Which is the best option?
Should you buy property to hold or should you buy property to sell?
If you are new to property investment then I highly recommend that you read my post on focusing on one property strategy at a time if you haven’t already.
I am going to discuss the advantages and disadvantages of both strategies here and to be clear this is about the residential market only. Look out for future posts about investing in commercial property coming your way soon.
If you have not chosen a property investment strategy yet then you need to choose the right one that will fit with your goals. Need help with setting inspiring goals for your property investment business? Well read my post on goal setting first.
I invest in both buy to hold and buy to sell properties. But when you are starting out I would not advise that you do this. It’s best to go for one strategy or another as there are many things to learn about both of these. Once you are an expert you can move into another property investment strategy.
Buy and Hold
To be clear here “buy and hold” is investing in the private rental market by purchasing buy to let properties. Holding on to a property has a number of advantages. For the last 1,000 years and more property in the United Kingdom has significantly outpaced inflation.
The problem is that it is really difficult to predict how much capital growth you will make and when you will make it. There are always peaks and troughs in the property market and at the time of writing you will probably not make as much profit with buying and selling as you could a few years ago.
In the UK at the moment there is a high demand for property but this is mainly in the private rental market because a large number of people cannot afford to take the first step on the property ladder. This doesn’t mean that buying and selling is not an effective strategy as I will discuss later.
The best way to get the best returns from a buy to hold strategy is to invest in the right locations. Right now we are seeing a shift in the UK towards cities and towns away from London that have the best yields. So you really need to do your homework and if you are based in the capital or the South East then be prepared to invest elsewhere.
Locations that have large universities are often a good choice. Cities such as Liverpool and Manchester are seeing some very high demand for private rentals and with the property prices the yields are very appealing.
A very important aspect of buy to hold is the financing. You need to determine what return on investment you are looking for and then implement your financial strategy around this. There are more and more lenders available now that will provide buy to let mortgages so you have a lot of options.
You need to think about the amount of down payment that you want to make and the amount of mortgage financing you need. It is also important that you know the average rents in the location so that you can calculate everything properly.
I use a good mortgage broker to find the best deals on buy to let properties for me. They have access to a number of different lenders and I recommend that you find yourself a good mortgage lender as a part of your team.
Another thing to take into account is the condition of the property. I always renovate my rental properties to a standard that I would be happy to live in. This has always worked well for me and I suggest that you do the same. You will attract better tenants and can charge the highest rates.
You need to know where you stand with renovations. It is essential to have a reliable contracting team that will provide you with a solid quote that they won’t deviate from. There is also the question of time. You don’t want to be waiting weeks for your renovations to happen because you will be losing money.
When you start to rent out your buy to let property you need to decide what you will do with the profits. Once you have paid your expenses such as mortgage repayments and any maintenance responsibilities then will you reinvest the profits? If you have another source of income then I strongly recommend that you reinvest your profits.
The other good thing about investing in buy to let properties is that if you choose the right locations then your property will appreciate quickly and you can use equity in your property to purchase another property and hold.
So here are the advantages of a buy to hold property investment strategy:
You will generate a monthly income
If you buy a property to quickly sell it then you will not generate a monthly income from it. With buy to let you will generate a monthly income from the rents that you charge. This is a passive income stream for you.
With this in mind it is so important that you set the right prices for your rents. You must do your homework and charge the highest price that you can based on the condition and location of your property.
You may find this a strange thing to add if you are aware of the changes made by the UK government with regard to tax benefits for buy to let property owners. There are ways around this and one of these is by setting up an SPV limited company where you will be able to claim your mortgage interest as an expense against your tax liability.
Pay down your Mortgage and build Equity
If you don’t need to touch the profits that you make from your rental income then you can use this to pay down your mortgage and build equity in your property fast. This will help when it comes to acquiring other properties for your buy to let portfolio.
Yes the value of any property can go up or down but if you invest in a good location you are far more likely to benefit from appreciation. As you are not looking to sell fast you have the time for the appreciation to be pretty significant.
This is very important. With leverage you will be able to expand your buy to let portfolio and generate even more passive income. Mortgage lenders will be happy to work with you based on the leverage you have with the properties you currently own.
Buy and Sell
The main attraction with a buy and sell strategy is the possibility of short term profit. In some situations it is possible to make around 20% or higher profit with buying and selling or buying, renovating and selling (flipping).
Some investors look for a property in good condition at below market value. Even if you can find a good property in good condition you may have to wait for a short time before you reach the level of appreciation to enable you to make the profit level that you require.
One of the most popular strategies within buy to sell is flipping. This is where you find a property that requires renovation, purchase it at a good price, implement the recommendations and then sell quickly for a profit.
This is a good strategy but you need to be careful. I strongly recommend that you use experts to assess and inspect the property as you don’t want to end up having to repair a very expensive structural problem. Getting this wrong can completely write off your profit and even lead to a loss.
When you buy to sell it is very important to take all costs into consideration. I mentioned the value of having a good contracting team with a buy to hold strategy and this is equally important with buy to sell. You need reliable contractors that will do a great job on time for you. With property investment time is always money.
Remember that when you buy and sell the property there will be stamp duty, estate agents fees, solicitors fees, mortgage setup fees and of course the cost of the renovation if you are flipping. You need to factor in all of the costs and work out your profit margin. Use a spreadsheet so you can instantly see what impact additional costs will have.
The biggest problem with buy and sell is that you are at the mercy of the housing market. If the market is rising then it is a great time to buy and sell because your property will appreciate fast increasing your profit potential. Of course the opposite is true when the market is flat or even in decline. So to succeed with a buy to sell strategy you need to know how the property market is performing and how the market is in the specific location that you are looking at. There is no such thing as too much research with property investment.