What property investment strategy to use can be a tricky question to answer but in this post I will try to help you make that decision. I will go through a variety of strategies (the most common ones) and give you my comments as to why and when they might work best and their pros and cons.
As with the previous posts, I will apply the terminology used in the UK but many of these will be the same or very similar to other countries. I would say that all of these strategies exist in most countries in one shape or form. For simplicity, I will not take cost, fees and taxes into consideration in my calculations as they will vary from case to case so please bear that in mind.
The sooner you can figure out which strategy is right for you, the better!
So let’s dig in!
Flipping
The strategy of flipping might be one of the most common property investment strategies talked about. It basically means that you buy a property and have something done to the property to increase the value and then sell it on. Investors who do this intend to make “fast” money as they have no intention of holding the property over the long run. Fast in, fast out.
When this strategy is spoken about “too much” maybe one should be a bit concerned as it is likely to mean that loads of new (novice) players are entering the market. So when your hairdresser and cab-driver talks about flipping properties we might be close to a peak and competition to buy is likely to be fierce.
The way flipping is done is to try and buy something that is “cheap” and then add value and sell it to a higher price and pocket the difference. Some investors prefer to buy cash, i.e. without using a mortgage as the process will be faster and they expect to be able to get better deals as they can act fast!
Adding value to a property can be done in many different ways like:
- Renovating parts of or the whole property
- Replacing bathroom or kitchen
- Add an extension
- Change the layout
- Split the land (sell a plot as a new property)
- Etc…
When this is an interesting property investment strategy
When you are starting out but want to increase the amount of cash you have to invest in other properties, this might be one of the most appealing strategies. Say that you buy a property for 100k, renovate for 30k and sell for 155k (not taking fees or taxes into account as this is just an example). You pocket 25k.
When buying another property using financing and if the lender will give you a 75% Loan To Value (LTV), basically meaning you need 25% cash and the lender will lend you the 75%, you can now buy a property for 100k.
If you wanted to make that 25k from rental income and let’s just assume your rental property would generate an annual profit of 5,000 (417 USD per month), it would take 5 years to get to 25k! This is one of the reasons why many investors look at this strategy, to speed up the process of being able to expand their portfolio.
In my experience and taken all costs into consideration, if you can make 20% in 6-12 months, then that’s a very attractive deal. If it’s much higher on paper, I would be a bit skeptic (but still happy to look at it of course).
To make this happen, you must know what you are doing of course and/or have a great team around you that you can trust. There are more risks with this kind of property investment strategy compared to just renting out a place as there are significant costs involved in renovations and if not under control, a potential profit can easily turn into a loss.
Pros and Cons
I like the strategy for the above reasons as it’s one of the best ways to generate larger amounts of cash quickly but it’s not a guarantee. If one knows the area well, understands the market and the renovation and is comfortable with the expected price one can catch after the renovation, this can be very lucrative. The cool things as well is that if you can run this operation smoothly it can all be done within months and not years (depending on the legal process and the time things take in the country of the investments of course).
The good and the bad with it is that it can all happen very fast. You can make a lot of money fast but if you are not in control or haven’t done your research, you can lose a lot of money! What I’m saying is that you have to understand what you are doing and when starting out with this strategy you should ideally start with some minor renovations and not structural ones!
As with any strategy, it’s always good to have at least two different strategies for each project as things can (and will) happen along the way. Say for example you intend to flip the property, then Corona happens and the market you are in completely freezes (or values fall significantly). In these situations you want to have a second strategy, like being able to rent the place out until the market has calmed down. This means you need to have the financial strength to be able to hold the property longer than what you initially intended as well as knowing the level of rent you can achieve if that’s your alternative strategy.
If you are interested in this strategy, just have a look in the area you find attractive and look at prices for run-down properties versus newly renovated ones (like for like!). Then try to estimate the costs of the required renovations (or ask a builder) and you then know if this would possibly work in that area or not. Of course you have to take all costs into consideration like lawyers, estate agent fees, finance costs, stamp duty etc.
Buy Renovate Refinance Rent (BRRR)
This is the one I personally love as it lets you get your money back out fast BUT you still keep the property. The strategy is exactly what it says and it’s very similar to flipping but the main difference is that you intend to keep it by getting a mortgage.
