I hope you are all well and enjoying the lighter nights starting to creep in. Spring time is almost upon as and with this being such a popular time for buying and selling I thought I would take this opportunity to put down a few thoughts on why people invest in property and what I believe are the 3 most common strategies used.
I’ve heard it mentioned that there are around 1 million property investors in the UK at present. I don’t know how accurate that figure is but I wouldn’t have thought it would be far off that amount. With that many people getting involved there is clearly good reason to do so.
Let’s have a look at some of the strategies used and you can decide what one is best for you.
Flip it- This is sometimes perceived to be the most enjoyable way to get a return on your investment. It’s quick, you see the benefits right away, there’s a lot of job satisfaction and you don’t have the hassle of dealing with those pesky tenants. The theory here is quite simple, you buy a house, improve it, and sell it on then keep the difference. Easy, right? Well, yes, it is (in theory) but there’s a few things you need to take into account. What is the realistic end value once the renovation is complete? How much will the home improvements cost? How sellable will the property be once the work is done? Tax implications of buying an additional property and how long will the work take to be done? As is the case with most strategies the difficulty is finding the right property. If a property is valued at £100k but needs £10k work, the chances are the amount the sellers is looking for will reflect that. You need to work out where you can save on the costs that makes the project viable. If you can do the work yourself or have great contacts in trade then it is a really popular way to make money, if the first one is a success and you make a lot of money, chances are you will get the bug and reinvest some of the money on your next project.
Buy to Let landlord- It is what it says on the tin. You find a good property, buy it and put a tenant in. The tenant then pays off your mortgage for you or you enjoy the rent as an additional source of income. When the time is right you can sell the property and get your money back. When buying a buy to let property something to think about is the yield vs Capital growth potential. Sorry for the jargon however to try and explain it in its simplest form, the yield is how much of an annual return you are likely to get on your investment, Capital Growth is how much the value of the property will go up.
If you buy a house in Edinburgh for example the yield is only likely to be around 5-6%. If you buy a house for £100k, you receive a rent of say £500pcm, this gives an annual income of £6,000 (divide the annual income by the purchase price and multiply by 100), this would be providing you a yield of 6%. Although this figure is not particularly high, you can feel pretty safe that you will sell your house for a profit further down the line.
In the areas outside of the cities and the smaller towns the consideration can be different. To use an example of a property we are selling just now in Maybole, Ayrshire. The guide price is £29k, the realistic rent is around £350pcm which gives an annual income of £4,200 which would provide a huge yield of around 14%. In contrast to the Edinburgh example I just used though is that you probably need to expect the price of the flat to remain roughly about the same. It is up to you to decide what route suits your needs better.
The BRRRR Method – No, it’s not cold in here, it’s just the next strategy I want to talk to you about.
In short- Buy, Refurbish, Rent, refinance and repeat.
In a bit more detail- Buy a distressed property that you can add value to. Refurbish it so you will be able to get a new home report showing the true new value of it, Rent it out so the tenant pays off the finance, Refinance it to withdraw your capital, (the new home report value is key to this and is the reason it is essential you add value to the property you’ve bought), Repeat the process.
This is a terrific strategy for ambitious buyers who are looking to grow or build a portfolio. Essentially you are using your one initial pot of cash to buy multiple properties while the tenants in each property pay off the finance for you. At the risk of stating the obvious, the key thing really is to do your due diligence and know your figures. Rental values, end values, refurb costs and tax implications.
I think that ends my ramblings for this month. I hope you found it useful and as always, if you want a chat about anything in this blog or want to know if a property you have found may be suitable for one of these strategies then we would love to hear from you, even if it’s just for an informal chat.
All the best