STRATEGIES FOR INVESTING IN PROPERTY

STRATEGIES FOR INVESTING IN PROPERTY.

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Recently week we looked at goals.

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You need to set some goals for yourself before you start to invest your hard-earned money into property. Knowing where you are going will help you navigate any twists and turns along the road.

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We identified three very different goals.

-??????Property for personal use.

-??????Property for income generation.

-??????Property for capital growth.

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But before you dive into the property market in search of a purchase alongside your goals it is worth knowing something about strategies.

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HOME IS WHERE YOUR HEART IS.

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If you are buying property for your own use, you are led by a very different set of criteria. All the many property choices that will be unique to you. Is it close to family? Is it near the football ground. Or the park? Or the beach? What’s are the schools like? Where is the shopping? Does it have a home cinema? Are all the bathrooms en-suite? In short, does it fit my needs and do you like the property? Plus of course the more rudimentary question: can you afford it. The property you pick will be a heart decision more than a head decision and will reflect your personal tastes more than market trends.

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Still, every property decision should be governed by some fundamental and practical ideas. No one likes to lose money, and to minimise the risks of that, it is best to avoid areas with poor employment prospects. Also check the crime figures in the neighbourhood. The ONS (office for National Statistics) publishes regular crime surveys.

High unemployment and high crime areas, although they can do well when the market is running hot and ‘cheap’ is the driving force, are more vulnerable to market downturns.

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In your research, look for the places with good transport links, good employment and shopping and schools prospects.

In APW Citywatch podcast episodes we focus on the PIE of a place. Not meat pies, although across the country the UK has many tasty variations, from Cornish Pasties to Steak and Kidney Puddings. In the podcasts,?we use the Acronym P.I.E. which stands for Population, Infrastructure and Employment. Properties in areas which score highly in these three categories usually have better longer-term growth potential and are less susceptible to dramatic price falls.

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MONEY OUT FOR MONEY IN

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For some, their property goal is to earn some extra money. When you define your goals you will have worked out how much extra income and for how long and when but we will start with the simplest idea. Buy and hold.

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As the name suggests this is perhaps the least hassle approach, but it does involve patience. You will have the opportunity for income, but the income comes much later. How does it work?

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BUY AND HOLD

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1.????You start by buying a property with a deposit of 20-30% of the purchase price.

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2.????The remainder of the purchase price is paid with an Interest and capital repayment mortgage.

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3.????Put a tenant in the property whose rent is enough to cover the payments on the mortgage.

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4.????Engage a management company to maintain the property.

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5.????Sit back and relax until the mortgage is paid off in 20-25 years’ time when all the rent will become income.

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The key to this strategy is buying the right property in the first place, which means looking at yield

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Yield is the ratio of the purchase price to the rental value. It is usually expressed as a percentage and calculated by dividing the annual rental income by the purchase price and expressing the figure as a percentage.

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So a ￡10000 annual income on a ￡200,000 property would become a 5% yield

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10000/20000 = 0.05 x 100 = 5%.

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In order to cover the costs of owning a property under management you should be looking of rental yield of around 6%. This is generally regarded as the amount which allows you to cover your mortgage payment and costs.

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Pros

·?????It’s a simple approach

·?????Ownership shouldn’t take up too much of your time

·?????You don’t need as much knowledge as with other strategies

·?????Someone else is paying off the debt for you.

·?????You will own a debt free property in 20 -25 years’ time.

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Cons

·?????If you plan to own more than one property, you will need to have a deposit for each one.

·?????It takes time and you may be in more of a hurry.

·?????No immediate income.

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INSTANT GRATIFICATION

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If you need immediate income then there is an alternative strategy. It is similar to the buy and hold, but, instead of a capital repayment mortgage, you opt for an interest only mortgage.

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This means that the debt is not paid down monthly. You will only be paying interest on the mortgage loan. This difference means income, which you have control of and are free to spend as you wish. Of course, you can save the income and pay off chunks of the mortgage when you choose. Most mortgages allow 10% of the total to be paid off every year without incurring penalties.

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The process is the same as the buy and hold.

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BUY FOR INCOME

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Buy a property with a 20-30% deposit.

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1.????Get an interest only mortgage for the remainder of the purchase price.

2.????Rent the property to a tenant to cover the mortgage payments and maintenance costs (again using a managing agent is sensible to keep things running smoothly)

3.????Use the extra income in whatever way you choose.

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Many investors save the money towards a deposit on an extra property.

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Pros

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·?????Relatively simple strategy

·?????Immediate income

·?????It is quicker to save for the next property.