First you buy a property, either with cash or a mortgage, then you renovate it and get a new valuation on the property with the intention of having it valued much higher than the money you have put into the property.
For example: Let’s say you do as in the previous example, you purchase the property for 100k, renovate for 30k and instead of selling for 155k you get a valuation at that level. If you then take out a mortgage on this property and you can borrow 80% of the value, you can borrow 155*0,8 = 124k
You have invested a total of 130k and can now get a 124k mortgage which means you only have 6k of your own money left in the deal but you still own the property and can rent it out!
An ideal scenario would be if you get a valuation higher than 162,5k and if the LTV is 80%, that would mean you would get a mortgage of 130k and get all your money back out!
What happens here is that if done perfectly, you can own a property plus get all your money back out and then some extra!
When this is an interesting property investment strategy
When you are starting out and want to build a portfolio using leverage (of course you want to use smart leverage!) but with limited funds. If executed well, this is a brilliant strategy as you add so much value, you get all your money back out and can do the same thing again and again! This is my favorite as you are literally going for two strategies at the same time (sort of), flipping by increasing the value BUT with the intention of holding it and building a portfolio and creating cash-flow.
I am not saying it’s easy and you will be “in the hands” of the valuer once the property has been valued and you want to get a mortgage on it. Though there are ways to minimize this valuation risk as well by having a clear and structured process with great documentation and analysis readily available once you meet the valuer for the valuation.
Pros and Cons
Unless you have unlimited funds or financing, this might be one of the best ways to build a long term portfolio and you will learn both worlds in terms of looking for objects for potential flips but also for letting. You will learn the letting process (via an agent of course) and everything that comes with that. Basically you will become quite knowledgeable fast.
The con is of course that it might not work and you will have to understand how surveyors/valuers work. There might be a hard time getting the valuation you want as they will know the amount you purchased the property for but still, it is doable. The main “risk” the way I see it is that you don’t get the valuation you want and hence have to leave more money in the deal. Still as your intention really is to let, the numbers as a let should still be attractive (else you should not have entered into the deal in the first place).
Buy to let (BTL)
Is just that, you buy a property to let it out. Plain and simple and the basic strategy most investors do in one form or another. When you talk about this strategy it’s often just one property and one tenant/family living in that property.
When this is an interesting property investment strategy
As with all different strategies you will have to do your homework to understand the demand and rental yield you can expect. As always, your numbers have to work. Personally I find this interesting as a base in any property portfolio. This is the “cash-cow” where you have stability and consistent cash-flow over time. If you manage to keep your tenants happy ideally they stay for years and just keep paying on time, hassle free.
Again, this is likely to be the base for most investors and this is also a great way of getting a track-record which all lenders like. When you can show that you own properties and that the money is flowing in consistently, they will be much happier to lend more money to you compared to if you don’t have these kinds of properties in your portfolio.
Pros and Cons
In an ideal world, it’s a hassle free and consistent cash-flow. It’s a very easy strategy to understand and to get started with as the market for rental levels in most cases (if not all) is very transparent. So you will know what you get and how much rent you will achieve. What you have to understand is what you need to do with the property (if anything) in order to make sure the standard is good enough and durable.
This will not make you rich fast but it’s likely to consistently provide you with cash (which is what we all need to live!) and over time they should also increase in value. If you buy to let without doing any renovations, you are likely to lock-in 20-25% of your money in the transaction for quite a few years. That is if you borrow 75% and invest 25% of your cash and the market barely moves over the coming years. So your money might be “locked-up” for some time.
Depending on your situation and what you want to accomplish and how, this might be the route for you, or not but it’s the simplest and most straight-forward way of investing in properties.
Houses in multiple occupation (HMO)
Is when a property is let to at least 3 individuals who don’t belong to the same family and where they share communal areas like bathroom, kitchen and living room.
It’s basically a shared accommodation but the rules have become stricter and stricter in the UK and a license might be required if you run a property like this with 3 tenants. If the property has 5 or more tenants, a license is mandatory. As the rules are constantly changing, one has to stay informed to make sure all the rules and regulations are met.
In the UK it’s quite common to share accommodation even after school. So you could be renting to students, key workers or professionals and it all depends on the type of property, location and standards of course. Mixing tenants randomly might be a challenge as you want to keep the turnover as low as possible as every replacement will cost you money.
