A question I am sometimes asked is, ‘Is there more than one way to do buy to let?’.
It all depends on how you define buy to let. If you define buy to let as buying a property and putting a tenant in then that could cover HMOs (Houses of Multiple Occupation), it could include commercial property where you could buy a commercial property and put a commercial tenant in.
Of course, in our understanding of the term ‘buy to let’ we are usually talking about a residential house or a flat which we let to one family, or one person or one couple, the key thing being that there is one tenancy agreement for that property.
So, with that said, is there more than one way of doing buy to let?
Yes, of course there is. There are many, many nuances but I suppose the two principle ways of doing buy to let which instantly spring to mind would be these.
The first is we could just buy a property, any old property, and put a tenant in.
If you’ve read my Home Study Course The Successful Property Investor’s Strategy Workshop you’ll know that’s not my preferred way of doing it. The premise that any old property will do, just stick a tenant in, wait for prices to go up, and collect a bit of rent in the meantime doesn’t really work for me. I think we need to be much more strategic about property than that. Investors who tend to go for that approach tend not to do very well. It’s much better is to be very strategic about it.
Having said that, the strategy that you are going adopt within buy to let is often going to depend upon where you are based. For example, if you are in a high value area then the strategy may have to be as simple as buy a property and put a tenant in.
If you are based in central London and properties there typically yield 3% or 4% then when you buy a property, the high value probably means you’ll only get something like a 50% loan to value buy to let mortgage, if you are lucky. This means you’ve got to stump up half the purchase price which is a big capital commitment.
If you could afford it, could you buy that property and then put a tenant in and collect the rent? Of course, you could.
But it’s questionable whether you would actually cover the cost of the mortgage and all the other costs of holding the property, but it could work.
Even if you are going to do that I still think you need to be doing it strategically, you need to be thinking about buying the right property in the right area, and you need to understand exactly how the figures work and why you’re doing it.
My preferred method of doing buy to let is to buy a property which is cheaper and easily rentable. It tends to be the case that the properties that are most easy to rent are the cheaper properties. Why? Because there is a greater tenant demand, there is a greater market for the cheaper rental properties than there is for expensive properties.
And a plus side of buying cheaper properties that is that you’ll get a higher return. A downside of that is that capital growth is probably going to be limited because the cheaper properties are going to be in areas of lower demand from purchases – some areas might be investors only.
What I like to do is to find a cheaper property which I can then negotiate a great price for it, and then do some work to it. Why? Because I want to be able to add value. Typically this will be by a simple refurb; new kitchen and bathroom and perhaps redecorating.
If I can add value, then along with buying it cheaply, I can create a margin which means that I can refinance the property and at some point in the future, usually 6 months because of the 6 month rule, and then get all or most of my money back out.
So, those are 2 forms of buy to let, and there are others
In summary, you can just buy a house and stick a tenant in and see what you get. Or you can be more strategic about it, you can buy a cheaper property, particularly a cheaper property which needs work doing to it so you can add value, and then you can refinance and get all or most of your money back out.
Then you can use all or most of you money again on the next property, and rinse and repeat to build your portfolio..
Peter Jones B.Sc FRICS
By the way, I’ve rewritten and updated my best selling eBook, 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 ThePropertyTeacher.co.uk