The most common strategies within property investment tend to be BTLs, Flips or HMOs.
We’ve given you a quick breakdown of the three below.
Flips – Most risk but quicker return.
The renovation of a property is a common way to create equity which will allow you to sell the property quickly in a process known as “flipping”.
Shows such as ‘Homes Under the Hammer’ have no doubt increased the desirability of renovating and flipping properties. However, it is important to consider that by the time you factor in the time and costs of the project; ‘flipping’ may not be as financially desirable. Nevertheless, some property investors are very skilled at flipping, and are able to make it into a lucrative investment model.
Keys to success when flipping are:
When buying below market value you’re essentially securing equity at the point of purchase rather than buying and hoping that the value of the property and your equity increases. Buying BMV insulates you against the market falling which is something that can be very key especially with the current economic turmoil surrounding Brexit. Furthermore, a key part to flipping is selling for profit. Therefore, if you start of with positive equity, you already have a head start!
2. Accurately predicting the renovation potential of a given property
You must first start with an accurate budget. Ensure you get multiple quotations from trusted builders and understand what is in and out of scope of their costs. To avoid blowing your budget due to unexpected renovation costs, add a contingency fund. Most contractors suggest adding 10% but larger projects may need up to a 20% contingency fund.
3. Only spend money on improvements that will add value
If you spend £150,000 renovating a property, this doesn’t necessarily mean that you will be adding £150,000 to its value. Don’t spend when it’s not necessary. Discuss your plans for the property with a local estate agent beforehand; they will be well placed to tell you what sort of improvements will add value to the property and will also have first-hand information on recently sold prices. Don’t get carried away and try not to get to emotionally attached to the property!
4. Tightly controlling costs and avoiding budget blowouts
Ensure you make a note of all outgoings/orders. This will allow you to keep an eye on what you have spent and on what; and most importantly, will allow you to easily see if you’re staying within your designated budget.
5. Getting the work done quickly – time is money
During the renovation and upon completion of the renovation; you will have to pay the mortgage (assuming you have a mortgage on the property), and any utility bills for as long as you own it. These costs take a large chunk out of the budget, and the longer you own the property, the more money you are losing.
HMO – Time consuming, additional costs, locally based, good yield
Instead of letting the property by the house or flat to one family tenant, you let out individual rooms to increase the income, cashflow & yield. The more rooms you can carve out of the property, the higher the income.
The definition of an HMO under the Housing Act 2004 states it is, “any property occupied by five or more people, forming two or more separate households.”
1. Key to success for HMOs:Identify opportunities to add value and create an extra living space.
The key to HMOs is creating extra living space which should subsequently lead to extra income. For example, a large living room could be split into two to create two further bedrooms, or you could carry out a loft conversion to create an extra room.
2. Local area and planning knowledge
It is important to have an understanding of local planning knowledge in case of any renovation work you would like to do to the property that may require planning permission.
It is also important that you have knowledge of the local areas needs/demographic. You must ensure there is demand for HMO(s) in the area that you are investing! E.g. HMOs tend to be occupied by young professionals/students. Choosing the right location. Can make or break a HMO!
If you want to rent out your property as a house in multiple occupation in England or Wales you must contact your council to check if you need a licence.
You must have a licence if you’re renting out a ‘large HMO’ in England or Wales. Your property is defined as a large HMO if all of the following apply:
- It is rented to 5 or more people who form more than 1 household
- Some or all tenants share toilet, bathroom or kitchen facilities
- At least 1 tenant pays rent (or their employer pays it for them)
Each local authority will have different rules and licensing requirements surrounding HMOs. Ensure you contact your local council directly to obtain clarification, ideally in writing!
4. Ensure you are aware of your responsibilities.
Some things that landlords of HMOs must ensure are in place include:
- Proper fire safety measures must be in place, including working smoke alarms.
- Annual gas safety checks must be carried out.
- Electrics must be checked every 5 years.
You need to decide whether you would like to manage your HMO(s) yourself or employ a local agent to do so.
HMOs can be very time consuming to manage as you will have to manage individual tenancy agreements for each tenant. You’ll also need to factor in the cost of paying an agent when calculating potential profits.
BTL – Hands off, low risk, long term, lower costs
Vanilla Buy To Let is the strategy most property investors start with and is by far the most popular and best known. At its heart, a buy to let is a property purchased with the intention of renting it out, typically to a couple, family or a single person. In other words, it is the ‘traditional’ way of investing in property.
Keys to success for Buy To Let.
1.Research the buy-to-let market
It is crucial that you educate yourself on the buy to let market and are aware of the risks associated and proposed changes.
In recent years, rules around buy to let properties have been changing. E.g. changes to the buy-to-let tax relief and the 2nd home stamp duty.
Consider where both you and the buy to let market might be in five years and keep up to date with market predictions (both local and national),
Some key things to consider:
- Will tax treatment of private landlords become less favourable?
- What is the outlook for interest rates?
- Are the favoured locations for rental properties likely to change?
2. Choose a promising area to invest in
Just like HMOs, location is key for buying to let.
It is important that you put yourself in the shoes of your desired tenants and try and consider what your desired tenants would want. This may be regular transport links to major cities, local leisure activities, vibrant nightlife, good schools and neighbouring families or a large population of students. Do not forget that you won’t actually be living in the property so try not to think about what you want.
You should also consider future regeneration opportunities in your area of choice.
3. Do the maths
It is important that you consider all costs included in a buy to let property. ultimately this is an investment, so profit is important.
Things to consider include:
- Potential rental income
- Potential mortgage cost
- Stamp duty (2nd home stamp duty especially)
- Unexpected circumstances that may occur e.g. what will happen if the property sits empty for a month or two?
4. Understand your legal responsibilities
Current regulations include, but are not limited to, some of the below:
- Gas safety certificates
- Energy performance certificates (minimum EPC rating of E)
- Protecting the tenant’s deposit
- Serving prescribed information
- Landlord license (certain areas only)
- Fire resistant furniture
- Right to rent checks
- Compliant plugs and sockets
- Safe electrical appliances
5. Rent Guarantee Insurance
It is wise to consider taking out an insurance policy (usually known as rent guarantee insurance) which will protect you against your tenant failing to pay the rent or refusing to leave in the case of eviction.
6. Build a good contacts book
Naturally, things will break and go wrong in a rented house. It is key that you have reliable workmen who you trust. It is always good to have a few local plumbers, electricians and handymen to hand.
When you find good handymen you’re going to want to hold on to them and use them again, so ensure that you pay their invoices on time!
Tenants are now able to sue landlords for cold, mouldy & damp homes. In an update to the Landlord and Tenant Act of 1985, the new Homes Act (March 20th) will give tenants the power to take their landlords to court if they do not maintain the property to an acceptable standard.
*This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.