Another thing to bear in mind when doing HMOs are that all bills have to be included and also furniture and those costs of course have to be accounted for and taken into consideration.
When this is an interesting property investment strategy
I would say that those who are looking for substantial cash-flows are the ones focusing on this strategy. The reason is that the cash-flow might be in the region of 3-4 times higher than a traditional BTL, for the same property! Yes, it requires more work and have more costs but the NET return is likely to be several times higher than a traditional BTL.
A rule of thumb for this strategy is to go for a minimum of five rooms as the three first ones are likely to “just” cover the costs of running the place so the additional ones will be the profit generators. One still has to be very careful to make sure one can get a licence prior to purchasing a property with the intention of turning it into an HMO as the numbers otherwise will be very different.
If your main goal is significant cash-flow fast, then this might be one of the most interesting strategies for you. Just make sure you understand what is required in your area and what the demand and price range is.
Pros and Cons
The main advantage is the potential very high cash-flow but there are a few drawbacks… Regulations can change and that fast which might mean you can’t renew your license or you will incur additional costs. The valuation of an HMO might be tricky, will it be a “bricks and mortar” or a commercial valuation? They will differ in value and interest rates. You have to be careful about how much you buy it for if you intend to get a mortgage so that you won’t get a nasty surprise if they value the property as a “bricks and mortar”.
You will have high running costs regardless of whether you have tenants or not and there is in general much more maintenance and high turnover (again more costs). Basically, there are several more factors to take into consideration prior to jumping into an HMO deal.
The other aspect to bear in mind is that the renovation and application to convert a traditional home to a legal HMO might take a year or more. This in turn means you will have to be financing it until it’s completed and cover all the running costs along the way until you can get paying tenants.
Despite the above challenges, this is one of the most popular strategies in the UK based on the potential cash-flow it can generate for it’s investors but be aware that it’s a competitive market!
Serviced Accommodation/Apartments
Serviced accommodation or apartments are properties often let to professionals who expect almost hotel-like standards and services but with access to (or it’s own) kitchen and similar facilities. They want to feel at home whilst “away” when staying in serviced accommodation and often these stays are for x weeks or months at the time.
The range on how a serviced accommodation can be offered and what services are available can vary a lot. Cleaning is often included even though they have a washing machine or access to one. The thing with serviced apartments is that they are often paid for by the company and booked for months. The rent or rate is much higher than a traditional BTL, as it’s not a long term rental in that sense, which might make this appealing if in the right location!
When this is an interesting property investment strategy
If you are focusing on an area where local companies have staff coming in for months at the time, it might be very interesting to look at this alternative. You will have to make sure you can offer the services they expect or have someone else do it for you and be able to cover the costs. Often SA’s have staff on site all the time but it doesn’t have to be the case.
The cash-flow is higher but more is expected and again, the location is key to be able to get the right kind of tenants for your property.
Pros and Cons
There are a few aspects I really like with this strategy and the first one is that you are targeting professional workers. Often they are at this location for a limited period and they are often working quite a bit (less time spent in the property). The company pays the rent so there should be very limited risk that the rent won’t be paid and on top of that, the return is higher than a traditional BTL.
The risk that stands out to me is being dependent on one or even a few companies for tenants and if something happens to those companies it might mean trouble. If the source of income is coming from one employer who has staff staying in your SA and they close their business or something significant happens, then what?! One has to really do the homework to understand the demand and if the niche is too small, i.e. too few potential clients. One must have a good back-up plan. This is especially true if you are buying an already existing SA and paying a price based on the current yield. Understanding your options and risks are key, as always!
The other aspect is to also understand how the service should be handled and the costs associated with that. Even if parts of your SA is empty and if you have staff, they will have to be paid. Basically, there are more variables and more costs with running an SA than a traditional BTL but that is also why the return potentials are greater! Just make sure you do your homework prior to entering this space.
Holiday Let
This strategy is exactly what it says, you let your place to holiday makers. This space is getting very crowded in many places. The spectrum of how one does it and what one offers can vary greatly. Some run their holiday lets like serviced accommodations where there are a lot of additional services to be had, whilst some run them like a bed and breakfast.
As you can understand, the location and competition is they key here if one wants to be successful. If you manage to create the right type of property in the right location, the returns can be very handsome and often a multiple of what the same property would yield as a BTL.