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Cons

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·?????The debt is not paid down so you must have an idea in place to pay off the debt at the end of the mortgage term. This can be done by selling at the end of the term, paying off in lumps during the term, or by re-mortgaging before the end of the term.

·?????Each new property still requires a new deposit but with the income this can be accrued faster.

·?????It may require more of your time than the Buy and Hold strategy because you need to stay on top of the cashflow during the mortgage term. It can be surprising how quickly the years roll by.

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Here is an example of the difference between an interest only mortgage and a capital repayment mortgage.

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Property Price ???????????￡150,000

Deposit???????????????????????￡?45,000 (30% deposit)

Mortgage???????????????????￡105,000

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Rent at 6% yield?????????￡???9,000

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Monthly payment at 5% interest for repayment mortgage ￡614 pcm

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Annual cost????????????????￡????7368

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Monthly payment at 5% interest for interest only mortgage ￡438 pcm

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Annual Cost???????????????￡????5256

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Annual Difference??????￡.???2112

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Annual income (before running costs)

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Repayment????????????????￡ ????1632

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Interest Only ?????????????￡.???3744

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There are online mortgage calculators where you can twiddle the numbers to suit your individual circumstance. Which route you want to take is your choice and depends on how much income you are hoping to generate and when. We will look in more detail and some of the other costs involved in a future article. And this is also a topic we will be covering in a podcast.

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A FIXER-UPPER

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A final approach that we will look at today is often called BRRR.

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This stand for Buy - Refurbish – Refinance – Rent.

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Sometimes an extra R is added which stand for Repeat.

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Using this strategy requires more knowledge and will take up more time. It usually also needs a network of professionals working on your behalf during the project.

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Put simply you buy a property that needs fixing in some way.

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Sometimes it might just need some tlc and redecorating - quick ‘relook’ with fresh furniture to match. ?Or it might need a new kitchen and bathroom to modernise the place. Perhaps there is something structural to fix which has resulted in a lower sales price. Or maybe you can see added value by altering the layout and putting in a back extension or adding rooms in the loft. Some properties merit being subdivided into apartments. Others can be converted into an HMO. The most extreme example, would be to demolish an old place and build a new one. ?Another option is to dividing the plot and build a whole new house in the garden. But if that is too much to think about some properties get added value by getting planning consent for a new property in the garden.

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As you can see these all need different levels of professional help. For the first it is a team of decorators, but as you go up the scale you will need plumbers, electricians, builders, structural engineers, architects, paperwork, solicitors, and perhaps help with planning permissions.

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It is time-intensive and projects will take at least six months but depending on the complexity, anything up to 3 years, perhaps longer for very complicated projects.

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Borrowing might be more complicated too. The best scenario is that you buy your property with a deposit of 20-30% and then fund the building/refurbishing works yourself. This could be done with other forms of loan, but depending on the project you might need to have a proven track record in running this kind of project to obtain some larger specialist loans.

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But all the BRRR ideas are based on the hope that once you have added extra value with the improvement works, you can refinance the property and put in a tenant.

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In the refinancing, you aim to recoup the cash that you have put into the property.

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For example, a ￡30k deposit on a ￡100k property with improvement works of ￡30k might create a property that is worth ￡160k. If you then re-mortgage with a 30% deposit of ￡48k you will be getting back ￡12k towards your next project. The higher value property needs a higher deposit so you will always be leaving some of the renovation cost behind in the house. However, if you sell you would be realising ￡90k (less buying and selling costs). The idea is that you will have generated a profit from your renovation works which you can then use towards your next project.

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There are a lot of moving parts to the sums involved. Building costs might go up, selling might take longer, planning permissions can cause delays, the value added might be lower than expected. As we said this approach requires some expertise, but it is a strategy that has worked for many.

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Pros

·?????A quick way to build a portfolio.

·?????Once you have saved the cash for one property you can recycle it

·?????Once you have completed the refurbishment you have the option to convert to buy and hold or the immediate income approach.

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Cons

·?????Capital time and knowledge intensive.

·?????More upfront capital

·?????The shorter time scale means you are exposed to short term variations in the housing market.

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It is a higher risk proposition, and requires greater knowledge of local markets, property types, property renovation costs, construction project management but if you are a renovation nut it can also be very satisfying.

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COMING TO THE CROSSROADS

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Three very different approaches. Buy and Hold, Buy for income, and Buy and Fix. Each approach aims to build up your capital and generate income at some point. Which one is right for you depends on your goals.

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Which road to take? It’s your call, but at APW we are happy to advise and help you make the right choice.

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Thanks,

Callum ?