Types of Property Strategy - Which is Best?

Today we are looking at some simple property strategies.

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We are looking at three strategies, making some comments on how they work, how much you need to get going, plus the pros and cons of each.

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There are more than these three approaches, but these offer the most contrast, and difference in immediate and long terms outcomes – thus make a good comparison.

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As with most strategies, there as sub strategies, side strategies, tangent strategies and other strategies with other names that I don’t know about. ?We will look at those in another article.

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Strategies we are considering today….

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-??????Simple buy and hold.

-??????Immediate income approach.

-??????BRRR…. Buy, Refurbish, Refinance, Rent (Repeat).

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Simple buy and hold;

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This approach is a simple approach, perhaps the least hassle if done properly. Anyone can do it, but to reap the most rewards from this approach you need patience and time.

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Withing any given property cycle, over a 18 year period, property prices will always rise, and have done since the property cycle started in the 1600s (video on that below if you want more information).

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Therefore, with a 15-25 year time horizon you will see the greatest results here.

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What do you do?

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-??????Buy a property with a deposit of 20-30% down.

-??????Get an interest and repayment mortgage on the remainder.

-??????Put a tenant in, have the tenant pay off the mortgage for you.

-??????Property fully paid off in c. 20-25 years.

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Buying right is the key to making this a success, you need to focus on yield, and achieving a yield of around 6% plus, which will, as a rule, cover the mortgage and costs.

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Meaning it costs you nothing. Finding the perfect deal here is less important… time is on your side, and the longer you are in the market, the less exposed you are to fluctuations in price (which for example you may be in the BRRR approach.

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You must use a ‘interest and repayment mortgage’ to make sure the debt is paid down over time.

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Pros;

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-??????Simple and pretty easy to do.

-??????Don’t need as much expert knowledge/connections as you do with others.

-??????Someone else pays off the property for you.

-??????A debt free property in 20 years.

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Cons;

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-??????Need to save a 20-30% deposit each time.

-??????Takes a long time…. (this depends on your perspective, in reality, 5, 10 and 15 years will fly by. Give yourself some greenlights now).

-??????No immediate income.

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Immediate income approach;

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This approach fairly similar to the buy and hold approach, with one key difference! You use an interest only mortgage, not an interest and repayment.

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As with the above, anyone can do it, and you can start reaping the rewards in the form of extra income almost straight away. ?

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What do you do?

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-??????Buy a property with a deposit of 20-30% down.

-??????Get an interest ONLY mortgage on the remainder.

-??????Put a tenant in, have the tenant pay you income, which you use to service the property costs, plus the interest on the loan.

-??????Mortgage payments on an interest only loan are much lower, therefore the additional income is yours to keep. ?

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Buying right is the key to making this a success, you need to focus on yield… as opposed to the buy an hold approach where we look for 6% plus, with this approach you should target as a high a yield as possible, to give you as much income as possible.

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You must use a ‘interest only mortgage’ to make sure that you have the excess income.

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Pros;

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-??????Pretty simple to do.

-??????Immediate income.

-??????Saving for the next property… The income you are earning should speed this up and become shorter with each property you buy!

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Cons;

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-??????Mortgage not paid down. Meaning in 25 years at end of mortgage term you will still need to pay off the original loan.

-??????Need to save the deposit each time….

-??????Perhaps a bit more hands on management needed to stay on top of cashflow.

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Comparison;

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How does an interest only versus interest and repayment mortgage make a difference to cashflow? Simple example;

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-??????GBP150k property.

-??????GBP45k down (30%).

-??????GBP105k mortgage.

-??????GBP9000 per annum income, 6% yield.

-??????Total annual mortgage costs on interest only – GBP2616

-??????Total annual mortgage cost in int and repayment – GBP5652

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Total income (before running costs) interest only – GBP6,388 per annum or GBP532 per month.

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Total income (before running costs) interest and repayment – GBP3,348 per annum of GBP279 per month.

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BRRR – Buy, Refurbish, Refinance, Rent;

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This approach is more capital intensive, more time intensive and require a higher base level of knowledge and connections in the industry.

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Time intensive in that it will require more of your time, but, for shorter periods, as a project would likely take 6-12 months.

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Which means you can recycle cash every 12 months and build your portfolio quickly.

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On the flip side, it also means you are at the mercy of the market, as your timeframe is shorter. Which means, you need to be buying in a rising market, or getting great below market value deals.

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This requires you, or your team, to have more knowledge on markets, locations, what makes a good deal, time managing, construction management and the various moving parts of a deal.

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What do you do?

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-??????Buy a property that you can add value to (old, unloved, terraces in city centers work well for this).

-??????Refurbish it…. Simply strip it back and modernize, or you can reconfigure the lay out to add bedrooms and further increase yield and value (requires more capital).

-??????Refinance the property…. Once done, take out a mortgage on the property for the new higher value, release the equity in the property in the form of cash to you.

-??????Rent out, with an interest only mortgage or interest and repayment. Depending on if you want it paid off, or immediate income.

-??????Use the cash you have pulled out of the deal, to repeat the process.

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As you can see from the above steps, even with oversimplified steps, there are many moving parts.

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This requires you to have experience, and in-depth knowledge of property, property markets and construction projects (or you work with a team that does, such as ourselves, there are others out there!).

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Pros;

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-??????A very quick way to build your portfolio.

-??????Once you have saved the cash to do one, you can recycle it.

-??????Profit to be made from the initial process, plus it then gives you the option to do buy and hold, or immediate income.

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Cons;

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-??????Capital, time and knowledge intensive.

-??????Requires more upfront capital.

-??????Shorter term process, means you are more exposed to short term fluctuation ins property prices and local markets….

-??????For example, what if prices fell… could you afford to wait it our as you do with a long term approach? Or would that leave you exposed?

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Which is best?

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This depends on your goals, ambitions and personal situation.

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Oh come on Cal, give us a proper answer I hear you say.

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But, that’s the truth! It’s not one size fits all.

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Having said that, something is better than nothing… it’s better to be doing something, and be actively IN the market, as opposed to over thinking and not being involved at all. You will not make money from property if you want decide which strategy is best for you….

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Ultimately, they will all make you money, just in different ways and timeframes.

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So, if for example, you want to do the BRRR approach, but don’t have the knowledge or funds yet, get started with a simple buy to let whilst you build the capital (which this property will help with!) and experience…

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For further info on any of the above, please get in touch and I can point you in the direction of more information.

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Please leave comments, feedback and questions!

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Thanks,

Callum.