The property market holds an enduring attraction for the would-be investor, and it is likely to remain the go-to arena for those with some capital to invest and with designs on making money without too much hassle. That attraction usually stems from the fact that the property market is easy to access and easy to understand; most of us have a property of our own and have a good understanding of how things operate and what the potential pitfalls are. If you're completely new to property investment, we recommend checking out our property investment for beginners article which will serve as a good primer before taking a deep dive into the strategies within this guide.
There are more ways to make money in property than perhaps you had first thought of. Furthermore, the more nuanced the property market gets, the more specialist it becomes, and hence the skills and experience required are harder to obtain.
Some of the best property investment strategies are:
- Student lets
- Taking on lodgers
- Holiday lets
- Property crowdfunding
All the different ways of making money through property offer different attractions, which will appeal to a specific demographic, based on age, what capital you have, what your investment ambitions are, what your career ambitions are and what your personal circumstances are.
Like any investment market, some property investment strategies are more lucrative than others and some are more passive than others. Some are specific to certain locations. In this article we will run through all the common methods of making money through property, and you should be able to judge where you fit in most comfortably, and what investment option suits you best.
This is a very common property investment strategy, mainly because the rental market is very strong in the UK. There is a shortage of new-build properties and many people are struggling to get on the property ladder, so the buy-to-let market is always likely to see plenty of demand. With buy-to-let you purchase a property, make it suitable for tenants and then let it out in return for a regular rent, usually paid monthly. Tenants receive a contract for a fixed term and you become their landlord.
You should aim to find an investment property where your target market is likely to want to live. Young professionals like dynamic, up and coming areas or even city centre living, while young families will need access to good schools, supermarkets and maybe parks and other attractions. If you need some inspiration on property location, we have rounded up some of the best places to buy property in the UK within a handy post.
There are different ways you can play the buy-to-let market to suit your lifestyle and ambitions. You can play an active role by being the landlord, finding tenants yourself, arranging contracts, carrying out any maintenance and repairs on the property, and collecting rent. Or you can leave all that to a letting agent, to whom you pay a regular fee.
Either way, there are some costs that you will need to deduct and which may prevent you making money at first. These include stamp duty, legal fees and refurb costs, and don’t forget you are liable to pay tax on your rental income.
Making money in the buy-to-let market is relatively straightforward, as you will be receiving a regular rental income which ideally should cover any mortgage payments you need to make on the property and leave you a little profit on top.
You should aim for a location that historically offers a good ‘rental yield’, this is the amount of rent you can expect to receive in a year, expressed as a percentage of the property price. So earning £10,000 on a £200,000 house is a 5% yield. Anywhere around 8% is classed as a good yield, but you can calculate what is acceptable to you.
There are few pitfalls to buy-to-let other than the potential of facing periods where there are no tenants, but you should be able to manage things to avoid that. In many cases, a landlord will look to build a portfolio of rental properties, all earning regular income, but essentially, you can look to sell the property whenever it makes sense market-wise to do so, or keep it as a buy-to-let property long term.
A final thing to keep in mind is that it's also possible to invest in commercial and residential property. For most people, residential property investment will be the right route to take due to being a simpler and cheaper option.
With this market you are looking to find a bargain property that is priced below market value because it needs work doing to it. You then carry out that work to increase its value and sell at a new, higher market value. Hence, you can very quickly make anywhere between £10-100,000 depending on the market in the location you choose.
This is a very attractive market to people who are DIY experts or builders, are not intimidated by the prospect of some hard graft and have a good vision of how a property can be improved. Alternatively, you might have good contacts in this trade who can do the work for you. Either way, you need to be very careful of the market and have a good handle on the location. Are properties likely to rise in value sufficiently to justify your investment?
Buy-to-sell is a little harder to get into, in that there are less such properties around. It requires a keen eye to look at a property and make a judgement on whether the work needed will proffer sufficient increase in value.
