In this blog we'll go over 6 of our favourite strategies for making money in property. Whatever your budget or experience level, we'll cover something for you. This is just a beginner's guide, so if you'd like any more information on any of the strategies mentioned feel free to get in touch!
1. Single buy-to-let (BTL)
One of the simpler strategies in property, a buy-to-let is as it sounds - the investor purchases a property to let to a tenant, rather than live in it themselves. The tenant will usually be a family, a couple or single professionals.
A BTL investor will generally have one of two aims with their investment - capital growth or return on investment (or a combination of both). A buyer interested in achieving capital growth with their investment property will look to purchase in an area they think will thrive and house prices will rise significantly over a long period - in the mean time they will let out the property to a tenant to cover the mortgage and other costs, but monthly income is not their priority. A buyer looking for high return on their investment, however, will look to make the maximum profit per month, as a proportion of the money they invested into the deal. We generally say a good return on investment (ROI) for a simple BTL is above 15%.
2. House of Multiple Occupancy (HMO)
A HMO is a property rented out by at least 3 people who are not from 1 'household' (for example a family) but share facilities like the bathroom and kitchen. The property will be rented out to the tenants on a 'room-by-room' basis under separate contracts - therefore this is a great strategy to achieve high return on investment.
Let's think about an example:
Investor 1 buys a £100k 3-bed house with 2 reception rooms and rents it to a family for £700pcm. Taking purchase costs and monthly expenditure into account, their ROI is approximately 15%.
Investor 2 buys an identical £100k 3-bed house with 2 reception rooms, converts the 2nd reception room into a 4th bedroom and ensures the house is HMO compliant (we'll go into this later) and rents each room out to 4 students each paying £400pcm. Taking purchase costs, renovation costs and monthly expenditure into account, their ROI is approximately 24%.
You can see that by adding the 4th bedroom and renting the property out on a room-by-room basis, investor 2 has managed to earn an extra 9% return on their investment for the same property.
There are, however, some important things to consider when looking at a HMO investment - the most critical being location. Since the majority of tenants in HMOs are students or young professionals, HMOs tend to thrive in city centres, close to university campuses and close to large places of work (warehouses, docks, etc). However, to control the number of HMO properties in an area, some councils have introduced Article 4 direction, meaning a buyer would need planning permission from the council to convert a property into a HMO. It's worth remembering that each council is different and has different rules, so the best way to find out how Article 4 may affect your property is to speak to the local HMO planning department.
The second thing to consider with a HMO is licensing. As of October 2018, all properties rented to 5 or more unrelated individuals must be licensed - this can be done via the local authority and as part of the process your property will be inspected by a HMO officer.
There are a checklist of criteria that HMO properties must meet, and these differ across locations, so always check the criteria with your local authority (often a quick google will suffice). Criteria can include:
Adequate room size
Fire doors
Integrated fire alarm systems
Sound proofing
Emergency exits
Overall, we really like this strategy for achieving high returns on your investment, but it's important that it is done right, as there is a lot to consider and the penalties for running a substandard HMO can be huge.
3. Buy, Refurbish, Refinance, Rent (BRRR)
The first two strategies we covered involved the investor leaving a chunk of their own money in the investment property (in the form of the deposit and any refurb costs). The Buy, Refurbish, Refinance, Rent strategy, however, allows you to recycle your cash again and again, leaving only a little in each deal. For this reason, you can expect high (and sometimes even infinite) returns on your investment with a BRRR deal.
This strategy focuses on looking for investment properties that you can add significant value to. You would then make a cash purchase for the property (either with your own money or a bridging loan), refurbish the property to add value, refinance the property at a higher value and put the property onto a mortgage, pull out most or all of your money, and finally rent it out to a tenant.
Let's look at a simple example:
An investor, we'll call her Sally, purchases a run down property in need of some TLC in cash for £60,000 (it was on for £70,000 but her cheeky offer payed off). Sally has done her research and knows that similar properties on the same street but in better condition are selling for between £80-90,000. Sally spends £10,000 renovating the property and finally manages to revalue the house at £85,000. Taking into consideration legal and renovation costs, Sally puts the house onto a 75% LTV mortgage and leaves just over £8500 in the deal, achieving a healthy 40% ROI.
