneration that could drive growth.
Identify the introduction of new commercial projects, bars and restaurants, and infrastructural changes. These kinds of developments can completely transform the perception of an area among renters.
Research Property Legislation
Staying abreast of any legislation changes or reforms can ensure that you’re not caught short at a critical part of your investment journey.
You’ll particularly want to consider any changes to tax or Stamp Duty that could change your financial situation and impact your bottom line.
A great example of this is the recent Stamp Duty Holiday, which has helped many investors find huge savings throughout their property purchase.
Researching property legislation should be at the forefront of your due diligence and maintained throughout your investment, especially if you’re in a long-term holding pattern with your assets.
Read Property Trends
Recognising the direction the market is moving can be the key differential between an inexperienced investor and a seasoned veteran, as well as informing the strategy you’re opting for.
For example, if you looked at the amount of people moving to city centres for long-term renting, you’ll instantly be better informed on the location and asset type you’re looking for.
While it’s impossible to predict exactly when and where the market will go, there’s no harm in future-proofing your investment strategy with some supporting research.
A great place to start is by reading up on property headlines or even larger forecasts that can identify growth hotspots – whether they’re established or emerging places to invest.
Consider Off-Plan Property
Off-Plan property investments are not the most traditional but have become increasingly attractive because they can offer excellent capital appreciation during build and strong rental yields when complete.
Because most Off-Plan property is new build, the latest services, facilities, build warranties and appliances are provided, creating a more desirable apartment.
Although every investment comes with its own risks, it can pay to get in early on a development that will either have a transformational impact or benefit from those in the surrounding area.
As always, do your research and maintain your due diligence. Remember, in the right circumstances, there can be a lot to gain from securing your investment before it hits open market and increases in price.
Perform Your Due Diligence
The property market can be fickle. House prices and rental prices fluctuate all the time. It’s common for a first-time investor to suddenly throw out their strategy for a new one every time there’s a dip in the market.
It’s vital to stay vigilant and have trust in your investment. Do not let small setbacks or dips dictate your future decisions. As an example, at the end of 2017, the Halifax HPI showed that property prices dropped by 0.6% in December compared to November. Looking at the big picture, we saw that house prices were actually rising by 2.7% year-on-year.
Despite the media focusing on falling property prices, the average property value had actually risen steadily over 12 months. While this might not be as attractive as a headline, it shows that property investment requires commitment and practice.
This kind of research should fall under your due diligence procedures during the investment. The more research you perform around a potential location, the better prepared you’ll be.
Typically as with all investments it’s best to diversify your portfolio and spread your risk. Whatever property investment strategies you opt for, it’s vital to ensure that you do your research, ask advice wherever necessary and keep on top of your goals. If you have a solid investment plan, you’re better equipped to make sound decisions and have a better chance of finding success.
Always speak to your financial adviser.