UK Property Investment [updated 2022]
Through this blog post we hope to provide aspiring property entrepreneurs with an introduction to a range of property businesses. Each business has its own risks and rewards, and you may wish to only choose those strategies which suits your skills and experiences.
Standard Buy To Let
The most popular UK property investment is the vanilla Buy to Let strategy. Fundamentally, a property is purchased with the intention of finding good tenants. Typically these tenants use the property as their primary residence. Tenancies usually are medium to long term in nature.
The main advantage is that, broadly speaking, the property should pay a steady monthly income without a significant time commitment on the part of the Landlord. This is not true for other types of property investment, such as HMOs or serviced accomodation. In addition, Buy To Let Mortgages are widely available, and the interest rates can be highly competitive. Finally, utility bills and council tax are paid for by the tenants.
The main disadvantage is that there is a steep learning curve for first time BTL landlords, particularly in the more technical areas such as tenancy setup and deposit protection. It is often advised that a first time BTL landlord should employ a letting agency for the first couple of years, enabling the landlord to “learn the ropes from the experts”.
One of the biggest challenges to getting started will be raising the required 25% deposit to purchase your buy to let property.
When purchasing a leasehold property such as a flat for rental purposes, it is important to confirm the amount of the services charges. Whilst service charges help ensure the delivery of a high-quality product to your tenants, they can significantly reduce the annual income earned on your property investment.
Effective marketing will be a key success factor. This article will help you understand the various websites which can assist you.
This strategy involves taking the original deposit and recycling it multiple times. Over a period of several years, those same funds can be used to fund the purchase of multiple investment properties.
More specifically, the BRRR method involves purchasing a property, and then forcing capital appreciation of that property through refurbishment or redevelopment. Once the refurbishment has been completed, and the capital appreciation achieved, this allows the investor to refinance the property and withdraw some or all of the original deposit. The withdrawn funds would be used to purchase another property and repeat the same process again.
At a high level, this can be broken down into the following steps:
Step 1: Purchase the property, using a combination of cash deposit and debt finance. At this point, the debt finance MAY be bridging finance.
Step 2: Refurbish or redevelop the property.
Step 3: Refinance the property. Depending on the new property valuation, it may be possible to extract the original deposit.
Step 4: repeat the above steps. This will be very much dependent upon the amount of funds released in Step 3.
In conclusion, this is advanced property strategy and is not really suitable for beginners. The main challenges include identifying properties where value can be added; detailed knowledge of different mortgage products work and the ability to successfully manage and deliver a refurb/redevelopment project.
Identifying and purchasing a repossessed house can work very well.
House flipping is an investment strategy involving buying a house and selling it for a significant profit. The main idea is identifying an undervalued property, purchase it, make it even more valuable by making it more attractive to house buyers and selling it for a increased amount of money.
Renovations can be simply decorative, improvement of the physical structure, or a combination of these. It all relies on what the property requires, what potential house buyers may be interested in, and what is trendy at the time of the flip. You may choose to renovate the kitchen and bathroom, convert the loft,or paint to improve the property value. The extent of the change is determined by the needs of the local market.
The real skill in property flipping is to achieve a balance between a high selling price and a speedy house flip. The complete process is much more complex than just buying and selling. Profit is usually earned through price appreciation as a byproduct of a hot property market with fast skyrocketing prices, or from significant improvements to the house, or both.
A property investor may, for instance, buy a house in need of repair, renovate it extensively, and thereafter resell it at a cost that represents its improved features and value.
In a different case, they may choose to purchase a property in a upcoming or high demand neighbourhood, and later sell it for prices higher than their buying price. In this case, the value of the property hasn't improved with refurbishing but rather because of demand.
From a strategic perspective, many house flip investors try to establish a consistent stream of income by flipping properties frequently, rather than focusing on a maximising profit on a single transaction. This is because the longer you take with the property, the more you spend on financing and ownership-associated costs.
From the time of acquisition until the time of selling, house flipping in the UK commonly takes 4 to 6 months to finish.However, you can take a shorter or longer time depending on the condition of the property when purchased, demand in the market and several other factors.
Find out more about house flipping.
House in Multiple Occupation ("HMO")
A HMO is any property with shared facilities (such as bathrooms and kitchens) which is tenanted by three or more people who are not a family.
HMOs are often favoured by experienced landlords as they are more lucrative. Total rental income earned can be considerably higher than a single let.
HMOs are more complicated to manage than more vanilla buy-to-lets. There are more tenants to manage. Furthermore, HMOs have more regulatory, planning and licensing requirements to be understood and complied with.
Mandatory HMO Licence
A mandatory licence – sometimes called a HMO licence – is needed for any HMO which comprises five or more persons. It is an offence to operate a licensable HMO without having submitted a valid licence application.
Planning is the formal permission from a local authority or council, for the erection or alteration of buildings or similar development, for a use class.
In the context of HMOs, there are 2 principal use classes:
C4 HMO planning: shared houses occupied by between 3 and 6 unrelated individuals, as their only or main residence, who share basic amenities such as a kitchen or bathroom.
Sui Generis HMO planning: shared houses occupied by 7 or more unrelated individuals, as their only or main residence, who share basic amenities such as a kitchen or bathroom.
In conclusion, before purchasing a HMO it is critical that you ensure that there is sufficient rental demand in your target area and that it is understood what work is required to bring the property into compliance with licensing and/or planning requirements.
