Buy To Let As An Investment Strategy
Investing in property as a pension has a sense of comfort and familiarity however
for most of us decent pensions disappeared at the same time as Jobs for Life and so we Defined Contributionpension pots spread across several employers, which to be honest are likely to add up to nothing much.
Sticking your head in the sand isnt an option if you are looking for financial security today and in your retirement.Now is the time for you to look outside the box.
Buy to let property as an investment strategy is a proven route for achieving financial security and wealth, however it can seem daunting and overwhelming when first starting, as there are so many strategies tofollow.
So please find below a brief overview of the four main strategies for investing in property. With each I have given an overview of the advantages and disadvantages as I see them, so you can take action and make your own informed decision.
Buy to Sell
This involves you purchasinga property with the specific aim of adding value and selling it at a profit. Think Sarah Beeny, Property Ladder and youll know this strategy. The key to success is buying at the right price, having an accurate calculation ofthe refurbishment costs (and sticking to them) and then being able to sell for a profit.
Advantage
If executed correctly buy to sell (or flipping) gives you the ability to walk away with a handsome profit. And getting a big cash injection can be very appealing.
Disadvantage.
Its an extremely popular strategy in an upwardly mobile market; however we are unlikely to experience that for several years. To fully utilise this strategy today you need to know your area thoroughly and buy significantly below market value, you need to be confident you can stay within your refurbishment budget and importantly you also need to keep constantly aware of changes in the market and be prepared to amend your exit strategy to Plan B if required (i.e. renting out).
This is particularly important as many flippers had their fingers burnt when the market crashed suddenly in 2007 /08 and they were left with properties they were unable to sell at a profit.
Looking at it from an income viewpoint this property investment strategy,does indeed give you the ability to get big cash injections, however the truth is you are only as good as your last deal. Its a bit like being a contractor;the money can soon dry up between contracts. And remember of course if you do make a healthy profit you will need to pay Capital Gains Tax!!
Lease Options
This property investment strategy has its foundations built in the Commercial world, the move across toresidential properties gathering popularity with the financial crash. It becameparticularly fashionable amongst those investors who fell out of favour with the banks for lending, due to bad credit scores, or lack of deposits etc.
Under a Lease Option you do not own the property but take a lease on the property for the agreed period, with the Option to purchase within a specified time in the future (i.e. with the next 5 years). The owner moves out of their home, and the property is rented out during the Lease period, you babysit the mortgage for them during this period (i.e. pay it) and you gather the rent.
Advantages
The upfront money required to enter into one of these agreements can be minimal and during the Lease period you receive the rental income from the property. You can also benefit from a lump sum under the Purchase Option. (This is the difference between the price you agreed to pay the Vendor for the property, and the actual market value at that time).
Lease Options also provide the major advantage that because it is an option to purchase you can walk away from the deal if the marketplace doesnt support the purchase price you agreed. (I.e. you took the Option to purchase the property at 200k December 2017, but when you reach that date it is actually only worth 170k). However, although you are not legally bound to Complete on the transaction, morally you are and so should this situation occur you really should look for an extension on the contract until the marketplace picks up again.
Disadvantages
This is not a traditional investment strategy and therefore this type of property investment is rarely found via the usual route of Estate Agents. Instead you need to get involved with direct to Vendor leafleting or establishing your own website, (both of which can involve a lot of upfront input in terms of both time and money).
Also because it is not common practice you need to allow extra time for several visits to the Vendor to explain the process and gain their buy in, and by no means can you expect to convert 100% of prospects.In fact the conversion rate is considerably lower than on a traditional purchase, as you need to find a Vendor who is willing to wait several years before they receive the money from the house.
Because of this delay in the transfer of money it is essential that you get your Legal Paperwork water tight, otherwise you may leave yourself open to a dispute (particularly if the house is valued considerably higher than what you agreed to pay for it). Finally as you are not the legal owner during the lease period you need to be aware this strategy leaves you exposed should the Vendor die or go bankrupt during the option period.
Buy to Rent
Often referred to as Corporate Lets this investment strategy involves you renting a property from a disgruntled, or tired landlord and then renting the property on at a higher rate on a room by room basis.
Advantages
A really great strategy to deliver high cash-flowing houses, with very little money required upfront.
Disadvantages
One of the massive advantages of this strategy is it can offer very good cash flow, however as a distinct disadvantage it is not a passive income. The high yielding benefits of this type of strategy comes at the price of you self managing the property. This means you will need to act as a Letting Agent and deal with the day to day issues of the property along with finding, interviewing and doing all the relevant credit checks tofill empty rooms.
Also you will sign an Assured Short holdTenancy (AST) agreement with the Landlord, and like any AST at the end of the period the Landlord has the right to change their mind about renting to you, so your tenants will need to vacate the property and your cashflow will cease. Taking this factor into consideration it is wise to ensure any refurbishment workneeded to make it rentable on a room by room basis, is kept to a minimum cost, unless of course you can get the owner to shoulder the full cost.
This strategy is limited to cash-flow only. As you never own the property, so cannot benefit from any capital growth over time. Put simply your income is as good as your agreement with the landlord.
From a paperwork viewpoint and my ex Mortgage Broker head, I would also recommend you working closely with the Owner, to ensure:
1) the property is on the correct HMO mortgage product otherwise you run the risk of the bank lending being withdrawn with the move to multiple tenants, since this will put the owner in breach of their existing residential mortgage terms.
2) The property is insured for multiple tenants, as you do not want to leave yourself legally exposed to be sued.
Buy and Hold
This Buy to Let investment strategy does exactly what it says on the tin, as you buy the property to rent it out and hold it long term. This is the strategy I utilise for our own family investment and those of my investors under Alton Property Partners and is the best property as a pension strategy.
Advantages
Buying and holding property has a proven track record to generate wealth and as the traditional route to property investment banks like it! They even allow you to leverage your investment money by utilising other peoples money to purchase up to 75% of the property. And you receive the income on the full 100%.
In addition as the legal owner you receive both the Cash flow generated and also any capital growth over the longer term.
In simple terms I believe this strategy provides you the greatest peace of mind as an investor. You can build your asset base at your own pace knowing you have control over your outcome, as you can make your own financial decisions. With the steady month in, month out cash flow having the ability to make you financially secure, both today and in retirement.
Historically property values have doubled every 7yrs 10 years since first tracked in 1952 by Nationwide, however we are currently in unchartered waters on capital growth. My projection is that we wont really see any real capital growth for several more years so the 7 10 years is more likely to be 10 yr 20 years this time around. That being said you make your money at the time of purchase and then because you are holding the property for the long term you will also have the ability to benefit from any capital growth over the long game. This capital growth can then be remortgaged out of the property for further investments, and it is tax free!
We have followed exactly this strategy with our initial three investment properties being purchased in Bristol around 1996, for 41,500, 30,000 and 31,500 respectively. They are now worth 150,000 and 100,000 each, and over the past 16 years we have remortgaged a total of 114,099 out of these properties, which we have then re-invested in more property. As we are naturally cautious investors we are also only geared at 60% across all three houses.
It is this ability to have control of your income and assets which the buy and hold strategy provides you which is of paramount importance to your financial security. You have the flexibility to build your own asset base at the pace that suits you and you can then leave it in a Will, so your family members benefit long term.
Disadvantages
You need to have access to some money for deposits, if this cant be your own then spend time looking for Joint Venture finance, this could initially come through friends and family.
And as with all investing it is essential that you do thorough due diligence, cutting corners will only be to your detriment and could mean the property you thought was going to be an asset, soon becomes a liability.
by: Gill Alton
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