Nine investment strategy solutions for property investors
Residential investment property strategies are as diverse as people. That’s one of the things that make property investment such a winner. When you want your money to work hard for you and build the lifestyle you want, there are many property investment opportunities to do so.
In this article, we describe the nine most common investment strategies that property investors use successfully to invest in residential property.
1. Long-term capital gain property
Some investors buy residential property with the objective of holding the property and making a capital gain over the long term. It may be because they think a location is undervalued or will benefit from some long-term regeneration or infrastructure investment. Whatever their reasons, these investors often allow their property to remain empty rather than have tenants paying rent.
This strategy places all faith in the market performing as expected for the investor to achieve worthwhile returns.
2. Positive cash flow residential investment property
The primary objective of an investor who buys a positive cash flow property is to produce rental income which exceeds expenses. They might also reasonably expect some capital growth, but this isn’t the main goal. The main aim is to rent out the property with as few void periods as possible.
The passive income may be used to pay down the mortgage, reinvest, or to achieve lifestyle goals. For truly passive income, the investor will factor in the cost of the benefit of using an investment property manager to take care of the day-to-day tasks of being a landlord.
3. Negative cash flow investment property
Some investors use a negative cash flow strategy in the pursuit of wealth. They are happy to subsidise a property whose rental income is less than the mortgage and other expenses. Why would they do this? Their objective is capital gain and not income. They expect the property to substantially increase in value while they own it. Let’s say you buy a property, and the expenses are £2,400 a year more than its income. You’ll have to subsidise the expenses by adding in £200 per month from your other income. However, if you expect the property to increase in value by £1,000 per month well, there are very few (if any) investment assets that could promise such a startling return on your monthly ‘investment’.
4. Renovate to let
Some residential property investors will buy properties that need renovating with the intention of creating a valuable buy-to-let property portfolio. The hope is to buy below market value, spend some money on ‘doing it up’, and then to rent out for better-than-average cash flow.
This type of positive cash flow investment strategy might produce potentially higher returns but is not without risks. Renovating a property should allow you to charge a higher rent. However, every area has a rental ceiling, and renovation costs can easily blow through budgets.
5. Renovate to sell
Most investors who buy to renovate do so with the intention of selling once the work has been completed. They hope that once completed; the renovation will add more value than the cost of renovating. They will then sell the property and bank the profit (after paying any capital gains tax liabilities, of course). They then move on to the next property and repeat the process.
This type of investment requires a keen eye and a good team around you. You’ll need to be very active in finding new property investment opportunities, too.
6. Houses in multiple occupations (HMO)
When a property is let to several unconnected people, the investor leverages occupancy to create higher gross income. You may be able to receive three payments of £400 per month instead of one payment of £900.
Usually, the gross rental yield on an HMO is higher than traditional buy-to-let. However, there are a different set of regulations, and if not already done so a property must be configured as an HMO. It also must be licensed by the local authority. Failure to get adequate licensing could result in a fine of up to £20,000 and a ban on letting.
7. Off-plan property investment
When you buy off-plan property, you should benefit from a discount to market value. Also, if the property market is firm between signing the deal and completing (which could be two or three years), then further substantial capital gains could be made. It may even be possible to sell on the contract for a profit before completion (though we wouldn’t recommend this as an investment strategy, but rather as an exit strategy if needed).
For longer-term buy-to-let investment, the off-plan property offers the benefits of low maintenance costs. Tenants are often willing to pay a premium on average rent to live in a new build home, too.
For the objectives of both capital gain and income, off-plan property investment is a popular investment strategy. The most successful off-plan property investors understand how to reduce the main risks of investing in off-plan property – financing risk, developer risk, and marketing risk. By doing this, they maximise their profit potential.
8. Distressed (or repossession) property
Investors who seek out distressed sales do so for several reasons. Such properties can provide instant capital gains, higher long-term yields from rental income, and enable a property portfolio to be built faster. A distressed sale is one where the seller is forced to sell quickly. Because of the need for speed, they are willing to accept an offer below market value.
The investor can then either flip the property for an immediate gain, rent at market rate and achieve a higher yield on their money, or use the equity in the property to repeat in a similar residential property opportunity.
Success depends upon your ability to negotiate and move quickly. It requires a good and nimble team around you, and certainty in your property investment research.
Flipping is the act of buying a property with the intention of selling almost immediately. It might be a distressed property, or one that can be bought for a bargain price at auction, or property that has been marketed poorly.
This strategy relies heavily on the market moving in your favour, and you’ll need to be very careful of other costs not destroying your profits (such as stamp duty, legal fees and agent’s fees).
How should you invest in a residential investment property?
As you can see, there are many strategies for investing in residential investment property. The one that is best for you depends on your investment objectives. You’ll also need to consider other factors, such as your investment timeframe, lifestyle goals, cash available, and attitude to risk.
When you meet with a Gladfish property consultant, they will help you build a unique property investment strategy. They will then work with you to ensure that your strategy evolves in line with your changing circumstances. As the property and economic trend cycle evolve, they will help ensure that your strategy is fit to take advantage of all market conditions and opportunities.
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