A definition of a passive investing is something that requires minimal effort, time, and attention to gain appealing returns. Property is a great example of passive investing. The investment will track the market’s growth for both rental and capital markets. Through outsourcing the acquisition, disposal, and management to professional firms it becomes a completely passive investment. This method also ensures the compliance, maintenance, and functionality of the property is up to date with the latest standards. The following passive investment strategies are turnkey solutions that will start cash flowing as soon as you own the property.
PASSIVE INVESTing STRATEGIES FOR REAL ESTATE
1) Single-family dwellings (house or apartment)
The classical and simple gateway into passive investment through property is single family dwellings. This can be a purposeful investment, or one created through a change of personal situation. For example, if you change location and rent out the property previously purchased for you to live in. Whether you purchase a house or apartment, these are termed as buy to let (BTL) properties. You will receive a single rent for the occupation of the property.
2) House of multiple occupations (HMO)
In contrast to the single-family dwelling above, this model has multiple parties that rent a bedroom in the house. This generates multiple streams of income and is very unlikely to have a completely voided property. The HMO model works best in locations with high demand for student housing or young professionals. The main drivers are that this demographic of the population wants to live in a co-living environment. Furthermore, that can’t afford to rent a single dwelling outright.
The key advantages of HMO investing are as follows, they achieve a higher total rent and ultimately, higher yields. Furthermore, voids are kept to a minimum because of the number of tenants you have for each investment. The cons are the increased maintenance that comes with the number and age demographic of the tenants. One thing to keep in mind is that this method commonly requires a license from the local council.
3) Serviced accommodation
Serviced accommodation can suit a variety of tenants. The concept involves renting out a furnished property on a short-term basis to individuals or businesses. These scenario opportunities are as follows, although not limited to:
- Businesses that have employees on short-term contract work and need to house them for the duration of the contract.
- Businesses that are relocating staff to an area need to offer accommodation to bridge the gap before they find permanent accommodation.
- Holiday rentals in prime holiday destinations such as by the coast or in central city locations.
- Short-stay opportunities, driven by large events such as festivals, shows, or sporting events.
This approach requires significant upfront capital expenditure in regard to furniture and ongoing cleaning between stays. Although it provides a significant increase in revenue potential when compared to strategies 1/2 above, Furthermore, it has the added flexibility for you to enjoy the property, whether that’s taking one week a year or living there permanently and renting the property out on the odd week you’re not there.
4) Apartment buildings
This involves purchasing the freehold of a building with multiple flats within it. This provides reduced risk through multiple streams of income from the various tenants of the flats, similar to an HMO, although without the constant expenses. If required, you have the opportunity to sell off individual flats on a long leasehold basis, which gives added flexibility to the disposal strategy. These buildings come at a slightly higher price point, although there is an opportunity to negotiate the price as you are essentially buying in bulk.
5) Passive investing through ground rents
Ground rents are required when apartments get sold off individually on long leasehold agreements. The owner of the freehold of the building receives a ground rent from each flat in the building as stipulated in their lease. This investment has similar features to a long-term bond. A leasehold agreement commonly has at least 99 years left and the ground rents will have set review mechanisms stated in the lease.
A mortgage becomes harder for leasehold properties to obtain if they have under 75 years in length. In this situation, an extension to the leasehold agreement is require and carried out through negotiation with the freeholder. The extension can’t be refused by the freeholder, although a premium is normally paid to the freeholder for the right to extend. The amount depends on the mechanism stated in the lease or any precedents set to understand the value.
Summary of passive investing in real estate
In summary, passive real estate investment strategies offer a variety entry points to generate passive income streams and financial flexibility for property owners. The 5 passive investment options listed above generate contrasting rates of return, which you can choose from to match your passive investing goals while, at the same time, enjoying the time freedom that passive investing creates.
