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Property in one of the main 5 asset classes, and one which many people invest in due it's tangibility, simplicity of understanding rental income and ability to leverage through mortgages thus generating a higher Return on investment (ROI). One can generate income through rent, capital appreciation and in most cases both.
Many people not only invest in property as property investors but many have now become what we call property entrepreneurs applying creative strategies which have the ability to generate income. In this guide we look at 5 strategies people use and perhaps you can one day adopt in order to become financially free.
For the purpose of this post we are going to omit the standard buy to let and 'flipping' which is where you buy a home, fix it up and sell it for a profit, like home under the hammer.
1. House of Multiple Occupancy (HMO's)
Traditional buy to let consists of buying a property and then renting it out to perhaps a family as a whole. But what if you could rent out your property on a room by room basis. This is what we tend to call multi-lets, sometimes used interchangeably with House of Multiple Occupancy (HMO). To distinguish between the two, the term multi-let is usually used to describe rental properties targeted at multiple individuals up to, lets say 4 rooms. Anything 5 rooms and above tends to be called HMO more often by investors. If planning permission is required (which is the case for some areas due to Article 4) then this is deemed more of a HMO by many investors and the truth is that those who own or aspire to own HMO's have to be properly licensed. Their properties must meet the certain requirements that are there to protect tenants and thus I see people who own HMO's as ta hybrid between property investors and property entrepreneurs.
The main benefit to this strategy is that by renting rooms out on a room by room basis rather than to a family, is that you can charge more. Think about it; did you share a house with friends at university? Are you a young professional currently doing a 'flat share'?
These are often the two main examples used when talking about Multi-lets and HMO's. House share is very common in the city that I am from (London) because quite frankly it is very expensive for young professionals who may have just secured a graduate scheme in the city, to buy a property or to rent a whole house/flat to themselves. Well, unless they are already from London or in and around, then you can stay with mum, dad, aunt, uncle or whoever will have you :). As an investor, if you want a high cash flow you can consider investing in one of these properties in perhaps university towns which could be a bit
cheaper, or if you are 'balling' or already 'swimming in cash' you can take this further buy investing in well known, highly demanded cities. (Tip: Make sure you are close to the city center and/or train stations)
The cons to this strategy is that you can end up with high turnover and thus this is not a pure passive investment. but perhaps this is worthwhile if you are planning on being more of a property entrepreneur than just a property investor. You can also get a property management company to mange things for you if you.
2. Rent-to-Rent Strategy
Rent a house of a landlord agreeing a set monthly rent for a period of time. For that period, you are now the ‘controller’ of the property, though the landlord still owns it. What you then do, is rent it out but at a higher rent than what you have agreed with the landlord. The risk is that you have agreed to pay the rent regardless of whether you can get tenants in or not. The benefit is that you don’t have to put too much money down, and you can benefit from cash flow almost immediately. Especially if you take on a house, agree a low rent, but then rent it out on a room by room basis as a HMO. It requires a bit of work so this is not totally passive income.
3. Rent-to-Serviced Accommodation
Similar to rent to rent, you agree a rent with the landlord for a period of time, you become the controller but then rather than renting it out to a family or even as a HMO, you rather rent it out as a service such as Air BnB. This is the most cash effective way but requires more work to be done and is a business rather than passive income.
4. Property Deal Sourcing
If you get the right training and you gain some experience you learn how to find properties for investments purposes and sell these onto property investors. This is more of a business rather than an investment. You can earn anywhere between £1500 to £5000 per deal depending on the size of the deal and how much leg work you would have done. Again, do make sure that if you decide to take this path, that you do it professionally and legally. Make sure you are compliant, have insurance and run it as a proper business.
As a property investor, of course you can buy deals from property sourcing companies too. Be careful, as there are so many inexperienced and bad sourcing companies out there. Also, keep in mind that just because all the work has been done for now, doesn’t mean the deal cannot still fail. You become entirely responsible as soon as you pay the deal finding fee.
5. Joint Ventures
Since one of the setbacks with traditional investing in property is the large entry costs, a way to tackle this is to do a Joint venture. This could be with family, close and trusted friends or professionals. To do this, it is advisable that you approach a solicitor and sign contracts, and/or set a business where each member of the JV has an equal shares and is a director. If you choose to choose a JV partner who claims is a professional, please make sure to do you due diligence.
Golden Nuggets:
Investing in property is an amazing way to generate passive income and applying these 5 strategies is great way to get a piece of the pie, sometimes without putting much of your own money down. The key is to get educated, find a mentor and build some experience. Don't go and quit your job because this is not easy to do and is another job. You have to have an interest and a passion for property if you are going to do very well in this space.