3 Best property strategies in the UK at the moment? It’s hard to beat these three low money down strategies:
- Rent to rent.
- Serviced accommodation
- Option to purchase.
Each strategy on its own is capable of making huge profits for property investors.
However, the three strategies also work very well together. Combine them to take yourself into the top league of property investors.
All three strategies are especially attractive if you have very little money to invest. As strategies, they don’t necessarily lead to you owning property. But the profits you earn from them can be used as deposits for purchases.
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3 Best property strategies UK #1 – rent to rent
Rent to rent is one of the 3 best property strategies in the UK because of the relatively low start up costs. It allows you to benefit from rental income without owning a property.
With rent to rent, you rent a property from its owner for a rent substantially below the market rent – giving you a margin to work with. Incentivise the owner by offering a guaranteed agreed rent for a number of years – typically three to seven years.
Rent out the property to tenants for a higher rent – giving you a profit.
You could rent the property under a single tenancy or you could rent it out room by room on a multi-let basis, achieving a higher rent. It is possible to achieve an even higher rent or income by using the property as serviced accommodation.
The strategy is very attractive because you may only need to pay two month’s rent (or even less) to the owner to get started.
Ideally you want an owner who is highly motivated to rent and is prepared to give you a very good rental discount. The greater the discount you can achieve, the higher your profits or earnings.
Control of the owner’s property with rent to rent
You can achieve control of the owner’s property by using:
- Commercial or corporate tenancies
- Management agreements
- Other contractual arrangements.
These legal documents will give you the right to sub-let the property to tenants who will pay rent to you. You will then pay the owner the guaranteed monthly amount you agreed.
Boosting your rent in rent to rent
One of the reasons why rent to rent is so popular is the opportunity to boost the rent of a rent to rent property. Say you agreed a deal for a three bedroom house with two receptions. You could tart it up and rent it on a single tenancy – for a rent marginally more than you are paying to the earner.
However you would make a lot more rent if you rented out the property as a 5 bedroom HMO.
Rent to rent combined with renting on a room by room basis is an exceptionally good way to maximise rental income.
Benefits to the owner in a rent to rent deal
Another name for rent to rent is “guaranteed rent”. The attraction to the owner includes:
- Guaranteed monthly rent for an agreed number of years
- No need to deal with tenants
- No management obligations
- Hands-off form of investment.
It is these and other benefits that cause owners to enter into rent to rent agreements.
Issues to watch out for with rent to rent
You should carry out thorough due diligence prior to entering a rent to rent agreement. Make sure that the owner:
- Owns the property
- Is likely to prove reliable and trustworthy
- Has the permission of the lender (if any) to rent the property to you.
There should be a written agreement between you and the owner setting out the role, rights, duties and obligations of each party in relation to the property and the tenants or users you put into occupation.
Responsibility for complying with the various regulations which affect rented property and tenants should be clearly set out in the agreement. Such regulations deal with matters such as:
- Premises licences
- Landlords licences
- Gas safety certificates
- Right to rent.
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Making rent to rent even easier
There are several things you can do to make it even easier to get into rent to rent:
- Negotiate the lowest possible amount to pay the owner. For example, the owner may want 2 month’s rent to hand over control to you. However, if you will need to carry out works to the property before you can let it out, you may be able to agree one month’s rent.
- You may be able to negotiate that you pay the owner when your occupier pays you.
If you have the skills, you could freshen up the accommodation yourself before renting it out, saving the expense of refurbishment.
3 Best property strategies #2 – serviced accommodation
Serviced accommodation is one of the 3 best property strategies in the UK because of the opportunity to achieve a very high level of income per property.
Income is uplifted by renting out a property on a room by room basis and providing value adding services such as provision of bedding and cleaning.
Typically, a regular residential property such as a house or flat is converted or fitted out so that it can be made available on a room by room basis to guests, customers or users.
As a provider of serviced accommodation, you will provide rooms on a short term basis (anything from a one night to several months) and will include “services” – hence the term “serviced accommodation”.
Common services include:
- Provision of bed linen and towels
It is accommodation similar to mainstream hotel or bed & breakfast accommodation.
You will charge for the accommodation on a daily basis at rates similar to but usually lower than hotel or bed & breakfast rates. As a result, rent could be two or three times higher than it would be if the property was let on a single tenancy.
Some practical considerations with serviced accommodation
Unless or until you have the resources to hire staff, outsource or delegate, serviced accommodation can be demanding in terms of time and money. You will need a very wide range of skills or abilities.
You will typically have a formidable number of jobs to do, including:
- booking rooms
- room preparation
- cleaning, maintenance and arrears
- dealing with guests,
It makes sense to source properties conveniently near to where you live. That will minimise the burden of travelling to and from properties.
Why serviced accommodation is one of the 3 best property strategies
Serviced accommodation is one of the 3 best property strategies in the UK at the moment.
The main plus is the opportunity to double or even triple the income of a property. There are many challenges with that. However, the enhanced income makes the strategy very enticing.