Need to evaluate an HMO deal from a financial perspective? Our HMO Deal Analyser can help you.
The serviced accommodation (hereafter “SA”) strategy involves letting out a residential property on a short term basis e.g. on a nightly or weekly basis. The property will be furnished to a high standard, similar to a hotel. When executed successfully, this strategy can deliver a high rental yield for the investor.
Two common examples of the SA strategy are:
1. A city centre apartment let out on a nightly basis to corporate customers.
2. A holiday home let out to families on a weekly basis.
A key aspect of all SA businesses is the advertising strategy. The top advertising websites in this sector include: airbnb, booking.com and vrbo.com. These sites provide advertising, enquiry management and reservation processing services.
A further component over successful SA business is the engagement of a local property management agent. Depending upon your agreement, the property manager will meet and greet customer, prepare the property between bookings as well as resolve maintenance issues. Some property managers will advertise the property and take reservations.
Off-plan properties are new build developments. To mitigate risk and/or assist with the financing of the project, the developer sells the new properties well in advance of their actual completion. Off-plan property is typically deemed attractive if there is a high level of infrastructure in the immediate area such as a new university or train stations, either already built or due to be built within the next few years. Upon completion, the investor can either sell the property or market it for rental purposes.
From a capital growth perspective, the time delay between date of purchase and final completion (which can be several years) can be highly advantageous to the investor. More specifically, if the property market is rising then the investor should gain significantly. Developers who sell off-plan property often offer financial incentives or discounts to early purchasers.
From a rental perspective, tenants will be attracted to rent your new build properties as the property condition will be high. New build properties should achieve a rental income towards the top end of the scale.
Purchasing off-plan does have risks. These risks include:
If property values start to fall before construction is completed, the mortgage company may reduce the amount of the loan or even refuse financing. However, the investor will still be required to complete on the purchase, and so there is a real risk that the developer will sue the investor to recover their losses.
The constructor may go out of business before construction of the property is completed. The investor may not be able to recover the monies advanced.
Another issue is that the finished property may have material defects which require expensive remediation.
Property sourcing involves finding and negotiating property investment deals, which are then sold to property investors. In return for receiving this service, a fee (or commission) is paid by the investor.
As many property investors are employed in full time roles, a property sourcing service can be an invaluable service which helps them to grow their property portfolio much faster.
Property sourcing can be a great way to get started in the property industry, particularly if you do not have sufficient funds to purchase a property. The key skills involved in becoming a successful property sourcer include:
finding and negotiating great deals with landlords
building an in-depth understanding of the local property market
building a network with local estate agents, with the objective of generating deal flow
building a network of investors
working with those investors to understand and fulfil their individual requirements
Property sourcing in the UK covers both the sales and rentals markets.
It is common practise for property sourcers to ask their clients to sign a non-disclosure agreement. This prevents their clients from dealing directly with the landlord, effectively bypassing the sourcer.
Another common practise is for property sourcers to ask their clients to pay their fee upfront or in advance of completion. Investors should be cautious and carefully understand the circumstances in which the fee will be refunded.
Finally, sourcing fees charged vary significantly from company to company. We suggest that you assess several potential property sourcers, carefully understanding the precise sourcing service on offer. Level of experience and the amount of work put in will be key determinant of their fees.
Rent to Rent
Rent to rent is where you (the investor) take control of a single property from a landlord and let it out on a room by room basis.
From an investor perspective, this can be a profitable strategy. Using a four bed house as an example, the rents collected from the four tenants should significantly exceed the rent paid to the landlord. The property will typically be rented out either for long term lets (aka R2HMO) or alternatively as serviced accommodation (aka R2SA).
From the landlords perspective, he/she signs a 3 to 7 year contract with the investor. Essentially the investor promises to pay the landlord a fixed monthly rent as well as manage all maintenance issues for the landlord. Accordingly, the landlord no longer needs to worry about finding tenants, rent arrears or void periods for the duration of the contract.
Whilst this strategy may appear relatively simple, there are multiple legal issues involved. For example, the agreement between the landlord and investor needs to be carefully drafted. There are many cases reported where the incorrect agreement has been used, causing considerable difficulties for both parties. A further example of legal complexities is the high level of government regulation around properties let out to multiple tenants. these are commonly known as (i) the 2006 HMO management regulations and (ii) HMO licensing requirements.
As the business grows, it is possible that the investor could be managing 40+ rooms. This can be challenging from an operational and financial perspective. Having the right IT systems and operational procedures in place become important for the investor.
Given the nature and extent of the legal requirements, this strategy is not really suitable for inexperienced property investors.
As mentioned previously, the landlord agrees to received a fixed monthly rent. Oftentimes the landlord is advised that this is a guaranteed rent. Landlords should carefully evaluate the evidence supporting any guarantee. During the COVID 19 crisis it was reported that several investors did not fulfil their obligations to their landlords, and pay the “guaranteed rent”.
Need to evaluate an Rent to Rent HMO deal from a financial perspective? Our Rent to Rent Deal Analyser can help you.
Multi Unit Freehold Block
Multi unit freehold blocks, or MUFB, are when a landlord owns and manages multiple rental properties in the same building. It can be a purpose-built block of flats or, alternatively, a converted house.
Each rental unit is self-contained, that is, having its own kitchen and bathroom facilities.
The key advantage of a MUFB is that you have many different rental income streams all in one place. Further, the overall rental yield should be higher than a single let buy to let property.
Click the link find out more about MUFB.