Property Investment Strategies: Building a Strong Property Portfolio
Introduction to Property Investment Strategy
Property is always a popular investment vehicle, providing a tangible asset and the potential for two separate income streams. Knowing the best property investment strategies is a vital starting point.
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 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 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.
- Single lets
- Student Property
- Flipping Property
- Off-Plan Property
- Land or Commercial Property
- Bulk Purchasing
- Rent to Rent
The Best Property Investment Strategies
Let’s imagine that you’re looking at Buy-to-Let. You’ve heard all about the power of rental yields and want to build a passive income. It’s a popular choice and at its core, represents one of the fundamentals mentioned above.
Most likely you’ll be aiming for two different outcomes, a monthly rental income and an increase in the value of the property over time in case you’re looking to sell up. While there are a few different ways you can go about a Buy-to-Let investment, they all follow this basic model.
What is 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.
Quick investment tip for single let property: Look after your tenant to avoid void periods.
- 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.
While the strategy is largely the same, it’s a vastly different market and warrants individual consideration.
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.
Tips: With the increase in purpose-built student accommodation being built, it can be difficult to market a more traditional student property so location is important (particularly as many student accommodation buildings are in prime city-centre spots). Focus on areas that offer amenities or facilities that suit students.
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
Buy-to-Sell Investment Strategy (Flipping Property)
What’s involved in ‘Flipping Property?’
Flipping a property is simply buying a house or apartment, renovating it quickly and selling it for a profit.
This is a completely different strategy to Buy-to-Let. Here investors will not rely on rental yields or long-term growth, choosing instead to focus on short-term gains.
There’s no worrying about rental income or tenants, you’re just simply looking to sell for as much profit as possible.
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 and keep any refurbishments or maintenance within your budget. Secondly, you need to market your property quickly and effectively. Having a good location for this process is ideal and will help the sale immeasurably.
Choosing Buy-to-Sell for your investment strategy depends entirely upon your goals. If you’re looking for something short-term and want to generate a lump sum, it’s perfect. If you’re in for the long-haul, want to build a portfolio or you’re looking for passive income, it’s not for you.
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
Buying Off-Plan Property/Off-Market Property
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
Land or Commercial Property
Purchasing Land or Commercial Property Explained
A commercial property investment is the purchase of any building or land that is used for business purposes. Units such as shops, offices and warehouses are all classified as a commercial property.
Commercial investments are often used as a way of diversification. While many investors are happy to stick to residential investments, a commercial asset can offer another avenue of income.
Commercial properties are considered a good investment because they generally offer a longer lease than residential properties. This can offer more relative security in the long term as income is typically more fixed.
Quick investment tip commercial property investment: Do mass amounts of due diligence. Check with all authorities involved to ensure you can do the work you want to do with the opportunity at hand.
- Range of options with the potential for lucrative returns
- Increased flexibility
- Longer leases can provide security
- Higher risk
- Increased upfront costs
- Harder to leverage cash
What is involved in bulk purchasing?
Bulk purchasing property is a great investment strategy if you have plenty of cash or finance in place and looking to get a deal. The opportunity to bulk purchase property usually arises when a developer or previous investor is looking to sell a high number of units or exit a portfolio.
Quick investment tip for bulk purchasing property: Here is your chance to negotiate, drive a hard bargain, and get the highest discount. Ensure you are buying below market value and being compensated for your risk.
- Discounts on unit prices are much more common
- High risk of capital
- Lack of portfolio diversification
Rent to Rent Strategy
What is Rent to Rent?
Rent to rent is the process of renting a property from a landlord to rent out to a tenant. Many investors using this property investment strategy 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
Building a sound property investment strategy – Top 5 Fundamentals
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.
1. Map out the investment hotspots
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.
In London for example, the 2012 Olympics opened up a wide range of potential property investment opportunities. The problem is, everyone knew that would happen. The key to success is to stay up to date on smaller developments that will elevate certain areas, staying ahead of the market.
More recently, we can look at Birmingham and the upcoming 2022 Commonwealth Games. This will draw a huge amount of interest from investors looking at the city centre but it’ll be worth looking at surrounding areas that might benefit.
Take HS2, which will kickstart the regeneration of Digbeth and the Eastside area when its completed. Already we’re seeing savvy investors looking at these Birmingham locations because of the potential that HS2 will offer in terms of connectivity. Developers have also noticed, with a number of developments currently in either planning or construction stages.
Also 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.
2. Familiarise yourself with the latest property legislation or tax reforms
Staying abreast of any legislation changes or reforms can ensure that you’re not caught short. Landlord tax reforms have been one of the most important, gradually scaling back mortgage interest tax relief until 2020 when it will become zero.
While these reforms often have a major impact on the market and landlords, there are still multiple strategies available to investors that want to maximise their returns.
