Not all property strategies require large starting capital to get started. Some strategies have low costs but give a high cashflow potential and Lease to Let is one such strategy.
It’s certainly not a pension plan investment strategy and not something that is suitable if your time poor, but if you want to get started in property without the deep pockets for deposits, you’ve got a love for dealing with people and your starting with time on your side, this can be a great (and lucrative) strategy.
In today’s video, we look at :
> The pitfalls and upsides of the Lease to Let Strategy (and how it works)
> Where you can make the money by being the property manager
> Is this strategy right for you, your personality and your situation
> & real-life case studies on how leasing HMOs and dealing with Multiple Tenants in a Lease to Let strategy actually works in the real world
[00:48] – How Lease to Let Works
[02:00] – Be careful with this if you’re a beginner to Property
[02:41] – The key to lease to let
[04:28] – The best properties for this strategy
[05:42] – Where the money is with Lease to let
[07:05] – What about Capital Growth?
[09:45] – Is this strategy for you?
[11:38] – The main assets that will help you succeed
[12:50] – The time-frame involved
[14:05] – Example – The figures revealed
[18:15] – Re-cap on the main points
[19:44] – A Real Life case study – How NOT to do it
[23:05] – Top 3 Lessons & things to do differently
[24:32] – A Real Life case study – When it goes right!
This is a more recent property strategy that has started to become more popular with mainstream investors from around 2013.
Although the first property I did using this strategy was back in 2011 in an area called Chester.
This strategy works by effectively taking on the managing of a property from a landlord and then renting it out as room lets (HMO’s).
You pay the landlord a set monthly fee as a lease agreement or a management agreement, and you then take on letting the property.
But with this you also take on the risk of covering void periods, rent arrears and internal maintenance costs.
For the landlord, they get their property earning a regular fixed monthly income.
For you, you get a property (without any large deposits) that you can make an income from by effectively managing the property and renting out individual rooms.
However this isn’t a strategy that you should jump straight in to if your a complete property beginner.
For a start, this strategy is only successful if you are good at managing tenants. So, background or experience with your own tenants or managing tenants is a distinct advantage.
It can also be a bit of a legal minefield, as sub-letting and lease agreements aren’t commonplace in the UK residential property market.
So it’s important you get a solicitor to draw out a proper lease or management agreement for you (instead of making up your own or downloading one from a friend), to make sure both you and the landlord are covered.
As long as you have the right setup from the beginning and are hands-on with managing the tenants, then this is a strategy that can work very well and is mainly for cash flow, not building your own portfolio.
The properties that work best on this strategy are ones that have already been used as an HMO previously (so they already adhere to the necessary council requirements) are unencumbered (meaning with no mortgage) and where you can deal directly with the landlord.
Where the Money Is
Your profit with this strategy lies in being able to successfully manage multiple tenants in one property. Your margin is the difference between your payment to the landlord, running costs, and the total rental income.
Keep your costs and voids down, and you can make a real success of this strategy with not much starting capital
You have lower risk than buying a property outright because if it’s not working you can agree with the landlord to end the agreement and hand the property back and you don’t need large deposits as you would do with buying it.
The downside is that you don’t own the property so you won’t benefit from capital growth or equity, just the rental income.
In terms of starting capital, most of the properties I have done on these agreements, the landlords have never asked for deposits, the properties have been provided furnished (although sometimes not to the best of standards – so you do need to have a budget for re-furnishing most of the rooms) and they have been flexible on giving us access to the property to start viewings before the agreement starts.
For the Lease to let properties we have, we target a Net cash flow of £400pcm, with a start-up fund of £2,000 to cover first month’s rent, small refurb and furnishings
Remember though…. everything is negotiable.
You may find deals that offer better returns than this or need more starting capital
Situation it’s Best For
Cash Poor & Time Rich
This is definitely a strategy for Time Rich investors.
It’s not a set it and forget it strategy, and I would strongly advise you should have some experience of managing tenants before you jump straight in, because to a manage an HMO with no previous experience of tenants can be very daunting.
But the rewards can be great, as the start up money needed is much lower than buying a HMO, and there are plenty of potential properties available.
There are always lots of landlords sick of managing their own properties and would love the idea of having a regular monthly rent coming in, with no risk of voids or internal maintenance.
So the supply should always be available if you know where to look (and I will show you the best places to source these deals later in your training)
Assets That Will Help
- Previous tenant managing experience
- A thick skin when dealing with tenants
- Time to source, negotiate and manage the properties
- 1 Month
The longest time is typically in agreeing on the timeline with a landlord for a taking over the management.
