Property Strategies (Part 1)
Given that many of you reading this blog post are new to investing, over the next few weeks I’m going to be looking at the different types of property strategies and the pros and cons of each.
By the way, this doesn’t mean that if you’re an experienced investor you should look away. Things change – the market changes, laws change and the way that we do things change. So, even if you have been doing property for quite some time now, please do keep reading as you may benefit from a refresher course.
Let’s start right at the bottom of the pile with Buy to Let.
Now, I don’t mean “bottom of the pile” in terms of not being a great strategy, but because it’s probably the “most simple” strategy. Nevertheless, there are nuances to it and this week I’m going to think about very basic vanilla buy to lets.
At a very basic level, buy to let is just buying a property, sticking in a tenant and collecting the rent. But it doesn’t stop there because even with a simple buy to let, there are different choices. For example, we have to decide if are we going to buy the property using a mortgage or if we are going to buy using 100% cash.
When it comes to buying for cash, the problem for most people is that this essentially means actually saving 100% cash. And, although it is possible to buy a relatively cheap property, i.e. in the North of England, even a cheap property is going to cost a relatively large amount of money. For most people, saving this amount of money is probably going to take a very long time (and be nigh on impossible), so it’s likely that most of us will use a mortgage.
As such, another nuance could be whether we use an interest only or a capital repayment mortgage. Received wisdom tells us that if you’re an investor, you want to use interest only – we’ll be looking at ‘why’ further down the line. But for some, buying a house, sticking a tenant in and using a capital repayment mortgage is a great way of using property almost as a savings plan.
Why? Because the tenant is essentially buying the property. If the rent is greater than the mortgage, then the tenant is effectively paying the mortgage and buying the property for you. So, if you take out a 20-year capital repayment mortgage, then by the end of the 20-year term, the property will be paid off and unencumbered.
Another variant could be buying at below market value or instead choosing to pay almost full asking price. Let’s think about why we would do this.
Not everybody who goes into property wants to necessarily be a sophisticated investor. Some are just happy to buy property; to put their money in and use the property as a place to store their wealth. This is actually quite common.
A while back, I was talking to an estate agent based in Nottingham who told me that many of his investors are London-based. These investors rarely negotiated a discount and are content with paying full asking price. In essence, they simply want to park their money somewhere safe. They are not bothered about getting 25% off market value; they just wanted to spend £70K or so on a property and have a stable yield of 6-8%.
With you, it might be the case that you want to buy just one or two properties, or a property in an adjoining street so that you can manage it yourself after paying almost full asking price. Or, you might choose to store your wealth in property or have a tenant pay down your mortgage for you.
Now, all of these are good things to consider. But, there are OTHER things you can do which make buy to let investing far more nuanced and far more exciting – and this is what we’ll be looking at next week.
Until then…
Here’s to successful property investing.
Peter Jones
Peter Jones B.Sc FRICS
Chartered Surveyor, author and property investor
www.ThePropertyTeacher.co.uk
By the way, I’ve rewritten and updated my best-selling e-book, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same. For more details please go to:
www.ThePropertyTeacher.co.uk/the-successful-property-investors-strategy-workshop
