What is the right kind of property investment for you - Traditional or Creative?

For many of us, building opportunities and finding sound investments to put money into confidently can be daunting; understanding where your money is going, how it will be invested, and the impact it will have on you is invaluable.

When done diligently, property investment can create wealth and build opportunities for the long haul, regardless of the fluctuations in the market.

Let's start at the beginning - What is property investment?

Investing capital into a project for commercial or residential use with the sole intention of creating a profit. When one invests in property, the purpose for purchase is to gain a return on investment or ROI. This return can become evident in several forms, e.g. monthly rental earnings, developing and selling or creating a multi-use property to increase income.

There are two main investment techniques that we shall investigate below. Comparing and contrasting these concepts provides investors the knowledge to decide which route is right for them.

What is ROI?

ROI or Return on Investment, simply put is the approximate measure of profit from the investment piece. In more detail, it is the comparison or ratio between net profit, calculated over a certain period and the investment cost in question. Effectively, the calculation identifies profits made with the capital invested.

Traditional Property Investment

What Is Traditional Property Investment?

This investment style is typically associated with 'Homes Under The Hammer'. Meaning an investor is looking to buy a property below market value (BMV) to maximise profit potential or buy a property to add value, perhaps through refurbishment or additional building work.

So, what do we mean by Below Market Value (BMV)?

Market value is the theoretical value of a property when looking at some variables such as recent comparable property sales and the property condition. Ultimately, a property is only worth what a buyer is willing to pay. As a result, situations emerge whereby a property may be bought below the market value, creating an instant opportunity for greater profits. Factors that would often allow an investor to buy a property below market value are speed, certainty, seller circumstances and a willingness to take on a property that may not be as desirable to most.

How do you buy a property?

• People often buy through estate agents, at auctions or contacting homeowners looking to sell directly.

• You can buy property entirely using cash, a combination, a cash deposit, and a mortgage (loan).

Suppose the property is not sold for a profit after the works are completed. In that case, typically, investors will hold onto the property and rent it out, looking to make a rental profit every month and through long-term equity growth. This is known as a buy-to-let investment and is the most well-known strategy.

What is equity? 

Equity is defined as the worth or value of something. Let's put it in terms that relate to property investment; simply put, it is the difference between the property's market value and the pending balance still owed on the mortgage of said property.

How to buy a property using a mortgage?

A mortgage is essentially a long-term loan associated with purchasing properties; the mortgage is ultimately the collateral for the property. The agreement is between the buyer and the lender, usually a bank, to secure the buying of the residential or commercial property. The loan is paid back over time until the debt is cleared in full, and the property then belongs only to the homeowner. Like with all loans, proving you have the capabilities to pay it back is essential and having your proverbial ducks in a row is a must.

Mortgage criteria:

• Suitable credit rating

• Sufficient deposit

• Cap on what you can afford depending on how much you can borrow (based on income) and deposit size.

These are all elements involved in and required for Traditional Property Investment. So how does its creative counterpart compare?

Creative Property Investment

This creative practice provides a lucrative opportunity for potential investors keen to build and diversify their portfolios but don't necessarily have the full financial capability to do so.

"The secret to success is to own nothing but control everything."

– Nelson Rockefeller, American billionaire businessman and politician.

Most 'traditional' investors start outputting big deposits down for properties and taking out numerous mortgages but inevitably reach the point of stagnation where they run out of cash!

Ultimately, creative investing is not just for investors who cannot buy properties through cash and/or mortgages but also for those who are simply looking for better returns or a way of building their portfolios more efficiently.

So, how does this all work?

• Creative Property Investment primarily revolves around controlling property rather than buying it.

• By controlling property, you can enjoy many of the same benefits as buying property, just without many hurdles and challenges.

• One of the primary reasons creative property investment is so popular is that the barriers to entry and, in particular, the up-front capital required to get started are much lower. This makes it accessible to many more people and most importantly, culminates in much higher than average returns on investment.

What do we mean by control?

You do not need to take out a new mortgage to buy the property by controlling the property. The current mortgage is left in place. However, legal paperwork is drawn up by solicitors to show that you will be taking responsibility for the property instead of the owner.

You then set up an agreement between yourself and the owner to ensure they are also benefitting from such an arrangement. We're always looking for WIN:WIN outcomes for all parties with every transaction we do.

Controlling property is similar to the one used by many of the world's biggest and most profitable companies. When you break it down, these companies are billion-dollar industry leaders, yet their model is simple; maintain control and let others provide the infrastructure, content or products.

These well-known companies are fantastic examples of Creative Control.

Let’s get back to controlling property, how can this be achieved?

Creative Strategies include:

• Rent 2 Rent

• Serviced Accommodation

• Lease Option

• Deal Packaging

Let’s take Rent 2 Rent for example, for this type of arrangement the benefits are highly attractive:

• No new mortgage required

• No huge deposit

• No big stamp duty

• No arrangement fee

• No broker fee

• Quick And simple

• Minimal risk

• High return on investment (ROI)

• Agent gets commission

• Landlord gets rent hassle-free

• You get rewarded for providing an excellent service

• WIN-WIN-WIN [Investor – Landlord – Agent]

So, how do you know what is the right approach for you?

Educating yourself on the pros and cons of building a property portfolio using either investment method is the only way to honestly know which will best fit your personal circumstances. Hopefully, we made some progress on that in this article!

We've looked at the difference between traditional and creative investment and familiarised ourselves with the terms and the processes, indicating that the accessibility and flexibility of Creative Property Investment have apparent advantages.

However, there is undoubtedly a time and place for traditional property investment, we wouldn't say you should never buy a property - Some below-market value deals or instances where you can enhance value just make sense.

Although you must proceed with caution, to qualify for a typical buy-to-let mortgage, you require a minimum 25% deposit, and the average property price in South East England (where we are based) is around £400,000 for a 3-bed house.

So, you would need £100,000 before even getting started!

In contrast that with creative property investment, where to take control of a property with similar features to enjoy comparable benefits, you would only need to invest on average between £3,000-£5,000 to take control of the property before you start seeing your return.

Mind-blowing stuff!

In the end, creative property investment will give you a suite of strategies to invest in any area and in any market, enabling you to thrive in good times and through recessions.

Times have moved on from the classic, traditional, rigid and capital-intensive methods of traditional property investment that excluded anyone who wasn't already wealthy from participating.

We now all have the choice to adopt these new modern techniques and embrace creative property investment as the future!

Summary Comparison:

Traditional Property Investment Creative Property Investment Must qualify for a mortgage (see above for criteria) No new mortgage required Cash Intensive Minimal cash required Low relative return on investment Huge relative return on investment Higher Risk Minimal Risk

https://www.fisherinvestments.com/en-gb/how-to-invest/investment-options/alternative-investments

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