Top Strategies for Investing in Property

How many private landlords in the UK do you think there are? Tens of thousands? You might be surprised to learn that there are over one million UK landlords. The number of people thinking about becoming a landlord will be even higher.

So, what exactly, is a landlord property investor? The simple answer is, a landlord is someone who invests in property, such as a house or flat, to rent it out to tenants. The landlord will own an asset that will bring in a monthly income and will also grow in value as time goes on. Over 80% of the UK population will retire without any substantial assets to speak of, whereas landlords will have a substantial asset in the form of property.

As the political scene is being transformed towards buy-to-let investing, landlords will increasingly need to be savvier about their investments and how they manage them. They must be on top of the ever-changing tax changes; changes that will no doubt be increasingly influenced by such things as climate change, as governments will require homes to be compliant with energy efficiency and substantiality goals. Consequently, landlord investors need to keep pace with the changing times, think strategically, and be in it for the long haul.

For successful property investing, a clear and cogent strategy and vision are essential. Different strategies will suit different people as circumstances will differ. Here, the focus is on looking at some of the basics of strategies for investing in property. These are not meant to be “ready-made” strategies to be followed without any breathing room, but rather an introduction to them to give an idea of what can be done, and for the purposes of further research. Most people are familiar with some of the terms that property investors need to know about, so a brief look at them should help when sifting through information on investing.

Yield

Gross and net yield should be differentiated. Gross yield is what the rental income is on an annual basis, which is then divided by the purchase price. To illustrate, if you earn £10,000 per year from rental income and the property costs £100,000, this will give you a gross yield of 10%. Of course, the gross yield from the rental income doesn’t account for all the costs that naturally come with it. The net yield is the annual profit that the asset yields. So, with the above scenario, if the annual costs are £4,500.00, then the net yield will be 5.5%. Such costs will include things like repair work and management fees.

Strategy one: Save hard for retirement

The principal strategy here is to grow a steady income stream over a few decades without having too much too much over it. It involves purchasing one property every few years or so. The duration of a few years, however, can decrease as the rental income grows and thus give you more cash to utilise. This is a long-term strategy and involves many years of investing and growing your rental income.

Saving hard and using these savings to purchase properties is probably the most well-known strategy and is a simple one to follow. The rental income is accrued to your savings, which enables you to speed up the pace at which you can invest: every two years can become 18 months, which then can become 1 year.

Because this strategy is based on a long-term view, it’s not a strategy that will get you rich in a hurry. It will take many years to stick with it, and so other avenues of income will likely be necessary in the short term. Don’t go handing in your notice to the boss just yet.

For property investors looking for a safe way to invest, this is a good option, but it does require a lot of serious saving and cash injection on the part of the investor. It’s also a strategy that will give the investor a lot of time to focus on their career and family life.

Saving hard for a deposit and then leveraging the power of a mortgage will yield benefits in several ways. Firstly, buying instantly with a mortgage, as opposed to saving up for the entire cash purchase, will yield many years of rental income that wouldn’t come from just saving for the entire sum over a long period of time. Secondly, investors will also benefit from the increase in asset prices as house prices rise.

Despite being quite a safe and simple method of investing, some investors may not be able to use this strategy because it involves saving a significant portion of their annual salary for the deposit on the next house. This, alone, will place this strategy outside the reach of many investors. These investors will require less capital-intensive strategies to achieve their goals.

Strategy two: Recycling cash

The principal strategy is to invest and grow an income stream without having to put up a lot of capital upfront. This involves purchasing properties in need of refurbishing and increasing their values by doing them up, and then refinancing them to help fund the next investment purchase.

The term “recycling cash” derives from the fact that the initial deposit used on one property is used again to finance other properties, after refurbishing and refinancing. Compared to the first strategy, this one requires more work by the investor, so this should be considered before going down this road.

The equity that is gained from refurbishing a property is the difference between what was paid for the property and what it is worth after the refurbishment work has been completed. For example, a rundown house for £100,000 has £15,000 worth of work done on it to bring it up to scratch, and then it is worth £140,000. The equity of £25,000 is the difference.

This equity, which has basically come from nothing, is key to putting less cash into later deals. This is a strategy worth considering and one that will require more research into the finer details of the risks and how it works best, which will include things like “bridging loans”. The main point to consider is that more work will be necessary by the investor in terms of refurbishing and finding the right property. The positive side is, however, less cash will need to be found to purchase the next property in the portfolio.

