Property Investment Strategies: Building a Strong Property Portfolio
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
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?
This is the most common form of the Buy-to-Let model and involves several, fairly simple (in theory) steps. 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.
While this is a huge oversimplification of becoming a landlord, the basics are simple and represent one of the easiest 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 Buy-to-Let 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?
The basic definition of an HMO/House Share is a property where each room is rented out on an individual basis. 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.
Tips: 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?
Although targeting student tenants could technically come under the HMO strategy, it’s a vastly different market and warrants individual consideration. Many investors choose to opt for a strategy built around students as they represent a predictable and 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 than 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.
- 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?’
Buying a property to sell is completely different to buy-to-let, aimed more at short-term or mid-term strategies. 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, 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 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?
This strategy is not strictly Buy-to-Let or Buy-to-Sell (both are viable), it’s simply a different method of initial purchase. Off-Plan Properties are new-build developments that are not ready for tenants, instead bought by investors before completion.
By buying Off-Plan properties you can often find excellent individual discounts. Additionally, Off-Plan properties are often seen as good investments because of the capital growth they can experience between planning and completion.
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.
- 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
- Range of options with potential for lucrative returns
- Increased flexibility
- Higher risk
- Increased upfront costs
- Harder to leverage cash
What is involved in bulk purchasing?
- Discounts on unit prices are much more common
- Highest risk of capital
Building a sound property investment strategy – top five considerations
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 for example. After completion, the regeneration of Digbeth and the Eastside area will be kickstarted. 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.
Look at the introduction of new commercial projects, bars 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 explained 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 the 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 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.