The common perception of a property investor is of a landlord, who buys houses or flats outright and then rents them to tenants. And while this strategy is unquestionably one of the more common ways to approach the industry it is far from being the only available property investment strategy in the UK.
Professional property investors don’t approach the market like a traditional buyer, they have specific investment strategies, angles of approach, and niche sets of search criteria that help them secure the best property deals. There’s nothing stopping you from using the exact same methods, but, especially if you’re a first-time buyer, it can be difficult to even know where to start.
There are a huge number of lucrative investment strategies to choose from, but sometimes too much choice can be a bad thing, leaving you paralysed by indecision.
There are a number of ways to generate income out of your investment, we will break some of them down below:
While there are lots of ways to make money from property, the most common, and the cornerstone of the majority of property investment strategies UK, is by securing a rental income. Rental income isn’t just rent, as a landlord will need to use a tenant’s rent to cover their costs. What is left-over, once those costs have been covered can be considered as income.
Such costs would normally include:
- Repayments on the mortgage or the servicing of some other finance.
- Council tax, insurance, and utility costs.
- Management (letting agent fees) unless the landlord has decided to self-manage.
- Maintenance costs – from smaller expenses like the cost of re-painting to larger ones, such as boiler replacements or roof repairs.
And further to this expenses can be unpredictable, for instance, a fridge breaking down, and income can sometimes be erratic, for example, if there is a long time between tenants resulting in a void period.
So, to ensure a positive cash-flow and a reasonable profit, a landlord must look at optimising areas of the investment to that end by making choices about the location to invest in, the tenant profile (the type of tenant they wish to attract), and even the property style or asset type. For example, a residential property will generate very different returns to a commercial property.
Then there is what is known as ‘adding value’ where a landlord will purchase a property that needs refurbishment and improve it, before putting it onto the rental market.
Lower purchase costs and greater attractiveness for tenants can increase future rental income significantly, not-to-mention that a recently refurbished property is likely to have lower maintenance costs.
And yet it should go without saying that refurbishments can cost a lot of money, so, it is essential that any prospective landlord feels confident about their numbers and their ability to project manage the work before engaging with this strategy.
But ‘adding value’, when done right, can do more than increase the rental yield, it can also increase the sale value of the property itself. And taking advantage of this is the second most popular way of making money from property.
Flipping (buy-refurbish-sell or property trading) is a short-term option that involves buying a property, increasing its value, and then selling it on.
Value can be added in a number of ways; there might be internal refurbishments such as plasterwork, modernisation, improvements on electrics, plumbing, and even just decoration that can be carried out. But there are more extensive methods, such as building an extension.
Or you may consider adding value through a legal route such as securing a change of use or getting planning permission in place as both of these can increase the value of a building.
And finally, there is space efficiency. Turning a one-bedroom apartment into a two-bed can increase its value, as can converting a garage into an extra bedroom. Likewise, turning a larger house into flats or an HMO can also make sense.
Buying a property, to sell it, after making improvements and changes, both small and large, is a common way of making money in the industry.
The third way of making money in this sector is by combining rental income and the principle of adding value through a conversion or refurbishment, together. And this is known as the buy-refurbish-rent strategy. In other words, you flip the property, but you hold on to it and rent it out, for a period of time.
But that’s not everything; a lot of investors also choose to add another element, with refinancing (buy-refurbish-refinance-rent). By refinancing, on the, now, more-valuable property, an investor can free up funds to buy another property, thereby allowing for faster portfolio-growth.
Real Estate Investment Trusts or REITs
A REIT or Real Estate Investment Trust is a common way for sophisticated investors to invest in property, as an asset, without needing to get involved with day-to-day requirements such as management or maintenance.
Typically, what this looks like, is that an investor would invest in a company or a fund, and in turn, that company or fund would own property.
Another way of investing in property, which is becoming increasingly known and practiced is to invest using a crowdfunding platform.
Because property crowdfunding is not just the means by which funds can be raised to purchase property, often-times it could involve a refurbishment, a flip, or a new-development – with investors having the option to invest in either equity or debt.
Making money in property
So, there are lots of ways to find profit in bricks and mortar. The best place to start might be with your own home; value can be added in the same way as with any other property and you can sell it for a profit. With due diligence, good choices, and hard work a person is more than capable of starting with a one-bedroom apartment and quickly climbing the property ladder. But then, there are more indirect vehicles for making money in property, as well.