Strategy three: Capital growth

The crux of this strategy is to invest a lump sum of cash into properties and wait for the capital growth to accumulate over time. This strategy will require a very high amount of upfront capital to get going.

As already stated above, property profits come from two sources: rental income and growth in the property’s value. Profit from rental income comes on a regular basis, but profit from capital growth only comes when the property is sold. What is the difference between these two? Rental profits are a certainty, whereas capital profits are not. Many things can sway the prices of houses, which makes for greater uncertainty. When prices have risen favourably, the capital growth can be substantial.

With this strategy, rental income is not the intended means of profit, it is capital growth. A good investment portfolio will likely incorporate both types of investment strategies.

The capital growth strategy is not focused on accruing large rental incomes and making huge monthly profits from them. Rather, handing the property over to a letting agency to take on all the leg work, you can sit back and reap the benefits a few decades down the road as property values soar. Historically, in terms of the UK property market, prices have doubled about every nine years. Even after paying the capital gains tax, when selling, you will be left with a nice slice of the pie in your account.

Strategy four: Use rental income to supplement your wage

This strategy concerns using your savings to invest in property with the purpose of replacing your wage income. That is to say: quit your job. It entails purchasing the right number of properties for you which will yield the rental income to match your wage income, or more.

Because the focus is just replacing your wage income, the number of properties required to achieve this will be relatively small compared to other strategies. A major benefit of considering this strategy is the immediate benefit investors receive, whereas other strategies are more focused on long-term benefits, such as capital growth.

Who would benefit from such a strategy? Well, those that are desperate to quit their jobs for some reason, still need a monthly income to support themselves and their families. It happens to most at some point, stuck in a rut with your job and feeling you aren’t going nowhere. Perhaps you just want to become your own boss. Alternatively, you may decide that you want to change your lifestyle by spending more time with your family or taking up an interest you’ve always wanted to pursue. If the latter is on your mind, you will need to consider that more time and effort will be involved with opposing this strategy, if you are managing the project yourself.

If this is a strategy you are considering – perhaps you desperately, and indeed quickly, need a change of scene in your life – note that it is best done with a substantial amount of capital upfront to get you going. By focusing on generating cash as fast as possible, using this strategy, you are not in the best position to accumulate equity or put in more money over the years.

The type of property which is best suited to this strategy is a House in Multiple Occupation (HMO). Multi-lets will enable rental income to be maximised in a single property by renting each room separately. With the right property, even more rental income can be gained by converting communal areas into bedrooms, such as reception areas. Another possibility would be to section off and convert very large rooms into smaller ones.

However, as alluded to earlier, this type of investment strategy will require more of your time to manage the properties, especially in terms of making sure the rooms are in constant let and dealing with everyone’s issues they have raised. Furthermore, more people occupying the same house will mean more wear and tear, resulting in higher maintenance costs, effort and time.

Employing letting agents to manage your project – if you are thinking of avoiding the time, effort, and headaches – is an option on the table, but this will, of course, eat into your income stream and reduce your ROI. On top of the management fees letting agents charge, you will also have to factor in additional charges like letting fees for renting out the rooms every time they change hand.

Conclusion

Outlined above are different property investment strategies for you to consider. These strategies are not exhaustive but represent commonly used ones by investors. There are others also worth exploring, such as “flipping” that you may want to take a closer look at. Flipping basically entails buying and selling properties in a short time frame for a profit, usually within less than a year or so. Flipping is like the above strategy in that its focus is on creating an income in a very fast time frame.

A lot of factors will come into play when deciding on which strategy or combination of strategies to follow. Apart from the more obvious factors, like how much you have in savings, you will also need to consider your personality and vision for the future. Self-reflection and determining your specific goals are a key aspect of decision making in the property investment process. If you are not a people person, for example, you may not be suited to investment strategies that involve a lot of contact with tenants, like an HMO single-let investment.

The above strategies are a good starting point to get you thinking. Doing more in-depth research into these and other strategies is a must. Investing in property can be the most rewarding and exciting thing you have ever done. It could be the key to a very different future than the one you are currently following. With the right planning, research, and investment strategy, you can open the door to a bright future that is your dream.