Making Money in Property: Core Strategies for Landlords and Buy-to-Let Investors
The common perception of a property investor is of a landlord, who buys houses or flats outright and rents them to tenants. And while this strategy is unquestionably one the more common ways to approach the industry it is far from being the only available investment strategy.
While there are lots of ways to make money from property, the most common - and the cornerstone of the majority of property investment strategies - is by securing a rental income.
Rental income isn't just rent. A landlord will need to a tenant's rent to cover their costs and 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 placements 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 void periods (the period of time between one tenant moving out and another moving in, during which time, rent is not being paid).
So, to ensure a positive cash-flow and a reasonable profit, a landlord must look to 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 add significantly to future rental income, 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, as well 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 (and should) 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.
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Flipping (buy-refurbish-sell or property trading) is a short-term play that involves buying a property, increasing its value and 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.
Building an extension would be another way of doing it.
Or a more legal route might be one to take, securing a change of use or getting planning permission in place can both 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 game 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.
Making Money in Property
We've outlined three mainstream, well known and widely preferred strategies to make money in property.
We've got rental returns (buy and hold), flipping or trading (buy-refurbish sell), and we have buy-refurbish-hold with the option of refinancing.
But of course, there are lots of ways to find profit in bricks and mortar. Most obviously, 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.
Real Estate Investment Trusts
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 practised, is to invest, using a crowdfunding platform.
I'm sure I don't need to explain the concept behind crowdfunding, but the principle is to join other investors and provide the funds for a project or acquisition, together.
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.
Let me Count the Ways
There are many ways to invest in, and make money from, property. It all comes down to the expectations, circumstances and psychology of the investor, determining which path they choose.
And all investors need to ask themselves some big questions, before getting into a project or trade.
- For how long should an asset be owned?
- What is the exit strategy?
- How hands-on are they willing to be?
- How much money is predicted to be made at both the top and bottom ends and is from equity growth or rental yield or a combination of both?
Because as a prospective landlord, a buy-to-let investor or a property developer, there are a lot of options that lie before you.
There are HMOs (houses in multiple occupations); renting individual units, within a house, to tenants - through to serviced accommodation (holiday and corporate lets) where you rent at a premium, over the short-term.
Social housing is another option, where a house or flat would be leased to a housing association, charity or non-profit who have housing needs for tenants requiring some form of support.
Then there is student housing or PBSA (purpose-built student accommodation) which can be cheap to buy and yield high returns in the right areas.
There are a lot of options.
Whether you are looking to rent to professionals, living alone, to families, groups or people or companies, is an issue, requiring careful consideration before you take the plunge.
Bringing it all Back Together: The Fundamentals
As is often repeated, cash-flow is king.
If the strategy involves rental income then your income and expenditure need to be understood and calculated - in granular detail - or you run a risk of going into the red.
And to maximise your income, you need to understand your tenant profile, own the right property at an expected standard and have picked the right location.
(Location and local market analysis are key.)
Then there is financing or buying with cash. Every investor needs to understand their leverage - their position and exposure to risk.
Then, finally, there needs to be an exit strategy and a plan for getting out of the deal or selling up, when certain conditions are met.
But in all of this, the two biggest considerations are people and places. Who is the customer, where do they want to live, what do they expect and what will they pay?