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
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.
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
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.
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
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