When I was new to the property market I needed a strategy (or, in reality, a series of strategies) that would allow me to build my property businesses without a large lump sum of capital available to invest.
A lot of people find themselves in the same position at the moment. Deposits are high, yet mortgages are at some of their lowest rates. And there is an influx of property for sale just now due to the coronavirus backlog and the stamp duty changes.
If you are wondering what to do, I can tell you about the steps I took and offer some advice to get you started.
My first suggestion is to act strategically
Here are the three little-known 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 in a bit more detail…
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, 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.
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 five years or more 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.
We go into a more detailed explanation of lease options in our podcast:
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.
Let’s look at an example:
A couple, we will call Linda and Steve, decided to start selling off their small portfolio as they approached retirement, but wanted to avoid the usual hassle of selling.
We, the buyer, agreed on a purchase price they were happy with, in this case, £160,000, and a five-year completion date. We paid an option fee of £16,000 upfront (although this can be as little as £1) and agreed to monthly payments of £320, leaving a balance of £124,800 after five years.
In this example, the couple got a lump sum and predictable monthly income, as well as a definite sale price and date. We, the buyer, benefitted from being able to rent out a property, generate income, and eventually purchase the property without a 30% deposit or any of the usual hassle. A win-win.
Using these three creative strategies, if you dedicate time and effort to this approach, you could build a million-pound portfolio of rental properties and be building long-term wealth in just three years!
About Rent 2 Rent Success:
Stephanie Taylor is co-founder of HMO Heaven and Rent 2 Rent Success. Stephanie launched Rent 2 Rent Success to help professionals who want to get involved in property, but feel stuck as they’re worried they don’t have enough time, money, or knowledge to get started.
Through her inspirational Rent 2 Rent Success YouTube channel, podcast and website, Stephanie debunks the myth that you need large sums of money to get started in property.
Her book ‘Rent to Rent Success – Our ethical 6-step system to get started in property without buying it’ will be published this month.