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Don’t let the tail wag the dog

14th April 2018

There are many types of investors, each with his or her own idiosyncrasies.  Each with their own levels of comfort, and each with varying need for control.  There are even those who will only buy a particular property according to the time you offer it to them, and those who will only buy certain house or flat numbers.

From an investment point, there are two types of investors: those who buy and keep, and those who wish to enter and exit.

Those who wish to keep can be divided into segments, depending on how long they wish to stay in the deal.  If they don’t decide, then it will be the length of time they stay alive which will govern how long they hold the investment for, after all everything has a time limit.  It can be argued that there’s little point in buying a freehold when your own body is a leasehold.

There is very underutilised tax incentive, called entrepreneurs relief, which means the investor will only end up paying 10% on any property gains they make.  For this to work one needs to purchase the asset in a company, and then sell the company shares rather than the asset.  There are other conditions which need to be satisfied in order for this relief to kick in, but they are not prohibitive.

There are also those who keep amassing assets year after year rain or shine, they don’t sell.

The question may be asked, what is the best way?  Should one have a fixed strategy or should one be flexible?

Recently, I had a request for a deal to be entered and exited.  However, the deal itself does not suit this strategy.  You may make a good slice of profit, but you will miss the cake and the cream.

The property in question is in one of the lowest areas of a location which itself is reasonably affluent and has increased in recent years.  Therefore, there is a lot of pressure from all sides for its upliftment as it seems to be the last spot left in the area.  This may take perhaps three to five years to mature.

I believe the property itself can be developed and sold on to give a healthy profit.

However, to optimise the deal my feeling is you would need to go with the current of what the deal demands rather than to impose one’s own will or ‘strategy’ on the deal.

Rather than purchasing and selling the property, it would be best to capitalise on its cash flow, and then look to refinance the deal with a view of taking out all your original capital from the deal, and holding the asset.  This would potentially give the investor a healthy cash flow for perhaps the rest of his or her life.

When the area matures sufficiently, which it is set to do, at this point one could consider an exit.  If, however, the property is producing a healthy income, it begs the questions as to why one should sell.

Although currently there is a good tax incentive for buying and selling, one must be careful to ensure the tail does not wag the dog; either from a tax perspective or one’s own rigid strategy.

Suresh Vagjiani

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