As a traveler, you often expect your stay to feel almost like living “at home” and with local hospitality. I often use holiday lets when travelling instead of staying in hotels. Hotels often feel very standardized and there is nothing special to them, unless you pay over the top of course. Whilst staying in a holiday let, you often get a completely different experience during your stay. When we travel, we often book via Airbnb which we have written about extensively before and if you want to know how you can do this too, check out the series on how to become a host on Airbnb.
Some things to consider are that there is a lot more work to a holiday let compared to a traditional BTL. Often cleaning needs to be done between guests, bedding and towels need changing etc. As the occupancy level will vary over time, it might be harder to plan. You also have to make sure that you are running your holiday let in a satisfactory manner as guests often leave reviews after their stay, so no slacking!
When this is an interesting property investment strategy
If you are interested in handling all the associated work with bookings, preparation, cleaning, communication etc., then this might be for you. The easiest way to do it is actually to start by letting your own place, or part of it, on a site like Airbnb. That will very quickly give you an idea whether this is something you would like to do. Regardless of where you live, I’m sure you can attract some guests even if you might feel it’s not an ideal holiday location, just price it accordingly. For more information on how to get started down the Airbnb route, check out this post: Airbnb – dipping your toes into property investing
The other obvious reason to look at this is if you can access properties in great locations where you know there is demand for holiday lets and limited supply. Still, you will have to make sure you can set up a great structure around the management of that/those properties!
In the UK, there are providers offering these services but it’s not as common to find a letting agent who has the experience and capacity to handle it, but if you do, it can be a gold mine!
Just to give you some rough numbers on what it can look like:
A BTL that might generate around 600 USD per month could generate around 100 USD per night and if you can run it at 70% (around the level often needed to break-even), that would equal 2,100 per month! Often there is seasonality but we are talking about the average.
In a BTL, you might have running costs of around 100 USD (council tax, insurance, letting agent fees etc..) so after running costs (excluding any mortgage) you might make around 500 USD profit pre-tax.
The Serviced accommodation will be very different as you have to cover all costs, like utilities, management, cleaning, washing etc. after every client! Just the cleaning and washing can cost up to 100 USD per stay and if the average stay is 3 nights that means 700 USD in those kinds of costs. Then you have management and utilities etc. which might be 400 USD. That would leave you with 1,000 USD per month. It’s still double the BTL but as you can see, more work and the occupancy and hence income level might fluctuate. If/when something like Covid strikes again, the hit can be devastating if this is the only strategy.
Pros and Cons
I’m an avid traveler so I love this space and I do think that just by travelling a lot, one can get loads of valuable insights and experiences that can be useful when starting a holiday let.
The first advantage with this strategy is that anyone can get started at more or less zero cost to try it out and get some insights and knowledge about how it works. This is done by letting one’s own home, either the whole property or just a room. In many cases we just need to let our place out for a week or so to have all our monthly accommodation costs paid for!
Another advantage is that often a middle man (a booking site) is used which means you will get paid and there is a great system for managing your bookings. Your guests have most likely stayed with other hosts, which means there are other hosts who have reviewed the guests and if they have poor reviews, you don’t have to accept their bookings! You can also dictate the rules of their stay as well as the length. This is also a great thing as your guests often only stay for a few days so if you are not that happy about them, they will soon be gone.
Many of our guests on Airbnb are returning guests which means there is more predictability and you also know your guests better which is always a nice feeling.
On the down-side you have the risk of low or no occupancy if something terrible like Covid-19 happens. Then you have to be smart and react fast to make sure you don’t go to zero income whist still having “high” running costs.
You will unfortunately have a lot of competition as anyone can offer their place to holiday makers and compete with you. Again, your place, location and the reviews you have will play a significant role in the demand going forward. The other aspect which can be a bit of an unknown is if there are regulatory changes in your area which limits you from continuing your holiday let. If you are running your properties as a holiday portfolio, using a company structure and following the rules, you just have to adapt to the changes.
What we have seen within this space is that the hotels don’t like the competition from private individuals as the rules are often much stricter on running a hotel than an Airbnb in one’s home. This is just something to be aware of and regulatory changes we can’t do anything about but it’s something to bear in mind, especially if you do this as a private individual and as a small “side hustle”.
If you intend to create and run it is a professional property investor, you of course have to constantly keep up with the law and any regulatory changes.
