“To let or to sell – that is the question”

You hear of a house needing a quick sale, it’s tatty but sound and you know you can get a good discount – but you also know it’s in an area where sales are reasonably buoyant. Most of our readers build their portfolio around property to let. But with this house, what about buying to sell? You’ve already got your team of builders etc – just call them in, do a thorough make-over and sell for a fast profit. Or rent it out long-term – how do you decide?

For some it’s easy, for those people who strictly do only one or the other, the long-term developers and the property investors. But if you are prepared to be flexible, why not have a mixed strategy? Why not take each new purchase on its own merits, assessing its value as either a portfolio asset or a quick turnaround? Or let your cashflow needs make the decision – a quick buy to sell operation can generate much-needed cash fast.

The trouble is that with buy to sell there is always a risk of not selling fast or not selling at all unless you drop your price, virtually eliminating your profit. What seemed a bargain and dead cert becomes a lead weight tying up your money and causing you a major headache, stress you could do without. That’s why some recommend a multiple exit strategy. And it seems good advice, keeping your options open as you manage your portfolio. If your buy to sell goes wrong, just add it to your rental properties. Or, if you decide to get rid of a rental property, just give it a serious make-over and put it up for sale – simple, yes?

No. The idea of a multiple exit strategy is sound – always having an alternative, a fall-back option in case circumstances change. It’s like the proverbial eggs not all going in the one basket. The problem is that any property might be a strong rental asset, or a solid sale proposal, but is rarely both. Grasp this, and the view does then become very simple, a case of comparing cashflow with profit margins and longer-term investment values. Here’s an example.

We buy a property at £60k and spend another £10k bringing it up to scratch. It’s now worth £80k on the open market, or can be rented at £480 per month. The choice seems clear – either sell and walk away with £10k profit, or rent it out and look forward to its value doubling in the next ten years or so. However, the profit won’t be £10k; we need to factor in all the costs involved in the short-term project, so add in £1k professional fees, £900 mortgage repayments till sold, £3.5k mortgage redemption penalty and product fee, and our profit has shrunk to £4.6k. Then bear in mind that if we got it as a discount because of a deflated market, we’re likely to have to sell at a discount too, say at £75k, and we’ve actually now made a loss of £400!

Of course you will already know what was wrong with this buy to sell prospect – the margins were just far too tight. This particular property will be far more valuable in your long-term portfolio. Successful buy to sell properties will usually be higher value than in this example, and of course need buoyant markets to sell for a good price. If you were to construct an identical illustration as above but this time based on a purchase of £150k and target sale price of £200k, the profit margin increases. And this is mainly because the mortgage-related costs also increase but at a proportionately lower rate.

Now, let’s flip the problem – we’ve gone for the higher value option but the market slumps again and rather than lose our sales profit we decide to keep the property and rent it out. It’s just as important to see how the mortgage (and market trends, this time with the rental market) can affect your investment. With proportionately more valuable properties, we will have to leave in substantially more funds to make up the mortgage short-fall, so it ties up our money for longer. Also the higher up the ladder you go, the harder it is to make the rent cover the monthly mortgage repayments – rents rarely go up in line with property value.

However, none of this means that a mixed strategy is wrong, simply that we should regard properties as being suitable for one category or the other, but not both. And each decision will reflect on either cashflow or profit, long or short-term. But there is one other consideration – you. Some of us have no interest in continually living with the stress of buying and selling, preferring the steady and low-maintenance rental operation. Others thrive on the buzz of chasing a quick profit. To help you understand what suits you best, here are some useful differences between buying to let and buying to sell.

Buy to let

• Increasing capital value: as well as the average doubling of value every ten years, once you’ve refinanced, none of your own money is tied up. You just look forward to a huge profit if you decide to sell in ten or twenty years’ time
• Tax-efficiency: remortagaging over time releases tax-free cash (whereas buying and selling incurs capital gains tax)
• Less stress: renting out takes up less time and causes less stress than buying and selling. Also the rental market is easier to monitor and manage than the volatile selling market.
• Cash cow: each single property gives you a way to recyle your cash for as long as you like, providing the property’s value increases over time.

Buy to sell

• Fast deals: the financial turnaround is much faster than in the rental market
• Reduced gamble: regardless of profit margins, at least you are not tying up your money in what is ultimately a gamble on rising values
• Injecting cashflow: in a mixed strategy, buy to sell raises useful cash for other projects
• No landlord headaches: buying, selling and repeating the process cuts out the low-profit but time-hungry element of the tenant

So, while there is no simple answer to the question, sell or rent, you need to be guided by your own finances, time, expertise and risk threshold. And keep a focus on your broader investment strategy and decide how each potential purchase can best serve that.

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