So you also need to have a good knowledge of the costs you are likely to incur. It is very easy for these to spiral out of control and very quickly any profit you make on the sale is swallowed up by refurbishment costs, or the work you undertake doesn’t result in the value increase you expected.
Another slightly different sub-section of the buy-to-sell market is relying on capital appreciation. Here you are buying a property cheaply, in the knowledge that the area is likely to become more attractive.
This requires good knowledge of local affairs and planning agreements, because an area can increase in appeal very rapidly, due to new schools being built, new shopping centres or new roads or other transport links, but you have to buy while property is still cheap and not so desirable. It is slightly harder to judge any potential increase in value this way, and it may take longer for this increase to materialise. This is also a sector of the market where there are far fewer investment opportunities, and when they do appear you may need to act quickly.
Traditionally, this is a very popular variant on the buy-to-let market, and of course targets students specifically. While these markets are very similar, there are also some subtle differences which make the student market a little easier to navigate. First of all, student housing tends to be concentrated in one area in close proximity to universities or their various campuses. Hence, this is a very stable market and trends are very predictable.
Also, student properties are usually quite cheap to buy and don’t necessarily need to be high-spec. While student expectations have changed in recent years, you don’t need to be furnishing a student house expensively, and properties are often older Victorian houses or terrace houses with multiple bedrooms (similar to houses of multiple occupancy), but many properties can be single let also.
These are cheap to buy and hence the student market is perhaps more attractive to investors who want a high return on rent rather than capital growth. As a direct result of student areas historically staying in the same location, property values tend not to change too much. This means buying student accommodation investments can be a good call in the right circumstances.
Consequently, there is a low point of entry into the student let market as the capital required is slightly less, and hence this is attractive to part-time investors as well as serious investors building up a property portfolio. Many people also look to buy a property to let to their own family and their friends whilst at university. This offers a reliable income source and a future investment that can provide a good pension alternative.
Contrary to popular belief, students often become reliable rent-payers as they have easy access to cash in terms of student loans, overdrafts and parental loans. Also, while you may fear void periods between terms when the house will be empty, most standard student contracts are paid in advance, so tenants will pay to cover holiday periods in order to secure a property.
Houses of multiple occupation (HMOs)
While you may touch on this market when letting to students, it is a lucrative market in itself when letting to young professionals and other demographics. A simple definition of an HMO is any property that is tenanted by three or more people who are not a family, and where there are shared facilities such as bathrooms and kitchens.
This definition can change by local authority, and indeed a big drawback of HMOs is that they are bound by considerable legislation and planning requirements, mainly regarding the size of rooms you can let out, fire regulations and what facilities must be available. You should also keep in mind that new HMO regulations were introduced in October 2018.
However, naturally, HMOs represent a much higher return than a single let, because you are receiving multiple income streams from each room you are letting out. Obviously, the rent you receive for a bedroom and shared facilities will be less than for a whole property on a single let, but the multiple occupancy brings many advantages.
If a room becomes unoccupied for a period it is less impactful on your income, as you are still receiving rent for the other rooms. The same applies if a tenant falls into rent arrears; you can afford to be more charitable in sorting that out as you are still receiving rent from the other rooms.
There are also tax benefits to letting out an HMO in terms of there being more tax deductible costs, and generally speaking, demand is very strong for HMOs amongst the student market and from young professionals, who are often ex-university friends who are still living together having subsequently found jobs.
The downside of HMOs is a result of the tighter legislation. Not all houses can be adapted into an HMO, so you need to do a lot of research before you jump in with an offer on a property. Can you legally let a room out as a bedroom, or is it too small? Is the bathroom big enough to be classed as a shared bathroom? It is also harder to secure a mortgage for HMOs because of the tighter legislation and the possibility that the property may not classify as an HMO. Another downside is that once a house has been adapted into an HMO it restricts your re-sale market, as effectively you are only now selling to other private landlords.
Letting agents sometimes shy away from managing HMOs as it means much more work for them, so you may end up managing the property yourself. This is not always a bad thing, and may have been your intention anyway. Bear in mind also, that start-up costs will require more furniture and furnishings, as you are fitting out multiple bedrooms.
