What are the different types of property investment strategies?
Updated: Jun 1, 2020
This is a question that we get asked very regularly: what different types of property investment strategies exist and how do I know which ones to choose?
There are two simple property investment strategies that all investors will agree on:
Buy a property and rent it out (Cash-flow)
Buy a property and sell it on (Flip)
Digging deeper into these options opens a wider range of strategies to chose from. It can be very overwhelming to decide exactly how you want to invest in property.
One of the great things about using property as a way to achieve your goals is that you can tailor it to fit your own personal circumstances and financial requirements.
Interested in investing? Why not check out our guide to investing in Liverpool.
The strategy that you choose will ultimately depend on a variety of different factors:
How much time do you have free to dedicate to this?
What is your appetite for risk?
What are your goals and what exactly are you looking to achieve?
Do you want short-term or long-term gains?
Do you want a hands-off investment?
Have you invested in property before?
Are you mortgageable and what is your credit rating?
The list goes on.
Property investment strategies can simply be broken down into the following:
Single-lets (also known as Buy To Lets, BTL)
HMO (Houses of Multiple Occupancy)
Rent To Rent
Buy To Lets
Buy To Let is a property that you purchase to rent out to tenants. Tenants can be working professionals or people who receive housing benefits.
Once you buy a property, you can potentially earn a profit in two ways:
Rental yield – what your tenants pay in rent, minus any maintenance and running costs, such as repairs and agent fees.
Capital growth – the profit you earn if you sell your property for more than you paid for it.
If buying with a mortgage, you will need a specific Buy-To-Let mortgage. A buy-to-let mortgage is a mortgage sold specifically to people who buy property as an investment, rather than as a place to live.
If you plan to rent out your property, you won’t be able to finance your purchase with a standard residential mortgage.
An HMO is effectively a house share. Each room is rented out room by room to individuals who are usually unrelated to one another. This increases cash-flow and yield.
This property investment strategy is typically more lucrative than a simple BTL however, there are higher costs associated with running an HMO that need to be considered. HMOs are usually furnished, and bills must be considered as well.
Simply because of the larger number of people under one roof, the landlord of an HMO has higher standards to meet. For example:
Safety – gas safety checks must be carried out every year and electrical system checks every five years. Smoke alarms and carbon monoxide alarms must be fitted.
Sanitation – ensuring that there are adequate rubbish disposal facilities, bins and bin bags. Providing washing and cooking facilities of a certain standard.
Facilities – landlords must prevent overcrowding and keep shared and communal areas in a good state of repair.
Individually tenancy agreements are prepared for each tenant so there is also more administration involved, as well as background checks and you are essentially managing a group of strangers all living under one roof.
This can often be testing and not something all property investors are interested in doing.
Commercial property is property that is used for business activities. Commercial property usually refers to buildings that house businesses, but it can also refer to land that is intended to generate a profit, as well as larger residential rental properties.
The designation of a property as a commercial property has implications on the financing of the building, the tax treatment, and the laws that apply to it.
From an investment perspective, commercial property has traditionally been seen as a sound investment. The initial investment costs of the building and the costs associated with customisation for tenants are much higher than residential property, but the overall returns are also higher, and some of the common headaches that come with tenants aren't present when dealing with a company and clear leases.
Rent To Rent
Rent To Rent is whereby you rent a property from a landlord and then rent it out to a tenant. The profit made is the margin between the two. Essentially, you take control of the property and act like you are the landlord, as if you actually owned the property yourself. You will usually give the landlord a guaranteed rent which is lower than the rent you charge your tenants and you pocket the difference. This keeps the landlord happy because they are receiving rent each month from their property without the extra effort that is usually involved in facilitating this.
This is a very niche property investment strategy and is not suited for everyone. There are no mortgages involved for you because you never actually own the property which is very appealing to some people; specifically those who maybe do not qualify for a mortgage for whatever reason.
This property investment strategy allows you to generate cash quickly, without the usual upfront capital required such as deposits and other large fees.
A lease option is simple a legal agreement that allows you to control a property and generate income from it without actually owning it, with the legal right to purchase the property at a later date if desired.
There are two agreements in place within a lease option deal:
Lease: You agree a monthly payment to the property owner, which allows you to manage the property and rent it out to tenants for a profit.
Option: You agree a price at which you can buy the property later, if you want to.
It is a great way of earning cash and little capital is required to get started, however leas options are very difficult to find and execute, making lease options one of the most obscures strategies in the list. The home owner might back out and there is usually not enough margin to employ a managing agent so it can be a very hands-on strategy which does not suit everyone.