In part 1 of property investment strategies, we covered the most common property investments that are marketed to overseas investors.
In this article, I wanted to share some other approaches that are available.
The options shared below can also produce excellent results. However, it’s important to understand what you are getting yourself into as managing these types of investments can be a lot more challenging than your average buy to let property.
So, let’s get started.
Holiday Lets & Serviced Apartments
Holiday lets or serviced apartments are properties that rent on a short-term basis to holidaymakers and business travelers. They’re pretty much the same, and the model is the same except for customer target. Holiday let’s have become increasingly more popular as they can offer excellent yields if occupancy is high, and you don’t need to deal with long term tenants as they are usually let for shorter periods.
Also, the tax treatment is better than your regular buy to let investment. As with any property, the level of return will depend on several things, such as the amount you initially invest, the location, and level of occupancy you can achieve. It would be prudent to do a lot of research and be realistic with numbers. Speaking to a holiday letting agent that is familiar with the area you are looking to invest can be helpful, as they will be able to give you an idea of the level of rental income you can expect.
The key to success with this type of model is to buy in an area that has year-round demand. Many people like the idea of a beach property or somewhere in the countryside. However, if the market is only seasonal, it will significantly reduce your yield.
Also, there is a lot more work involved in these types of properties. You need to clean regularly, deal with lot’s of people and be available for changeovers and guest arrivals. You also need to market your property.
There are systems you can put in place, and companies that can fully manage it. However, they can be expensive. Getting a mortgage can be tricky on Holiday Lets & Serviced Apartments, potentially reducing the leveraged return you could achieve.
Commercial real estate investment can offer great value mainly if located in an area with new development and a high volume of foot traffic. Determining the value of a commercial property is different from residential. Residential requires a comparative market analysis.
That means comparing the selling price of properties in the same neighborhood with similar features. Commercial property valuation techniques, on the other hand, are more complex and valuing it will depend on the type of property.
Commercial property is more vulnerable to changes in the economy, and when there is a downturn finding and replacing new tenants can take a long time. On the plus side, tenants are usually responsible for maintenance and leases tend to be longer than residential ones. Also, the amount you can borrow is lower and interest rates generally higher. There are some tax advantages as a pension can own it making it a popular choice for some.
Buy & Flip
To buy & flip is where you find a property that has the potential to resell for a profit. Or, buying a new build property off-plan with a view of selling it on completion for a higher price. It is the complete opposite of buy-to-let and is a more short-term strategy.
It carries a lot more risk and is more for experienced investors. The objective is to turn a profit by buying a property at one price and selling it at a higher one. Investors that focus on this type of approach are more like traders than long term property investors.
The attraction is that if you can find the right deal, then you can make large sums of money. However, it is a complicated approach, and if you don’t know what you’re doing, there are lots of things that can go wrong.
Also, managing this type of transaction would be extremely challenging if you are not on the ground. Therefore, it would be challenging to implement as an overseas investor.
House of Multiple Occupancy (HMO)
There are various definitions of what constitutes an HMO. However, for simplicity, an (HMO) is a property that gets rented out to unrelated tenants room-by-room.
HMO’s can deliver excellent returns, and in some instances double or triple the rental income a landlord would receive on a single rent. However, they have stringent requirements you must meet to operate one legally and without penalty.
The costs are higher, as HMOs tend to be let furnished and include all bills, plus they incur more wear and tear. If you are self-managing, it can be extremely time-consuming as there is more to do, and if you appoint a management company, the fees are higher to reflect that.
As HMO’s offer excellent potential, they’ve grown hugely popular over the last few years driving councils to take more action on regulation, making it a lot stricter. Many HMO’s need a license, and getting permission for new ones in some areas is difficult or not allowed.
Alternative Property Investments
It’s common for investments like student accommodation or old-age care homes to be marketed heavily towards overseas investors.
On the surface, these may appear compelling. They are relatively cheap to buy and often offer guaranteed returns ranging anything between 6%-12% on a completely hands-off investment.
They are usually high-end developments offering occupants luxury services. As amazing as they appear, these are illiquid, high-risk investments. It’s tough, if not impossible, to get a mortgage as they are difficult for banks to resell should they have to repossess.
Often, once the guaranteed rental period comes to an end, the real market rental income is much lower as the guarantee got built into the purchase price. As there isn’t a valuation from a bank surveyor, it can be hard to know that initially.
Also, guaranteed rent is only as secure as the company ensuring it.
Reselling these types of investments are also challenging. You don’t have an open market as you do with regular buy to let, and the only people that may be interested are other investors, significantly limiting your options. Management fees in these types of products can also be high.
It can be confusing for investors as these types of assets can often be described as some of the best-performing. However, that is when done by institutions like pension companies, investment funds or real estate investment trusts. These institutions have a lot more control as they buy whole blocks and appoint and run the management of the schemes.
Less Common Strategies
Other, less known strategies are Rent-to-rent & lease options. They’re not that common and are more for people who don’t have funds to invest.
Rent-to-rent is renting a property from a landlord and then renting it to a tenant – with the idea of making a profit. HMO’s are sometimes set-up this way. They are hard to find but can be a good way of generating income from a property without the cash input. However, margins can be thin, and it’s very hands-on.
A Lease option is similar to a rent-to-rent, except you have the “option” to buy the property for a fixed amount for a set amount of time. For example, if a property is worth £200,000, an investor may take an option to buy it for 230k over a set timeframe. They will then take over the owner’s responsibilities and costs, then rent out the property. It would usually only be a distressed owner that would enter this kind of deal. It was common in 2008 as many people were trapped, but it’s not easy to find opportunities when the economy is strong.
There you have it; the above information should be able to give you a general idea of some of the alternative approaches that are available to you in property.
All of the strategies mentioned have their pros and cons, and If you are considering any of them, I highly recommend that you do a lot more research and contemplate if they suit your investment scope and risk profile.
An excellent way to do that would be to seek out investors that are already operating them successfully.