Like any investment, you need to weigh all these costs up, but without doubt a stable HMO property in the right area can be a lucrative property investment strategy and usually justifies the additional management involved.
Spare room accommodation / lodgers
A simple way to earn money through property is to rent out a spare room in your own home. It may be that you live on your own and have a spare room available, and the incoming rent would be a great help with subsidising the mortgage. Or maybe you are a couple whose children have now moved out of home and their old bedrooms are vacant?
Spare rooms can become dead space or simply become filled with clutter, when they could be earning you money that you can put away for some considerable savings. As long as it suits your lifestyle to offer a room to someone you don’t know, then this is perhaps the easiest way to make money through property.
The traditional way to do this is to offer your room to a lodger. This is usually an informal relationship with someone you know, or who is known to you through an acquaintance, and needs a room. The rest of the house remains the same, but you need to establish some ground rules about access to shared and communal areas and what is expected. Hence, some form of rental agreement is usually drawn up.
A variation of this is to rent your room out only during the week. This is popular for business people who go home at weekends, but want a shorter commute during the week. A similar arrangement is via Airbnb, or other such ventures, where you offer short stays to visitors or tourists, if you live close to a big city or an attraction of some sort. This can bring lucrative income, but the rest of the time, your home is your own. Of course there will be periods where you have nobody staying, but with this arrangement you are not faced with huge costs you wouldn’t normally be paying, like buy-to-let on a second property, so void periods are much easier to handle.
Offering a room to foreign students is another popular way to make use of a spare room, although in this case you would often provide food as well. This can be a great cultural exercise both for the student but also your family, as long as you are sociable and accommodating.
These kind of ventures always require some kind of ground rules, and rent would normally cover all bills also. You may find that your home insurance premiums go up as a result of declaring a lodger, but you can earn up to £7,500 tax free with this arrangement.
Holiday lets have become a very popular alternative to the buy-to-let market, not least because they hold a number of tax advantages. A second property is usually used as a holiday let, although some people have the option of adapting their current home. Either way, location is the key factor. While any home in an attractive area can be rented out via Airbnb or something similar, a holiday let needs to hold some more unique value.
This does not necessarily need to be a seaside or coastal home, because people are increasingly opting for holiday cottages in the countryside and remote places for some peace and quiet. Maybe you own some land and can build some log cabins to rent out, or offer space for camping or glamping?
All these are very fashionable ways for families and groups to book ‘secondary holidays’ or weekends away, and this becomes similar to an HMO arrangement, where you can create multiple income streams from one asset. On the flipside, of course, there is plenty of management and maintenance involved, and if your property is leasehold, you should also ensure that your lease terms allow you to let a property out.
A typical holiday cottage may be remote from where you live, or you could retire to a village and set up a holiday let there. Communication and furnishing is key however. People expect a good quality of accommodation and as you are running a business, you need to welcome people personally and ensure their stay is comfortable throughout. As a result, you are able to charge more ‘rent’ than the average buy-to-let or HMO arrangement. People expect to pay more for a holiday and hence this can cover some of the additional costs you will face, and make the investment a solid business proposal for later life.
If you like the idea of investing in property but want to play a passive role, and if you like the idea of buying shares but don’t understand the jargon of the stock market, then property crowdfunding could be the perfect solution for you.
With a minimal investment, you can buy a share in a property with other, similar small investors. You then earn a share of the rental yield that comes in and you also earn a share of any profit when the property is eventually sold. So there are two ways to earn money, you can increase your share at any time and also cut your losses at any time by selling your shares.
Property crowdfunding is a great introduction to investment and carries very little risk. It allows you to enter the property market with only a small, manageable investment and to watch how it performs. After 12 months, you might decide to increase your investment, add a second property or diversify into other areas also. The low-risk element of property crowdfunding gives you lots of options, and often, a diverse property portfolio is the key to being able to navigate any bumps in the road and maintain your investment long term, which in property terms, is the best way to ensure good returns.