5 Strategic questions to consider in choosing a property model
One of the exciting parts of property investing is that there are lots of different property models out there for making money from property.
Be it second-hand refurbs, being a developer yourself, new build and off plan, HMO, rent to rent, serviced apartments, lease options and all forms of alternative property investments like student lets, hotel investments, holiday rentals etc.
With so many models out there it is important to have a strategy in place, your strategy will give you focus in helping you determine what you should concentrate on to implement, and what model that is just not right for you, as it does not match with your situation and goals.
I come across so many people who attend property seminars and are full of enthusiasm following on from the theory they have just picked up from seminars without necessarily becoming grounded on what it really takes on a practical level to create the level of success they short term believe they will achieve after such seminars.
You’ll find that most property models being preached about at seminars are suitable for people who want to do property full time and get their income from property full time which is great if that is you, but not practical for a lot of people’s lifestyle, desires or stage in life.
The main model you’ll get from a property seminar is either buy high yield lower priced properties or buy the worse property in a really good area/street and do it up.
With buy high yield low priced properties, the challenge is in the areas where this happens in the UK you do not get the growth, hence why they stay cheap and usually you do not get the best quality tenants.
The real challenge is since the growth in these areas are not there (regardless on marketing claims ), it requires more of your own funds to grow the portfolio or even worse borrowing money from friends and family and giving away the yield.
You scale the above up and you end up creating problems for yourself with more cheap properties not growing in value, with potentially not the best quality of tenants, hence why It’s important to have a real proper assessment of your situation and goals first, as it could be best for you to focus on quality over quantity of properties.
With buy the worse second-hand properties in a really good area/street and do it up, you’ll need to be full time and effectively become a developer (There are models in place though were as opposed to being the developer, you can leverage off a great developer like off-plan when done well).
What you’ll find is, seminar students who succeed are the ones who make the sacrifice to give up their jobs and end up doing property full time, then start selling educational course, seminars or some form of mentorship which is where the real money is made from the seminar business model (Selling theory – education), not necessarily property.
Here is a small list of factors to consider in determining what is the best strategy and property model for you based on what stage in life you are at, your goals from property and the property market cycle.
1 – What is your predominant goal from a property?
Property is just a vehicle we use to achieve specific goals we have for ourselves. Be it as part of a retirement plan, replacing a full-time job, a hobby you enjoy, or you see It as a store of wealth to have something to pass on to your kids.
Your reason for using the vehicle will determine exactly what property model you should be buying.
2 – What return do you predominantly want from the property?
Once you have clarity on your reason for the vehicle, then the next thought should be does my reason require me to have an immediate return now to live on (income – short term) or is my focus more on getting a return in the future (capital growth – mid to long term).
This is critical to get clear on because this will determine what model you choose to go ahead with, the area you choose to buy in and the property you choose to buy.
Each property you purchase will either predominantly be an income-producing property (Generator – high yield and low capital growth) or will either predominantly be a capital appreciating property (Accelerator – high capital growth and low yield).
Whilst you can balance out your portfolio with a combination of income-producing properties and capital appreciating properties, there is, unfortunately, no perfect property that will give you both high yield (over 8%) and high capital growth (Over 8% yearly), it just doesn’t exist so stop looking for it….to achieve this you’ll need to combine several strategies.
3 – What is your current situation now – Your current Income, the current level of capital to invest and do you need the extra income now to maintain your lifestyle?
Do you currently earn enough income to maintain your lifestyle? Do you enjoy your full -time job/business and are happy to carry it on for the foreseeable future?
These are some strategic questions you want to consider because if you want to maximise the use of leverage and benefit from compounded growth using a capital appreciation strategy, then whilst the properties you purchase may be sufficient to look after themselves cash flow wise, do not expect to be able to live on the cash flow from the properties.
You will have to have a secure and reliable source of income other than from the properties whilst you allow time for these properties to truly appreciate in value over the years.
If you do need an income stream straight away, then perhaps an income producing model may be best for you, however, if you want a significantly high-income stream, you may need to be hand on.
So the next question is: do you have the time, effort and knowledge required to follow a strategy that will produce a high-income stream for you right now?.
4 – How much time can you put into a property (Hands on vs hands off)?
Most people nowadays no longer work from 9 am to 5 pm. Most full-time jobs are now realistically 6 am from when you get up to 7-8pm when you arrive back at home.
Property investment, to do it properly using second-hand models is a full-time commitment and it’s very competitive.
If you have the time and passion for property then the second-hand route whether via refurbs, being a developer, rent to rent, service apartment or HMOs might be the way for you, but expect some competition and be prepared to work hard to see some results.
You also want to put a value on your return on time invested. Is your time best rewarded working on something else other than property?
Alternatively, if you haven’t got enough free time or realise that you can get a greater return on your time from something else other than working on property, then new build and off plan model could be right for you as it requires less of your time, and produce a higher return for your time invested.
5- What is your current age (Life Stage)?
Finally, your age is an important factor. You speak to any expert out there and they’ll say get into the property as early as possible why? Well, one reason is one of the greatest assets we have whilst we are young and earning a good income is our ability to leverage and benefit from compounded growth.
Your ability to leverage diminishes as you get older as most banks’ lending on Buy to lets will lend to you right up to the age of 65 to 75 (In some case 85). But let’s be honest do you really want to be worrying about debts by the age of 65? So, assuming you are 60 years old, then you’ll only be able to get a 15-year loan term maximum with most banks.
It’s best to use good debt to your advantage when you are young to create wealth that you can live on when you are older.
If you are already in your 60s then an income-focused strategy could be best for you, unless you do not need further income and just want to invest for something down the line for the kids.
No doubt there are a few things to consider when determining the best strategy and thus property model to meet each person’s individual situation and goals.
Once you have considered all these factors mentioned above, the most important next step is to gain the knowledge surrounding your strategy and the knowledge surrounding the property model you’ll use to meet your strategic objectives.
You need to invest the time to learn everything you can about that strategy. You want to know the good, the bad and the damn right ugly. You obviously want to learn how to avoid the bad and the ugly.
One of the best ways to developing knowledge is by spending time with people who have implemented that strategy and are willing to share their knowledge with you. Contact the team at Gladfish today.