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 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.
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 buy to let which instantly spring to mind would be these.
The first is we could just buy a property and put a tenant in. If you’ve read The Successful Property Investor’s Strategy Workshop you know that is 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, collect a bit of rent doesn’t really work for me. 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. 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 4 or 5% then you probably are looking at buying a property, you’ll probably get something like a 50% loan to value buy to let mortgage, if you are lucky, which means you’ve got to stump up half the purchase price which means it is a big capital commitment.
Can you put a tenant in and collect the rent? Of course, you can. 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 you need to be doing that strategically, you need to be thinking about buying the right property in the right area, you need to understand exactly 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 properties than there are for expensive properties. The plus side of that is that you’ll get a higher return, the downside of that is that probably capital growth is going to be limited because the cheaper properties are going to be in areas which are less likely to enjoy greater levels of capital growth.
But when you find a cheaper property what I like to do is to find a cheaper property which I can then bargain hunt, I can buy, I can negotiate a great price on it, and then ideally it needs some work doing to it. Why? Because I want to be able to add value. If I can add value as well as buying it cheap then 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, you can refinance the property and get all of your money back out.
So, those will be the 2 forms of buy to let. 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 a work doing to it so you can add value and then you can refinance and get all or most of your money back out so you can use all or most of you money again on the next property.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, author and property investor
PS. 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.
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