Rent to Rent
This is when you find a property you can rent and then you in turn rent it to someone else. There are quite a few things to consider with these arrangements but they can also be quite lucrative and some don’t even require any money invested up-front.
A pretty common arrangement is when you rent a large property long term and with the owner’s approval (and their lender if they have one) you might rent it out by the room. This would mean you “convert” a traditional BTL property to an HMO and manage everything and pocket the difference in the cash-flow.
To be able to do this, you might have to spend some money doing some partial renovations/upgrades as well as furniture the whole place and apply for a license for the HMO if that is required.
When this is an interesting property investment strategy
If you don’t have the money to buy a property or any possibility of financing a property purchase, this might be an interesting route to take. In essence, if you are looking for cash-flow but minimized outlays, this might be an interesting avenue.
It seems like many new investors or want-to-be-investors are looking into this space and that of course makes sense as it requires very little or even no money to get going with this strategy. So if you are after cash-flow and not actually interested in owning the assets, then this might be an interesting alternative. It might also be a great way to get started to get a track-record within the property area which is very likely to help you further down the line when you want to make that first purchase.
What some investors tend to do is signing a lease option agreement and then change it into an HMO generating a nice cash-flow and then when they intend to use the option of buying, the get a commercial valuation and take out a mortgage. This means that the lender doesn’t look at the property only as a bricks and mortar when valuing it but they look at the cash-flow it’s generating. This often means that the valuation is significantly higher than the bricks and mortar valuation, which probably was used when the potential buyer and seller agreed on the selling price at the outset of the lease option agreement.
Pros and Cons
The main advantage is the fact that this strategy can generate very handsome cash-flow without large investments and that is of course great! Although these strategies often mean a bit more risk/work as they tend to go down the HMO or Holiday Let route.
On the risk side, the key aspect in my view to be careful about is the contract. It has to be a contract where you understand everything and especially in terms of your responsibilities when it comes to maintenance and what condition the property is expected to be in once the contract ends. One would also have to be very clear on when and how the contract can be terminated. As an investor, you don’t want to enter into an agreement, be doing some initial renovations and then 6 months down the line have the contract cancelled… Read it very carefully and make sure you understand the rules in your country and involve a lawyer even if it comes at a cost, that would be my advice.
So if you are a bit short on cash or not keen on owning but still want to get going and start generating cash-flow from properties, this might be the right way to go for you!
Lease Option
Is when you rent a property and then at a future, predetermined date, you have the option to buy the property at a predefined price.
So it’s a combination of renting and buying at the same time but where at the end of the term, you have the alternative to buy if you want to but you don’t have to. Agreements can of course be written in different ways but often the purchase is (as the heading states) optional and not mandatory. Else it would be called a Lease Purchase Contract.
When this is an interesting property investment strategy
There might be several instances when this can be of interest. You might have found a property you really like but don’t have the funds right now but you are comfortable you will have them the future. The seller might not be interested in selling right now for whatever reason but would be happy to rent it out to you and give you the option to purchase further down the line.
So if you have, or don’t have the money right now and if the future seller is open to a lease agreement, you might have a great transaction. If property values for some reason were to fall through the floor, you could just decline to buy and return the property to the owner.
Maybe you are looking at investing in an area where you think there will be some significant changes over time but you are not, then this again could be an interesting approach to invest in that area.
Pros and Cons
If you know what you are doing and can get a great deal with a future payment date, brilliant! Also the cash-flow you can generate during the rental period might help to pay for the actual purchase which is brilliant. The other aspect is the fact that even if you don’t have the money today, you can enter into an agreement like this and secure your investment.
On the downside I would say we have the legal aspect. Again, one has to be very good at reading legal texts or have a great lawyer just to make sure everything is crystal clear. Then there might be challenges finding the deals but that’s not really a negative but rather a challenge and the same goes for all investors so if you find a way of doing this, you have an edge!
These I would say are the most common property investment strategies to use but there are loads of variations and mixes. The key thing is to find a way that works for you and that you understand what you are doing. Still, knowing is not enough, not even close but doing is.
Now kick ass!
Actions to take:
- Start with our overview of the property investing series
- Then – Airbnb – dipping your toes into property investing
- Third – Our full series on how to go from A-Z with your first property
– Jakob
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