Getting started in the property investing world can be confusing and uncertain if you’re new. In this video we’ll explore the different strategies in the property investing strategy pyramid starting with the basics and moving up through the more complex strategies. Setting yourself apart from newbies and other beginners who haven’t taken the time to learn could make the difference between you securing a great deal or just being one of the Saturday morning club who don’t take property seriously like a business.
By understanding what should be the bread and butter of your property career and how to move up to the bigger, riskier more complex strategies, you’ll learn what you should be thinking about next and taking a bigger step rather than a riskier, giant leap.
Let’s jump into the property investing strategy pyramid and give yourself the chance of being the best beginner in the world of property.
So we’ll explore the 7 layers to the property investing strategy pyramid which includes, buy to let, flips, social housing, multi-lets, HMO’s, small conversions and large conversion / developments.
Buy To Let
Buy to let property is the bread and butter of property investing, it’s what everybody thinks of first and is known as the vanilla flavour amongst all the more exotic strategies out there.
Buy To Let is simply using some of your savings to put a 25% deposit down on a property somewhere in the UK and simply renting it out to a tenant, with this, the properties also tend to not require any crazy refurbishments to be safe and suitable to let out and it’s made even easier by getting a letting agent who charges around 10% of the rent collected.
It’s simple and easy as well as low risk if you buy a property in a good idea and rent it out for an amount higher than the interest only mortgage you can sit back and enjoy around £200 – £300 rental profit every single month this way.
You might get the odd call from the agent or the tenant if things break or need a repair but otherwise if you get a good family or person in there, often the tenant will stay for a long period of time and if they have minimal issues, then so should you.
Sometimes things can go wrong, just check out all the TV Programmes of dodgy landlords and dodgy tenants, so make sure you or your letting agent are referencing and background checking properly and that you also trust and check your letting agent is also doing their job correctly.
Unfortunately, with the rise of popularity of programmes like homes under the hammer, they make it look super easy to pull off a £40k profit deal by not visiting a property and not doing the right due diligence. But what they don’t show you is that TV is made for entertainment and often the programme are tipped off by the auction house when a lucky bidder gets a property at a really good price, usually out of sheer luck.
The majority of the time, finding the right flip deal can be very hard and a tricky thing to do and if you’re not careful and don’t run your numbers correctly – you could end up buying a property for well above what it’s worth and actually losing money.
For example, I was looking at an auction property that happened on January 26th, the guide price was £60k – £70k, average properties in the area are worth around £95,000 at a push. This is for a standard 2 or 3 bed terraced house in Sheffield and the auction ended up going for £90,500 – this is just insane.
If the property was a nice spec inside – this would make sense, but the property needs about £20k of refurbishment spending on it to do it up inside as it’s a very old property that hasn’t been lived in for many yeas, by the time the new owner has spent the money doing it up – regardless whether it’s an investment property or owner occupier, they’ll struggle to refinance the property due to negative equity after the refurbishment versus what they bought it for so they’ll have to put even more cash in of their own to refinance it onto a normal mortgage.
For this kind of property, the owner will end up spending around £115,000 after all costs and refurbishment, for a property that would struggle to get above £100,000 in value. And this is happening up and down the country.
I have no idea if these were investors or owner occupiers looking for a family home – but you can see from the bid history what happened.
But at the end of the day – flipping properties can be a great way to get started in the industry, build up your seed capital and also gain that crucial experience of getting a great power team together, managing a builder and a team of tradespeople and being able to trust both your project management skills but also your planning and strategy to ensure you buy at the right price, know your numbers and can end up leading a project that makes a good amount of profit at the end of it.
Particularly if the numbers are strong enough, you can actually refinance a property and keep it whilst pulling as much money out as possible and then turn that into a vanilla buy to let and hold it for the future.
These are often overlooked by investors, usually because of the lack of knowledge or fear about the type of tenants that would be living in the property. The great thing is is that usually you would approach the council and they would lease the property off you for a fixed price every single month.
You pay no management fees at all, there are no voids if the property is empty because the council keep on paying you and if the property is damaged by a social housing tenant then the council will pay to fix and maintain the property while they lease it off you as this becomes their responsibility.
