Quick Pros and Cons to Different Property Investing Strategies

Buy-to-Let

As well as a catch all phrase for property investments, Buy-to-let is the staple of property investment, sometimes referred to as 'vanilla' buy to let. This involves buying a property and then letting it out to tenants, generally on a long term (6 months minimum) to then generate a monthly rental income. As you are then keeping the property on a long term rental you will also get, along with the rent, capital appreciation over time.

Pros

• Popular strategy

• Proven strategy

• Can get BTL (buy to let) mortgages

• Generally passive income potential with the right tenants and property in good order

• Predictable returns with good tenants

Cons

• Tax considerations

• Lots of legislation changes have bought in regulatory burdens on landlords

• Lower yields/returns than other strategies

• Void period risks

• Market volatility

• Risk of bad tenants

Best for: First time investors or investors looking for a stable source of income, and the potential for long-term growth.

Short-Term/Holiday Let

Short-term lets or STLs are similar to buy-to-lets but that offer shorter tenancy stays from one night upto six months (sometimes longer with company lets), an alternative to hotels. Short term lets, STLs, and Holiday lets became very popular after the Covid 19 pandemic, with many people vacationing in the UK, and also key workers needing temporary accommodation. Investors started to buy properties popular tourist destinations and also city centres ideal for those professionals looking for accommodation, but not necessarily wanting to sign a 6 month lease.

Shot term lets and holiday lets can generate a healthy monthly rental income and capital appreciation gains. The right properties in prime areas can command high nightly rates and rental prices.

Pros

• High nightly rates achievable

• Less regulations compared to buy to lets

• Minimal to no tenant interaction

• Less wear and tear than buy to lets with daily/weekly cleaning

• High yielding with high occupancy rates

Cons

• Risk of bad tenants / damage to property

• Dependent on high occupancy rates

• Intensive management or high management fees

• Risk of high void periods with saturation and growing competition

Best for: Investors looking for high yields and happy to take slightly bigger risks than with standard buy to lets, however with many STLs being apartments you are unlikely to get better capital gains than freehold houses

House in Multiple Occupation (HMO)

An HMO or House in Multiple Occupation is a property generally occupied by three or more unrelated people/tenants. Normally they will share facilities like the kitchen and lounge, and sometimes the bathroom, but will have their own bedrooms. You can buy ready made HMOs or many investors will convert properties from standard residential houses into an HMO or commercial buildings, such as offices and turn them into HMOs. HMOs are extremely popular as an investment strategy because, similar to STLs, you can generally make a higher rental yield than buy to lets because you are letting out individual rooms, rather than the whole property. HMOs are popular with tenants and different demographics, generally because for a single person to rent a room, it is cheaper than having to rent a whole property, also bills for the single tenants are generally cheaper, and it is a way of meeting new people if moving to a new city/area for work.

Pros

• High rental returns/yields

• Reduced risk from voids/rent arrears

• High demand

• Popular investment strategy

Cons

• A lot of regulations

• Licenses required in many areas

• High tenant turnover

• Quite management intensive

• Properties require fire doors, mains interlinked smoke detectors and must meet all fire and safety standards

Best for: Investors wanting higher rental yields, and happy to jump through all the relevant stricter regulations. HMOs are very popular but quite management intensive so investors must be ready to be hands on, or find a good management company.

Purpose-Built Student Accommodation or PBSA

Purpose built student accommodation is housing built specifically for students to live in. Generally the properties are blocks of flats or studio apartments, or sometimes cluster flats with shared kitchens. Investors can buy single apartments in the block and let them out to students, generally the block is then managed by a third party student management company who will look after the rent collection and management of the property.

Pros

• High demand initially

• Good rental income

• Hands-off investment for investors

Cons

• Very low capital appreciation

• Only good demand when the block is new, falling with age and competition

• Seasonal voids

• Management fees

• Low tenant demographic, can only let to students

Best for: Investors seeking a hands-off investment, and for those looking to invest in an area with a high student population. However with management companies available for other strategies there are better options to achieve similar returns.

Commercial Property

Commercial property is a catch all term to describe the majority of property that is not residential, including offices, warehouses, retail, healthcare, educational buildings, industrial amongst others. Commercial properties require less management in terms of time commitments by the landlord or managing agent, with long leases, and FRi leases (fully repairing insuring). Commercial investments are subject to stricter lending criteria for financial purposes.

