TIP 4: Plan Your Strategy
When conducting research into property investment, you should consider which strategy would work best for you. The most common strategy amongst investors tends to be buy-to-let but there are many other types of investment, some of which are more specialised and niche than others. The main two strategies to consider are buy-to-let and buy-to-sell, which are usually the preferred choice amongst investors.
Once you have decided on this part of the strategy, you must then consider the type of property that you would like to invest in. The main types of investment to consider are residential or commercial properties, both of which have their own benefits and risks.
Buy-to-let or buy-to-sell
A buy-to-let investment strategy refers to the purchase of a property with the purpose of renting it out to tenants. By renting it out, the investor – or the landlord – will then receive an income from the rental payments that the tenant makes each month. This strategy is one of the most popular given its potential long-term benefits, such as a consistent cash flow and passive income.
Many investors choose buy-to-let as their strategy because there is currently a demand for rental properties, as the UK rental market is thriving. You may wish to target a specific type of tenant within your strategy, such as students, families, or young couples. By targeting a specific type of tenant, this may determine your choice of location and property. By cashing in on the UK rental market, which is thriving, investors can enjoy the benefits they reap as a result of the rental demand and rental yields.
As for buy-to-sell – or property development – investors will purchase a property for the purpose of selling it, for a profit. When the property has been purchased, investors will then spend time transforming the property with improvements and refurbishments. This will then increase the property value, allowing investors to make a profit once the home is sold.
This strategy is sometimes also referred to as ‘house flipping’ or ‘fix and flip’, especially if investors make this a long-term strategy where they consistently purchase properties, transform them and sell them. The principle of this strategy is straightforward, but there are many considerations to be made. You must still carry out research, to determine the best location and market conditions. You then have to budget effectively throughout the project, prioritising the work that needs to be done, and must find a suitable mortgage product for the property.
When it comes to deciding which strategy is best for you, you must consider your long-term goals and the purpose of your investment. To generate a profit quickly, buy-to-sell is considered a worthy investment. However, for long-term benefits and growth, as well as a consistent cash flow, many investors favour buy-to-let as it allows you to earn a rental income over a longer period of time. As for buy-to-sell, you’ll only make a profit once the sale of the property has been completed.
Residential or commercial property
Whilst investing in a residential property is usually the first thing that potential investors think of when thinking about getting into property investment, commercial real estate does offer another way to earn an income and a profit. Both types of property have their own benefits and challenges, and potential investors should spend time considering these to make an informed decision about the type of property they want to invest in.
Commercial property usually refers to hotels, offices, warehouses, retail stores and any other property that is used for non-residential purposes. Most companies that occupy a commercial property prefer to rent it out, which gives investors an opportunity to capitalise on the demand. Regarding the benefits, investors can often enjoy lower stamp duty taxes with a commercial investment and rental payments that are often paid in advance. Commercial properties also come with longer leases, meaning that investors can have peace of mind that they will receive a steady, consistent rental income.
However, there are risks to consider with commercial real estate. For example, mortgage products for this type of property are much harder to find, and they tend to be more costly than standard residential mortgages. As such, your additional costs may be greater with this investment. If a commercial property becomes vacant, it’s also harder to find a new occupant when compared to a residential property. When a property is vacant, you receive no rental income, which means that you may have periods of time where you do not see any financial benefits.
Generally, investing in a residential property is considered cheaper than investing in a commercial property, yet you can still generate profit. However, tenants in residential properties tend to sign shorter leases, often with break clauses. This may pose a risk to the investor and their cash flow. Landlords of residential properties tend to be much more involved with their tenants – the tenants live in the property and it is their home, so landlords have greater involvement in their lives. The responsibilities of organising repairs and maintenance usually fall with the landlord too, whereas tenants of commercial property usually have to organise this. However, this all depends on the terms of the tenancy agreement and it may differ case by case.
Overall, both commercial and residential properties can provide several long-term benefits, providing that careful research is conducted before investors make a decision regarding their strategy. As with any investment, they are subject to demand and the state of the market, and so both pose their own risks and benefits.