Further, while it can be expensive to set up a serviced accommodation, it can also be relatively inexpensive to do so. It all depends on the property and location – and what needs to be done in terms of building works and legal compliance.
The pros and cons of serviced accommodation
Serviced accommodation has grown rapidly in popularity in recent years. That is due to the opportunity to increase income and lessen the impact of section 24 – which increased the tax burden on landlords owning property in their own name, rather than a limited company.
The main advantages of serviced accommodation include:
- Not renting out rooms on a long term basis so greater flexibility
- Higher income per room
- More of a business than a landlord and tenant arrangement
- Not burdened by most of the regulations which typically apply to regular tenants
- Possibility of reduced income tax for some some landlords (section 24).
The main disadvantages of serviced accommodation include:
- May need to spend time and money converting and furnishing the property to make it suitable for serviced accommodation use
- Will usually need planning permission to operate
- More work than a long term letting in terms of day to day management
- May need to hire staff to carry out the day to day management
- No certainty that occupancy levels will meet projected incomes
- Will be running a business similar to a hotel or bed & breakfast commitment, with the regulations and risk that will entail.
How you can scale up in serviced accommodation
A major plus with serviced accommodation is the opportunity to scale up your income by in increasing your serviced accommodation unit.
Say you made £450 net per month on your first property. If you scaled up to 10 properties you would be netting £4,500 per month or £54,000 per year.
Scale up to 20 properties to net £108,000 per year. Scale up to 40 units to net an astonishing £216,000 per year.
How far you go is up to you and how much time and effort you are prepared to put in.
A huge attraction of scaling up is that your higher earnings gives you the opportunity to hire staff and outsource – allowing you to run a ” passive income hands-free” operation if you wish.
With just a few units, outsourcing is unlikely to be cost-effective, unless you can get into the very top end of the market.
Issues to consider with serviced accommodation
Before providing serviced accommodation there are many formalities you need to comply with.
First of all, consult a solicitor or property professional experienced in the set up and management of serviced accommodation.
It is important that you have suitable insurance in place to protect your guests and your business.
Ensure that your property or the property you intend to buy can be used as serviced accommodation in terms of planning law.
If your accommodation will amount to an HMO, check whether you will need:
- An HMO licence
- Planning permission.
Also check whether you will need a landlord’s licence.
A property with 7 or more residents will need planning permission.
A dwelling house with 3 to 6 unrelated residents does not currently (December 2019) require planning permission.
However, if an Article 4 Direction is in place you will need planning permission to change use from a dwelling house (use class C3) to a small HMO (use class C4).
The cost in time and money to get planning permission or licences may be prohibitive.
Traps for the unwary – serviced accommodation
Serviced accommodation should be regarded as a fairly complex property strategy. It has many moving parts and there are a range of risks. That means you should educate yourself fully and take expert advice before jumping in.
Consider hiring a property coach. If possible, seek informal advice and assistance from experienced property people willing to help you for free or an affordable charge.
Perhaps the biggest danger is that you will be over-optimistic in your calculations. As a result, you could end up with a business which makes a loss and fails.
You will need to do the extensive research and due diligence needed to establish if there is sufficient demand for serviced accommodation of the type to be provided by you – in your chosen area.
The night rate you charge needs to be carefully calculated to take account of realistic occupancy levels.
The strategy is fairly labour-intensive. Will you be able to do the work needed? If not, will the income be sufficient to enable you to delegate?
There are a range of risks on the legal side. Apart from issues around licensing and planning permission – dealt with above – you should also be aware:
- There are restrictions on short term letting in London
- If you buy a property with a regular buy-to-let mortgage, you should not proceed to use the property as serviced accommodation
The regulatory threats to serviced accommodation
There are clear regulatory dangers facing serviced accommodation. The strategy is largely unregulated and is a big threat to regular hotels and guesthouses.
Several councils are concerned that serviced accommodation may be reducing the accommodation available to regular long-term tenants paying standard rents.
Serviced accommodation operators typically rely on booking agencies like Airbnb and Booking.com to find guests for their accommodation.
In London, under the Deregulation Act 2015 a residential property cannot be let out on a short term basis for more than 90 days a year unless planning permission for short stays is obtained.
Airbnb has fallen in line with this legislation by imposing its own 90 day rule for London properties.
The danger is that other large councils, like Manchester, Birmingham and Liverpool, will follow London and impose a 90 day limit. That would be a problem for operators because the biggest and most profitable serviced accommodation locations tend to be large cities.
However, greater regulation is not necessarily bad for serviced accommodation. It could benefit professional operators with better accommodation and higher standards – as the amateurs and cowboys are driven out.
Making serviced accommodation even easier
Serviced accommodation can be a demanding strategy – demanding in terms of time, money and resources.
A big way to make things easier for yourself is to consider going into the strategy with someone else. The many jobs could then be split between the two of you.
A joint venture is especially likely to work if the two of you have complimentary skills. For instance, you could be good at getting the deals and your partner could be good at doing up and managing the properties.
A joint venture may also help you to overcome any financial hurdles to entry. Whatever the amount needed to do deals, your financial contribution will be halved if the arrangement is that each party makes an equal contribution to funding costs.
