Three strategies for building up your property portfolio

Business Insights

Right now you may be wondering if you should enter the property market more seriously and build up a portfolio.

Currently 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.

But what if like me, when I started, you don’t have substantial capital to invest?

I took time to think through my long-term goals and then used these three strategies to go from almost nothing to creating a million-pound property portfolio in just three years.

Rent to Rent

The first strategy I used to get my property portfolio off the ground was by becoming a property manager for house shares. I’d rent a property, take on the bills, work to make it a comfortable home, and then rent to someone else. Adding value allowed me to charge a higher rent than I was paying. This cashflow enabled me to save 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. 

It’s all about creating beautiful affordable homes people will love to live in. Working ethically to add value for both tenants and landlords is the foundation of rent to rent.

Lease Options

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 several years to be fully paid for it? 

The most common reason is that a seller is in negative equity; the property has reduced in value, yet they still have a mortgage to pay off. By agreeing 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.

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. Look for anyone wanting to move quickly and/or who may be in negative equity as they’re 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 review a worked example:

As they are approaching retirement a couple decided to start selling off their small portfolio, while avoiding the usual hassle of selling. 

We, the buyer, agreed on a purchase price, in this case £160,000, and a five-year completion date. We paid an option fee of £16,000 up front (although this can be as little as £1) with monthly payments of £320, leaving a balance of £124,800 after five years.

The couple got a lump sum, a predictable monthly income, and a definite sale price/date. We, the buyer, benefitted from renting out a property, generating income, and finally purchasing the property without a 30% deposit or any of the usual hassle.

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 will then make it easier for you to access traditional mortgage finance. Once you have some cashflow from your properties, you can engage in exchange with delayed completion to expand your portfolio further.

By Stephanie Taylor, co-founder of Rent 2 Rent Success.