How To Get Started with Property Investing: Powered by VELUX
There are many ways to get into the world of real estate. Together with home improvement company VELUX, we take a look at how to make the most of your investment – a refurb being a great example of how to turn cost into profit!
In this article, we’ll explore four effective strategies: Buy to Let, Refurbish, Rent to Rent, and Deal Selling. Each comes with its own set of advantages and challenges, so let’s dive in and explore which might be the best fit for you.
1. Buy to Let: Long-term tenancy vs. serviced accommodation
Buy to Let is one of the most traditional and well-known real estate investment strategies. It involves purchasing a property with the intention of renting it out. However, within this strategy, you can choose between two different paths: long-term tenancy or serviced accommodation.
Buy to Let: Long-term tenancy
The long-term tenancy model is rather straight forward: you purchase a property, find tenants, and rent it out long-term. This strategy offers several advantages:
Stability: With long-term tenants, you benefit from a consistent rental income, reducing the risk of vacancy periods.
Ease of maintenance: Long-term tenancies generally require less frequent maintenance, as tenants are more settled and likely to take care of the property.
Set income: You can predict your income with greater accuracy, making financial planning easier.
However, this strategy is not without its downsides. The rigid nature of long-term leases can be challenging if mortgage rates increase, potentially turning your investment into a loss-making venture.
Buy to Let: Serviced accommodation
Alternatively, you might opt to rent your property as serviced accommodation. This could involve renting out the property on platforms like Airbnb, where short-term rentals are the norm. The benefits of this approach include:
Flexibility: You can adjust pricing and availability based on market demand.
Potentially higher income: With the right property and location, short-term rentals can generate more income than traditional long-term leases.
High Standards: Properties used for serviced accommodation are frequently cleaned and maintained, often to a higher standard than those under long-term tenancies.
On the flip side, income from serviced accommodation is not guaranteed, as it depends heavily on occupancy rates. Frequent guest changeovers can also lead to higher maintenance costs and more work overall. Additionally, it's crucial to ensure your mortgage allows you to rent the property as serviced accommodation; otherwise, you could face legal complications.
2. Refurbish: Add value and options
Another popular strategy is to Buy to Refurbish. This approach involves purchasing a property, improving it through renovations, and then either selling it for a profit or renting it out.
Refurbishing isn’t just about slapping on a fresh coat of paint; it’s about transforming a property to unlock its hidden potential. Here’s why this strategy is a favourite among savvy investors:
Value addition: Refurbishing a property can significantly increase its market value, providing a higher return on investment if you decide to sell.
Rental opportunities: Post-refurbishment, the property might command a higher rent, increasing your income potential.
However, refurbishing is not as simple as it sounds. It requires thorough research, a solid plan, and careful execution. Before purchasing a property for refurbishment, consult with estate agents to understand the potential resale value and rental income. This will help you determine whether the investment is likely to yield a profit.
Crack the financials
For those planning to refurbish and sell, the financials are critical. A basic formula to keep in mind is:
Net Profit Percentage = (Value of Property After Refurbishment - (Purchase Price + Building Costs + Legals & Tax)) / Value of Property After Refurbishment
For example:
· Purchase price: £500,000
· Building costs: £100,000
· Legals & tax: £30,000
· Value after refurbishment: £850,000
Net Profit: £220,000
Net Profit Percentage: 25.88%
Aiming for at least a 25% net profit is advisable.
3. Rent to Rent: Leveraging existing properties
The Rent-to-Rent strategy involves renting a property from a landlord and then subletting it as serviced accommodation. This can be a lucrative way to generate income without the need to own property outright.
Key points:
· Company lease: Instead of a tenancy agreement, you enter a company lease with the landlord, typically for a long-term contract.
· Quick return: The goal is to recoup your initial investment within the first year of operation.
· Due diligence: Ensure that the landlord’s mortgage permits subletting as serviced accommodation and carefully assess the property’s surroundings, as they could impact your business.
This strategy requires a goodrelationship with the landlord and a solid understanding of local rental markets. It’s essential to conduct thorough research and ensure that the property’s location and condition will attract enough demand to make the venture profitable.
4. Deal Selling: Becoming the middleman
If you have a knack for finding lucrative property deals but aren’t ready to invest yourself, deal selling might be the perfect strategy for you. This involves finding great property deals and selling them to other investors for a fee.
Requirements:
· Experience: You need a good understanding of the market and the ability to identify valuable deals.
· Contracts: Legal knowledge is crucial to ensure that contracts are watertight and protect your interests.
· Networking: Building a network of investors who trust your judgment is key to success in deal selling.
This strategy can be highly profitable, but it relies heavily on your ability to source attractive deals and maintain strong relationships within the industry.
Common pitfalls and how to avoid them
No matter which strategy you choose, property investing comes with its own set of challenges. Here are some common mistakes to avoid:
1. Be realistic: Don’t let your ambitions outstrip your budget or abilities. Always plan conservatively and leave room for unexpected costs.
Barbara Entwistle, Project Development Manager at VELUX, highlights the importance of managing expectations:
“I have friends who have also done houses up. I have friends who’ve done fantastic extensions. But everything comes with a risk. Usually it’s a stress risk, but it can be a financial risk. So, what I think you first need to do, is to manage your expectations.”
2. Choose a good builder: For refurbishment projects, selecting the right builder is crucial. Check their past work, read reviews, and have a clear plan.
3. Project planning: Ensure you have a detailed project plan, including timelines for different phases. It’s wise to add extra time as a buffer.
4. Expect the unexpected: Unexpected issues will arise. Keep a contingency fund (about 10% of your estimated costs) and be prepared for delays.
5. Manage expectations: Property investing requires time, effort, and patience. Understand the commitment involved before you start.
6. Don’t assume: Never assume anything about the process or people you’re working with. Keep clear records and confirm all details.
Getting started: The first steps
Ready to dive into property investing? Here’s a simple three-step process to get started:
1. Identify your strategy: Choose the investment strategy that aligns with your goals, whether it’s Buy to Let, Refurbish, Rent to Rent, or Deal Selling.
2. Research properties: Look for properties that fit your chosen strategy. Consider factors like location, price, and potential for improvement.
3. Start your investment journey: Once you’ve found the right property, move forward with your investment. Whether you’re buying, refurbishing, or subletting, take the plunge and start building your property portfolio.
Property investing offers numerous pathways to financial success, each with unique benefits and challenges. Whether you choose to secure long-term tenants, refurbish properties for resale, sublet existing homes, or find deals for other investors, the key to success lies in careful planning, diligent research, and a realistic understanding of the market. Start small, stay informed, and your journey into property investing could be a rewarding one!
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