3 Best property strategies #3 – option to purchase
An option to purchase is one of the 3 best property strategies in the UK because it offers the opportunity to control property (land and/or buildings) for an option fee as little as £1.
An option to purchase is where a property owner, in return for an option fee, gives you the right to buy their property within a set period of time for an agreed price.
The amazing thing about an option is that it gives you the right to buy the property but you are under do obligation to do so if it is not in your financial interest.
An option gives you control of a property. That control enables you do many things which can lead to you making a huge profit on a property you do not own.
If you have an option to purchase a property, you can make money in numerous ways including:
- Securing planning and increasing the value of the property by building
- Changing the use of the property to a more valuable use and making a profit
- Selling your option to a third-party at a premium, making a profit
- Subdividing the property and selling it off in parts.
Here is one of many simple ways you could make money using an option to purchase:
- Agree an option to purchase a piece of land from a landowner for a £100,000 paying an agreed option fee of £1,000
- Apply for and get planning permission to build 4 houses with a GDV (gross development value) of £500,000
- Exercise your option, purchase the land for £100,000 and build the houses worth £500,000
- Once your building and other costs are taken into consideration, you stand to make a substantial profit based on an initial outlay on the land of just £1,000. With good negotiating skills and in the right circumstances, your initial outlay could be as little as £1.
The pros of an option to purchase
The obvious pro of an option to purchase is the ability to secure the option or right to buy a property for, possibly, very little money.
Further, if prices are rising and increase beyond the price agreed, you will have a built in profit.
If you have the right to assign or sell the option, you can cash in on any value uplift without the cost and hassle of buying the property.
If you can add enormous unexpected value to the option property during the option period, you can make huge profits.
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The cons of an option to purchase
However an option to purchase is not without its drawbacks. While, you may be able to negotiate a negligible option fee of £1 in some instances, the most likely scenario is that an owner will want a more significant option fee to tie up their property for several years.
Furthermore, a canny property owner will insist that the fee is:
- In addition to the agreed purchase price
If you pay such an option fee and your plans for the property don’t materialise – causing you not to buy – you will stand to lose a substantial amount of money.
The risks to you are especially high if you take an option on land with the expectation of getting planning permission. First of all, you might not get planning permission. Secondly, the GDV of any planning permission you get might be too low bearing in mind the price you have agreed to option pay.
If you don’t have the right to assign or sell on your option, you position will be weakened. Say you had an option to buy but could not do so because market conditions or your own personal circumstances had changed – so that you now longer qualified for a mortgage.
If there was a profit to be had from your option but you could not sell it on to a third party, you would lose out financially.
Issues to consider with an option to purchase
It is highly desirable to seek legal advice prior to entering into an option. Both parties should have their own independent solicitors.
If you are the landowner, you should consider carefully the length of the option you are prepared to give. During the option period, you will not be able to dispose of the property unless you can get the agreement of the option holder. A option can therefore tie your hands, restricting your freedom to deal with your property.
For that reason, if you are granting an option, you will usually want to grant one for the shortest period you can agree.
As the holder of an option, you want to be sure that the owner will not compromise your rights by disposing of the property to a third party. You can protect your rights by way of a Notice registered at HM Land Registry. Make sure that your solicitor carries out the registration – providing you with documentary proof.
The main financial advantages of the 3 best property strategies
The 3 best property strategies are extremely powerful ways to make money from property.
Rent to rent offers the advantage of being able to earn a rental return without owning a property.
Serviced accommodation is a chance to double or triple your income from a property.
An option to purchase allows you to control what happens for a fixed period of time upon payment of an option fee – which can be as little as a £1.
All three strategies have one important thing in common: you can benefit from them without owning a property. They are great strategies if you don’t have the money or credit record to be able to buy a property.
They are also similar in not requiring a huge amount of money to start up.
Combining the 3 best property strategies
Each of the 3 best property strategies is great on its own. However, if you combine all three you can create a lean mean profit-making machine!
Here are some super-profitable ways to combine and make full use of the strategies:
>>>>Secure a regular house with two receptions on a rent to rent at a low rent and obtain an option to purchase from the owner at the same time. Configure the house into 5 bedrooms and rent out each on separate tenancy to greatly increase the rental return
>>>>Same as in A but this time rent out the rooms on a serviced accommodation basis – increasing the rental return even more
>>>>Shortly before the option comes to an end do one of the following:
- Extend the option
- Exercise the option by buying the property
- Do up the property, exercise the option and sell the property for a profit
- Sell on the option to a third party for a profit
- If it’s in your financial best interest, allow the option to lapse and walk away when it ends.
Have you tried out any of the 3 best property strategies mentioned in this blog? How did it go? Please leave your comments or observations below.
About the author
Dalton Barrett is a solicitor, conveyancer, investor, PRS registered property coach and Amazon author. Read about his unconventional worldview of property here
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Dalton Barrett, Solicitor
Rebel Property Coach
My website is: www.rebelpropertycoach.com