But once you have your agreement ready to go (remember to use an agreement that’s been agreed with your solicitor), finding the landlords can be quiet quick, as you’re looking for properties that are already being offered to let and are available today.
You may need to invest some time in decorating the property or improving the furnishings if it’s a tired property, but you could comfortably get your first property sourced and up and running within a month
- For this example the total investment includes £650 (First months Rent) + £1,000 (Furnishings) + £350 (Decorating) – £2k
- Other letting costs = 3 months rental income (to include internal maintenance, voids, arrears, utility bills) – Note: this is lower than the HMO example, because this strategy relies on self management and being active in keeping the costs down.
Return On Investment (Rental Income – Per Annum)
Total Investment: £2k
Gross Rental Income (pa): £16,640
Lease Payment to Landlord (pa): £7,800
Other Letting costs (pa): £4,160
Total Costs: £11,960
Net Rental Income (pa): £4,680
NET ROI %: 234% (Net rent income Total invested)
As you can see, with this strategy you will earn back your initial investment quickly, and if you have a couple of properties in the same area, you can build in economies of scale for the management.
The downside though is it can be seen as taking on a Property J.O.B, as it’s difficult to effectively outsource unless you have real scale and take on a few properties with 5+ bedrooms.
One of the hidden benefits of this method, is it often leads to being direct with motivated landlords… who ultimately want to sell and are sick of their properties.
You are then in a position to buy the property from them and piggyback this with one of the other strategies to achieve a win: win sale for both you and the landlord.
A Real Life Case Study (how NOT to do it)
One of the first properties I took on as a lease to let, was a great 4 bed flat above a restaurant.
It was in good condition, fully furnished and in a great location. All looked good.
Until we took the keys to start the viewings, at which point we had just signed the agreement.
The property let quickly and the first tenant moved in, but after only an hour of being there, we got a call saying the boiler wasn’t working.
Now on this agreement, we covered all internal maintenance…… and you guessed it… this included the boiler.
We sent an engineer around, and it was a major part that was broken and wasn’t worth repairing.
The cost £1,250 for a new boiler system…..Ouch
The ink wasn’t even dry on the contract and it hadn’t been less than 24hours since we had gone into our first agreement and we were already stung with a big maintenance bill, that we had to foot because of the way we had structured the agreement.
Luckily for us, we explained the situation to the landlord and he agreed to split the bill with us. To his credit, he didn’t have to, but as we had just taken over, it was only fair and I am glad he did.
We had the agreement on a 5-year lease so we were happy to go with it still, and the property otherwise was in a great condition.
A very quick lesson learned on this one, and I made sure in our future agreements the landlord took responsibility for the boilers and electrics for the first 3 months of the agreement, or for shorter agreements (1 to 3 years) that they cover the boiler costs totally, because a large maintenance bill like this could wipe out a good few months of profit, and when YOUR not getting the added benefit of adding value to the property, you want to keep your maintenance bills low.
Top 3 things I Would Do Differently
- Get the landlord to cover the costs of large items like external maintenance and boilers
- Don’t take things at face value – assume a contingency budget may be needed
- Negotiate on the terms of the agreement to give time to start viewings, and line up tenants before the agreement starts and you start paying rent/management payments to the landlords.
A Real Life Case Study (when it goes right)
One of my lease to let’s is in an area that is traditionally a family rental area.
But the reason why it works is that it is a short distance to the metro link and to the Trafford Centre in Manchester. Aswell as some other large industrial areas, so the demand from professional and blue-collar workers is high
For this property, the standard market rent is £525pcm if it was rented as a standard let.
As the property was in great condition and ready to let straight away (it had just had a very nice refurb carried out by the owner) we agreed to pay full market rent.
We negotiated a 5 year lease with no rent increases, time to start viewings before the first payment started, and we had a warranty on the boiler for any major breakdowns included… (certainly learnt from the last time there)
We decided to put in slightly higher quality furnishings in the property as we wanted it to stand out from the other lets on the market, and we provided a communal cleaner for the tenants as well as the usual bits and pieces and bills.
The property let very quickly, and out of all the properties we have, it continues to have the most long-term tenants there. The property rents per room at around £80pw and because of the low maintenance costs due to the great condition it was provided in, and the long-term tenants, this property is our best performing Lease to let to date and generates around £500+ per month net income