This is great if you really want a hands off approach without the worry about voids, maintenance and management.
Typically councils pay a little bit less for these kinds of deals compared to what you’d get renting out privately but the point is that you don’t have to put all that extra money aside for the costs you’d get with renting privately so depending on how the numbers work – you could end up making more money from this longer term so it’s definitely something you should think about.
All you’d have to do is have a chat with your local council and see what their requirements are and what kind of properties they’re after and what rates they pay based on the number of bedrooms and work out if it could be feasible for you.
The 4th layer in the pyramid is multi-let also known as mini-mo’s. This is basically an HMO property but usually around 3 or 4 bedrooms maximum so they’re not these super big huge HMO’s where you have 10+ people.
They’re usually part of a flip project where you can buy a house and then convert it into a mini-mo either with en-suite bathrooms or having tenants share 1 to 2 bathrooms between them and having a shared kitchen.
This strategy usually works really well when you find a nice terraced property near a popular city or town that isn’t part of article 4 – depending on the local council you’ll still need to get an HMO licence in most areas these days and be on the HMO register and depending on the city even for a 4 bed HMO in an article 4 area you’d need to get planning permission in article 4 which could be rejected so be aware of that.
These multi-let properties are a great way to get started and dip your toes into the world of HMO, firstly to test out the strategy and the finances and also build up your confidence to look at bigger projects like a pub conversion or changing a commercial building into residential where typically you could fit 7+ bedrooms in for tenants over multiple floors.
Multi-lets are part of phase 2 of my strategy, after I’ve dabbled with flips and buy to let to build up my initial capital and experience, I want to branch out into cashflow strategies which involves creating beautiful design led HMO’s.
Then on the 5th layer we move onto proper HMO’s – realistically they are the same as multi-lets, just bigger versions that could be 5+ bedrooms, require full licensing and often require planning permission, especially if over 7 bedrooms which will mean that you REALLY need to be up to speed on your local councils regulations and requirements around HMO property.
Having these bigger properties often mean they’re purpose converted from older residential or commercial buildings to have co-living spaces but also feature en-suites or even their own kitchenettes within the rooms themselves.
With a bigger building to manage and more tenants ultimately means more problems will arise so you have to have the right personality to be able to deal with this or have a SOLID HMO managing agent in place who can deal with the size of the property.
However – once fully tenanted and running well, these kind of HMO’s can generate ridiculous amounts of cash every month and can even replace a full time salary if done right, it also means as people move in and out of rooms, this way your voids are minimised because you’ll usually have someone in various rooms in the property, so by having 1 or 2 rooms empty, the property still remains cashflow positive.
Now we enter the 6th and penultimate layer of property investing as we step into small conversions. Now, with a traditional flip project – these usually involve just tarting up a property, re-doing the walls and interior decor, putting in a new bathroom and kitchen to increase the value of the property.
With a small conversion we start entering the territory of extensions, loft conversions and adding space onto a property, or taking a property and changing it by going back to brick and completely rebuilding the inside of the property with the help of an architect and full build team.
Typically this is where your refurbishment costs start to extend beyond a £20k budget for a tarting up project and you also start stepping into the realm of either permitted development extensions or even going into full planning permission development of a property to really transform it into the vision you have. This will require more time, complexity, money and experience to pull off.
Large Conversion & Developments
Lastly, we enter the big boy world of development. This could be taking a large commercial building and completely changing it into a mixed use development of commercial, HMO, buy to let AND service accommodation all under one room.
It could involve finding plots of land and building brand new homes from scratch, going through full planning applications with a planning consultant and architect to make your dream come true and will often involve hundreds of thousands of pounds of build costs and often lenders releasing the finance in stage payments or stage gates depending on the progression of the bulid.
This can be the most riskiest as you’re often offering in and buying properties and projects subject to planning meaning it can be slow and if the planning application is rejected, you’ve already cost yourself a few thousand pounds in architect fees and planning fees so you really have to know your stuff.
Also with this strategy – with such high build and development costs you really need to be able to project manage well and keep an eye on finances to make sure that you don’t start overspending a project otherwise you could end up in hot water if you don’t have enough money to fund the remainder of the project