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Loading...By Stephanie Taylor, co-founder of Rent 2 Rent Success
How can you enter the property market, and build a portfolio if you aren’t in the lucky position of having capital to help you buy properties?
This is the position I was in when I started, and many people find themselves in the same position today. 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.
Image: Jump Story
So, whether you are trying to get on the property ladder or build your own million-pound property portfolio as a long-term business, you may be wondering how to get started. Let me tell you about what I did and the three approaches I used.
1. 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 earned 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.
2. Lease options
Typical buy-to-let deposits are around 30%, making them unaffordable when you are just starting out. Lease options are contracts that 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 involve 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.
For example, John bought a property at the height of the market in 2007 for £300,000.
By 2016, the property had dropped in value to £240,000, leaving John in negative equity and set to lose around £60,000 if he’d sold it. What’s more, the property was costing him £800-£1,000 per month.
A lease option then made perfect sense. John 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 the buyer and the 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.
3. 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’ll call Mary and David, decided to start selling 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.
In summary
Rent to rent provides a quick and easy way to get started in the property market, allowing you to develop a portfolio of property assets and build your reputation. A good track record of managing and renting properties will then make it easier for you to access traditional mortgage finance. And once you have some cash flow from your properties, you can engage in exchange with delayed completion to expand your portfolio even further.
If you are energetic and put in the work required, you could build a million-pound portfolio of rental properties and wealth for your future.
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 in January 2021.
The views and opinions expressed in this blog post or content are those of the authors or the interviewees and do not necessarily reflect the official policy or position of any other agency, organization, employer, or company.
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