This is one of the riskier strategies, so due diligence is absolutely key. But find the right deal and you could be onto a winner!
4. Rent-to-rent (R2R)
Rent-to-rent is a great way to generate cash-flow without needing substantial financial input. With this strategy, an investor rents a property from a landlord, before renting this back out for a profit (please note: this is different to subletting, and the correct license and permissions are needed to do this legally).
The easiest way to explain the benefits of the rent-to-rent strategy are through examples, so let's look at 2 examples:
Rent-to-HMO: Investor 1 rents a 4 bedroom house from a landlord for £600pcm, and with permission from the landlord, converts the property into a licensed HMO and rents each room out to students for £400pcm each, generating a healthy £1000 per month profit. This requires little financial input from the investor, and the investor can pull out of the deal at the end of the contract if they wish.
Rent-to-Serviced Accommodation: Investor 2 rents a city-centre apartment from a landlord for £500pcm, and with permission from the landlord, advertises the apartment on booking sites such as Airbnb and Booking.com, with an average nightly rate of £100. In a typical month the investor makes a healthy £1000 profit per month.
Of course, these examples are simplified and there are things to consider such as getting the correct permissions and licensing, but this strategy can be extremely profitable and is a popular option for beginners. Just make sure that in a worst-case-scenario you could cover the rental costs if the property was vacant, as you cannot guarantee the property to be full at all times.
5. Lease Option Agreements (LOA)
We know from experience that it can be really hard to save up enough money for a deposit, and with the added legal fees and potential refurb costs that come with an investment property, it can sometimes seem like an impossible task to get on the investment ladder for a beginner. This is why we love Lease Options Agreements.
A Lease Option Agreement sees in investor take control of a property by taking over the mortgage payments and maintenance costs, to benefit from the cash-flow generated by the property with the option to purchase after a set period of time. Put simply, you would find a seller that is happy to agree to a Lease Option Agreement, you would take over the mortgage and maintenance payments for the property and often pay the owner a little good-faith money each month, you would rent the property out and benefit from the monthly profit, before having the option to purchase the property for a pre-agreed price after an agreed amount of time (usually between 3-10 years).
I know what you're thinking, how do I find a potential lease option agreement? The key to an LOA is that it benefits both the seller and the investor. Often, good LOA opportunities will be found in properties that are currently in negative equity but the buyer is wanting to sell. In these circumstances, the buyer needs to sell for at least what they payed for the property to avoid making a loss, but due to a market crash the property is now worth less. This is where an LOA can benefit both parties. As an investor, you could offer the buyer the amount they want for the property, but in order to give the market time to recover, you can only purchase at this price in say 5 years time. However, in the mean time, you will take over the mortgage payments of the property so that the buyer can essentially forget about the property and have the peace of mind knowing they are not making a loss. Often, by the time the investor comes to purchase, the property is actually worth more that the agreed sale price - it's a win-win for both parties.
This is a complicated strategy on paper and it can take some time to find a great deal and a seller who is open to an LOA, but is buying a house with no deposit worth the effort? We think so!
6. Deal Sourcing
Of course last but not least is our own current strategy, Deal Sourcing.
Rather than investing in property themselves, deal sourcers make a profit by helping investors to find their ideal investment and taking a finder's fee if a sale goes ahead. There are many reasons why an investor may benefit from using a deal sourcer, and we go into more detail on this here, but some reasons are to save time, to tap into the sourcer's local knowledge or to use the sourcer's 'power team'.
By law, all deal sourcers must be fully compliant, and if you're using one it is important to check this before paying any fees. Some will send a weekly email out with investment deals, and others will provide a more bespoke sourcing offer, working closely with investors to find properties that match their criteria. At The Sourcing Circle, we like to do a bit of both, and investors that subscribe to our mailing list will receive a weekly email with at least one investment opportunity, as well as the opportunity to have a call or meeting with us so we can find out exactly what it is you're looking for - we'll then send you tailored deals that fit your criteria.
This is a great strategy for beginners, and of course we love it!
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