Pros

• Require less management with tenants taking on more responsibility than residential

• Tax advantages

• High yielding potential

• Capital appreciation potential

Cons

• Tenant dependency

• Prone to saturation

• Long void period potential

• Mortgage harder to secure

• Location extremely important

Best for: Experienced investors looking for minimal management. Ideal for investors with higher upfront capital.

Other strategies that utilise some of the properties outlined above include:

Social housing

Social housing properties provide affordable housing for low-income and/or vulnerable tenants. Generally an investor will give their property to a social housing provider to take over as tenants, giving the housing provider the ability to house any of the vulnerable tenants they look after. With a housing shortage in the UK, social housing has become a very popular investment strategy with investors investing in council houses, housing association properties, temporary accommodation, and assisted living facilities. The leases tend to be longer than normal residential tenancy agreements and provide investors with a secure rental income. With the rise of ethical investments becoming popular with people wanting to help and make a difference, social housing investments provide investors the chance to make a positive impact by creating more affordable housing options.

Pros

• Assured fixed income

• Predictable returns

• Positive social impact

• Government support

• Lower turnover of tenants

• Low management fees

• Lower risks compared to other strategies

Cons

• Limited control and flexibility with longer leases

Best for: Investors wanting to make a social impact but also looking for high returns. Good for longevity investments.

Off-plan properties

Off-plan properties are properties that are still in the planning or construction stage. Off-plan property can be priced below the market value and will increase in value as the build happens. By buying a property at the planning or build stage means you can potentially make a great return on the appreciation, but it does come with higher risks from numerous avenues, such as market downturn or rising build costs, delays in construction or in a worst case scenario the developer going bankrupt and not managing to complete the build.

Pros

• Below market value

• High capital appreciation potential from the initial purchase price

• Structured or staggered Payment plans often available allowing for flexible purchasing

Cons

• Construction delays

• Build issues

• Developer bankruptcy

• Many off plan developments are apartments which can suffer from low long term capital appreciation

• Saturation with high competition in many city centres

Best for: Those investors happy taking a slightly higher risk for the potential for quick appreciation and good returns, but also those who don't mind a longer strategy and tying money up during the build/construction phase.

Flipping

Flipping or buy to sell means buying a property that might require refurbishment or renovation. Once purchased you then do work to the property, hopefully adding value, in order to selling the property for a higher price once finished, making money in the NET profit. Although it sounds simple it involves a good understanding of the local market, ideally having relationships with tradesmen, or being able to do as much of the needed work yourself, which cuts on costs, making you more money in the long run.

Pros

• Great for high ROI potential

• Tax efficiency

• No on-going management required

• Making large lump sums

Cons

• No passive income

• Good understanding of local market

• Market dependency

• Good project management required

• Prone to unforeseen issues

Best for: Seasoned investors who are hands on, happy to work on their own projects, looking for short term quick profits, have extra capital to absorb market fluctuations or unforeseen problems arising at refurbishment stage.

Rent-to-Rent

Rent-to-rent basically means to rent a property from another landlord to then sub-let the property to a third party, another tenant/group of tenants, the trick is to rent more than your rent costs, making money in the profit between the rents paid and rent received. You have to ensure that your landlord knows you are going to sub-let the property because many properties and landlords do not allow sub-letting, it can invalidate insurance in some cases, and people have been caught out in the past. You need to have a rent to rent agreement.

Pros

• Low financial commitment

• Generates quick cash flow

• High yield potential

Cons

• Landlord is in control (not you)

• Lots of regulations

• Potential to invalidate insurance

• You don't own the property so no capital appreciation potential

Best for: Investors low initial capital. Happy to network for third party tenants, and understand the risks involved with dealing with investor/landlords.

Each property investment strategy we have discussed offers its own pros and cons. We have gone through the basics of each of the main strategies available to you, now you need to decide which suits your investment goals. If you are still struggling we advise speaking to an expert investment consultant from Landmarka.

If you are looking at a potential investment property then visit out FREE Rental Property Calculator to help you estimate rental income, forecast returns and help you make an informed decision on your next investment.