3. Stay up to date on lifestyle and property market trends
Recognising the direction the market is moving can be the key differential between an inexperienced investor and a seasoned veteran. Understanding the property market can help inform whether to opt for a long-term or short-term strategy.
For example, if you were to look at the amount of people that are moving to city centres for long-term renting, you’ll instantly be better informed to make a choice on not only location but asset type you’re looking for.
As ‘Generation Rent’ continues to grow in popularity, young professionals are looking for ‘access, not ownership’. They value mobility and are put off by long-term financial commitments. Flexibility is the priority and knowing this can make the difference between a failed and successful investment.
This infographic published by Goldman Sachs explains the theory behind this.
The consumerisation of technology has also played into property investors’ hands. The immense popularity of Airbnb is a great case in point, with the company recently revealing that the number of business trips being booked through the platform tripled in 2016.
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.
4. Consider Off-Plan property investments
Off-Plan property investments are not the most traditional but have become increasingly attractive recently.
Off-Plan can offer excellent capital appreciation during the build period and strong rental yields when it completes. Because most Off-Plan property is new build, the latest services, facilities, build warranties and appliances are provided, creating a more desirable apartment.
With no agent, buying direct from the developer can also help with keeping costs down.
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, check the details or any warranties or guarantees and work with a trusted developer. 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.
5. Be vigilant, perform your due diligence and don’t get distracted
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.
Financial Strategy – How to Finance Your Property Investment
This option speaks for itself. If you have enough money to hand, you can buy a property.
Cash investments are typically not viable for beginner investors but worth bearing in mind for the future. Paying with cash negates the need for a mortgage, which speeds up the entire process and mitigates the risk of being rejected.
Furthermore, many developers may offer incentives for cash buyers – especially in the Off-Plan property market.
Buy-to-Let mortgages are designed for property investors that want to purchase a property to rent out – allowing them to receive regular rental income on top of capital growth.
These types of mortgages are slightly different to standard residential mortgages as the risk to the lender is often greater. This often translates to a larger deposit – typically around 20 – 30% of the property purchase price.
Some Buy-to-Let mortgages are also only available on an interest-only basis, meaning any capital will be repaid at the end of the term. Investors will generally have to provide information on how they intend to pay this at the start of the term and common methods include: stocks and shares, pensions, investment bonds, savings or capital held in other properties.
Unfortunately, equity within the property itself cannot be used as this usually speculative.
As you’d expect, commercial mortgages are used to buy commercial property. They work in a very similar way to residential mortgages, meaning a lump sum deposit is paid before a series of monthly payments spread over a fixed term (usually around 25 years).
Commercial properties can also be rented to tenants but Buy-to-Let restrictions will then apply, provided this is the reason for the application.
A bridge loan is a short-term loan taken out between two major transactions – such as the sale of one property and the purchase of another.
Bridging loans are similar to mortgages in that the amount you can borrow is usually dependent on the value of the property you’re borrowing against. Furthermore, the property is usually used as collateral for the loan, meaning if you don’t meet repayments, it will likely be repossessed.
Similarly, the interest of the loan is usually paid over the fixed term, while the capital is paid as a lump sum at the end.
The differences end with the terms – while mortgages may last upwards of 25 years, bridging loans generally last around 12 months. They’re also much quicker to set up and process, though borrowing costs are higher.
In property development, bridging loans are often used to purchase a property which can then be renovated and sold, allowing the buyer to pay off the loan and earn some profit. This comes with obvious advantages and disadvantages, so always consider speaking to a financial advisor before considering this.
Other People’s Money (OPM)
For many first-time investors, using ‘other people’s money’ is a vital way of getting onto the ladder. OPM is essentially the leverage you’re using to buy real estate, whether that’s conventional financing, seller financing, crowdsourcing money or equity partners.
When most people think of OPM, they think about silent partners. While there are many cash rich people out there, they may not have the time or resources to invest in property. Finding an equity partner willing to play the part of cash investor can be a great way of getting into property investment with other people’s money. Typically, while you’ll receive the profit you would from the standard investment, the cash investor will receive a percentage of the returns or interest with repayment.
Another common method is seller financing. This is where the property seller keeps the mortgage in their name but the buyer makes regular mortgage payments. During this time, arrangements will typically be made that provide the buyer with the rights to the property, including the right to sell.
If you have enough equity in your residential property, it is possible to release enough to invest in property.
Generally this is done when you’re remortgaging and many investors have found success in funding their next investments through this method.
For many investors, this can be a quicker way of raising a deposit, especially compared to saving up cash month-on-month. Buy-to-Let property requires at least a 10 – 30% deposit and the more you have, the better rates you’ll find in the long-term.
Typically as with all investments it’s best to diversify your portfolio and spread your risk. Whatever property investment strategy you choose, 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.