Renting to long term tenants may seem the obvious choice when it comes to property investment, but 2021 is proving there are several options investors can explore when researching their investment strategies for 2021.
Investing in property in the UK has proven a strong strategy for many over the last decade or two, with house prices rising consistently and frequently.
Traditionally, the most popular property investment method remains to be buy-to-let, where returns are gained through rental yields and capital appreciation over time, other methods such as flipping and HMO’s are increasing in popularity.
Property investment – How does it work?
If you’re new to property investment or have an established property portfolio, investing can be a great way to build an additional or new income. Property is often considered one of the soundest investments you can make, but as with any investment, it isn’t without risk. Ensure to carefully consider your options before making any investment decisions.
In summary, property investment works by generating a higher return, either in the form of a lump sum or an additional monthly income. This higher return is gained as a result of time and equity put into the investment project.
The investment must generate enough revenue to cover the costs of labour and interest, which is accumulated within set terms (usually 18-60 months) to ensure there will be a profit.
Here we’ll explore your property investment options for 2021: Buy to Let, HMO’s and flipping, and aim to clear up any common questions or misconceptions.
If you’ve been researching property investment, it’s likely you’ll have some idea of buy-to-let already. Buy-to-let is often the strategy most property investors start their portfolio with.
To summarise, buy-to-let is a property purchased with the intention of renting it out. This is often seen as the traditional way of investing property.
How to have success in the buy-to-let market
Ahead of any investment decision, it’s crucial to research the current market and be aware of any risks and changes happening in the pipeline.
In recent years, there have been many changes to regulation and legislation in the buy-to-let market, along with changes to tax relief and stamp duty for a second home.
Location is key
When scouting for the right location for your next buy-to-let, put yourself in the shoes of your prospective tenant. Consider if there are reliable transport links to major cities, good schools in the area or a bustling town centre.
An important part of property investment strategies is to purchase in places you’ll see the best return on investment. Make sure you take this into account as well as the tenants’ needs. A healthy balance is the winning formula.
You can also consider regeneration opportunities by researching local areas that are due to be improved.
How to finance a buy-to-let property
Once you’ve chosen the area you want your property to be in, it’s time to investigate payment options.
It’s important to remember that buy-to-let mortgages require a substantial deposit, with most needing at least a 25% deposit of the property price to be considered. This means that for a property costing £300,000, you’d need a deposit of £75,000.
Buy-to-let mortgages usually involve higher interest rates too, so you’ll need to consider how well your projected rental income will cover your monthly mortgage and other costs.
Flipping – risk versus return
Flipping has increased in popularity and desirability due to the amount of renovation television shows and dedicated Instagram accounts. However, it’s important to think about time and costs of property renovation before deciding on this route.
Flipping isn’t always a financially stable option, but some property investors have the skills to turn this into a lucrative investment model. There are some tips for success you can follow if you’re committed to flipping as an investment model.
Buying below market value
By buying a property for less than market value, you’re securing equity at the point of purchase rather than buying and hoping the property value increases.
Buying below value protects you against any dips in the market, which is important during economic uncertainty from the pandemic and Brexit. The key component to property flipping is selling for profit, so starting with positive equity gives you a head start.
Set a renovation budget
Getting this right can make or break between profit and loss. Ensure you obtain multiple quotations from trusted builders and tradespeople to avoid going over budget.
It can be a good idea to add a contingency fund to avoid blowing your budget on unexpected expenses. It’s recommended that this is 10% but some larger projects may require more.
Only spend money where it matters
Spending £50,000 on a renovation project won’t necessarily add £50,000 to the property value. Spending money where you don’t need to can harm your budget.
Discuss your plans for the property with a property specialist before undertaking any renovations, they will be well-placed to offer advice on what improvements will add value, and importantly, which ones won’t.
Get the work done quickly
Don’t forget that during the renovation project you will have to cover the cost of the mortgage, if there is one, and any utility bills and council tax. As long as you own the property, these costs are your responsibility. Be sure to include these factors in your budget, and remember the longer you keep hold of the property, the more money you are losing.
What are HMO’s?
Another option to consider when researching property investment options is to look at House of Multiple Occupancy (HMO).
The key difference between a buy-to-let property and a HMO is instead of letting a property to a single tenant or a family, rooms are let out either on an individual basis or as a shared household.
Letting as an HMO will increase the income, cash flow and yield. The more rooms in a property, the higher your income will be.
The Housing Act 2004 defines a HMO in many ways, in summary, what determines a HMO is that the property will be occupied by more than one household, more than 2 people that may include shared houses, self-contained units and bedsits.
The key to success with a HMO is creating as much space as possible to encourage extra income. For example, a large living room area could be split to create additional bedrooms, or think about a loft conversion or extension to increase space.
Think about licencing and planning
It’s important to get an understanding of the planning regulations local to your property, in case any renovation or extensions require planning permission.
Assess the local area ahead of purchase too. Make sure there is a need for HMO’s in the areas you’re planning to invest in ahead of purchase. HMO’s tend to be occupied by students and young professionals, so bear this in mind when location scouting.
In order to rent out your property as a HMO in England or Wales, you need to check whether a licence is needed.
You’ll need a licence to rent out a ‘large HMO’ in England or Wales. A large HMO is defined if the following apply:
- It is rented to five or more people who form more than one household
- At least one tenant pays rent (or their employers pays it on their behalf)
- Some or all tenants share kitchen, bathroom or toilet facilities
Local authorities will have different rules and requirements surrounding HMO’s, so be sure to contact your council before committing to a purchase.
Managing a property investment
Once you’re in the position to purchase a rental property, you’ll need to consider how it will be managed. If you choose to manage your property yourself, legislation can be complicated and staying compliant is the most important aspect to consider.
By using a letting agent, like homes4u, to manage your property, you can ensure:
- Get great tenants – advertising and referencing will be done for you
- Compliance – legislation such as gas safety checks, fire, smoke and carbon monoxide safety is all done for you
- No paperwork or hassle – Tenancy agreements, rent collection and maintenance will be handled on your behalf
If you’re starting your property investment journey, or need property management on an existing portfolio, get in touch with us today.