However, people are not sure how to take their first steps. This was the position I was in when I started out in the property market. I felt it was an interesting opportunity but I didn’t know where to begin particularly as I did not have large amounts of capital to invest.
So, where should you start?
My first suggestion is to be strategic. Building a property portfolio is a long-term venture, especially if you are starting out with little to invest. So, the first step is to develop your long-term strategy.
Here are the three strategies I used to go from almost nothing to building a million-pound property portfolio in just three years:
● Rent to rent
● Lease option
● Exchange with delayed completion
Let’s look at each of these.
Rent to rent
The first strategy I used to get my property portfolio off the ground was to become a property manager for house shares. I would rent a property, take on the bills and put some work into making it a warm, comfortable home, and then rent to someone else. I earnt profit from adding value to the property, allowing me to charge a higher rent than I was paying. This cashflow enabled me to save the funds for deposits to buy my own property.
It’s not really an investment strategy but an ethical way to make money from properties without buying them. Of course, you need to find landlords who are willing to allow you to sublet the property and properties that could use some TLC so that you are adding value.
To make it easier to find these kinds of properties, I founded Rent 2 Rent Success, connecting landlords with renters looking to start their property journey. And that’s the beauty of it ‒ you can get started without needing a big deposit saved. You can get started for the cost of renting a property.
It’s all about creating beautiful affordable homes people love to live in. Working ethically to add value for both tenants and landlords is the foundation of rent to rent.
Lease options
Typical buy-to-let deposits are around 30%, making them unaffordable when you are just starting out. Lease options are contracts which allow you to control a property with an
option (and not an obligation) to buy it, on or before, a specified date at a specified purchase price.
They are sometimes known as ‘no money down’ strategies because you can secure properties for as little as £1.
Lease options are actually a combination of two agreements: the lease and the option.
The lease is the agreement with the owner to rent out the property to tenants in return for a monthly payment. The option is the price agreed to buy the property at a later date if you choose to.
A lease option typically involves the following four elements:
● an option fee, also known as a ‘consideration’, that you pay upfront
● your monthly payment (the lease)
● an agreed purchase price (the option)
● an agreed purchase-by date (you can purchase before this date)
Now, you may be asking: Why would a seller agree to sell their property and then wait to be fully paid for it?
There are lots of reasons. The most common reason is that a seller is in negative equity, so the property has reduced in value since they bought it yet they still have a mortgage to pay off. If they sold their property now, they would still owe more to their mortgage lender than they receive from the sale, leaving them out of pocket. By agreeing on a lease option, they get their mortgage covered which can help them return to positive equity.
Another common reason is that sometimes the seller wants to move more quickly than the standard property sale process allows, such as for work relocation. A lease option gives them the opportunity to move now without losing money on their property.
Let’s look at an example of how a lease option can work:
David bought a property at the height of the market in 2007 for £300,000.
By 2016, the property had dropped in value to £250,000, leaving David in negative equity and set to lose around £50,000 if he’d sold it. What’s more, the property was costing him more than £800 per month.
David started with rent to rent. Once the property had regained some value he was keen to sell. A lease option then made perfect sense. David got his mortgage assured for a few more years and then got a hassle-free sale for a price he was happy with.
Lease options can be ideal if the conditions are right for buyer and seller. Unfortunately, this can make them hard to find and settle on an agreement. Keep an eye out for anyone looking to move quickly and/or who may be in negative equity as they are most likely to benefit from a lease option.
Exchange with delayed completion
An exchange with delayed completion is similar to a lease option. You contract with a seller to buy their property, on or before, a specified date at a specified purchase price. Unlike lease options, however, you have an obligation rather than an option to buy it by the agreed date.
For example, an older person might want to sell off property as he or she approaches retirement.
In one example the seller agreed on a purchase price she was happy with. The buyer paid an option fee of £15,000 upfront (although this can be as little as £1) and agreed to monthly payments of around £300, leaving the balance to be paid at the end of a five-year period.
In this example, the seller got a lump sum and predictable monthly income, as well as a definite sale price and date. The buyer benefitted from renting out the property, generating income, and eventually purchasing the property without a 30% deposit etc.
For people interested in the property market taking time to understand the different approaches is time well spent. They will be useful for those wanting to take the first step on the property ladder as well as those looking to increase their property portfolio and build a long-term business.
