I had a proposition this week to start a small consortium with some investors who wanted to build up a portfolio and keep these properties. They wanted me involved to tap into the deal flow we can access.
They have built up a number of properties in Harrow and North London. They know our game plan is mostly to hit and run, meaning to buy and sell in a short space of time, ideally without adding any value what so ever.
The reason why they were swayed towards purchasing and holding is because they are getting on and this is the way they have always done things.
They felt even though currently the market is supporting our strategy I should start thinking about building a strong asset base for the times ahead. It will not be summer in the property market forever, as sure as the seasons change there will be a change in the property market and therefore there must be some emphasis on the buy and hold strategy.
This question arises again and again. Do you buy and sell or buy to keep?
Both have their pros and cons. Buying and selling is about two things: price and timing. The price you purchase at is of course important relative to the market price. If you purchase below enough you can resell still keeping below the market price and you will have sufficient demand. The other point which many people do not place enough emphasis on is the timing. This is not only the time between exchange and completion, but also the timing in relation to where the rest of the market is at.
An example I have mentioned before, but is worth revisiting, is when I attended a corporate event and met an Indian man whose family were big in the commercial property market and had built up an asset base of £350m. A prominent business man offered £330m for the whole portfolio, however they refused the offer. This was pre credit crunch 2007, fast forward to post credit crunch the portfolio was suddenly worth £150m. The borrower was wise enough to not give personal guarantees on the borrowings he took. He has mentioned to me several times the reason why he’s still standing is because of this very reason. I have heard it said if you owe the bank £100,000 you have a problem, however if you owe the bank £100m they have the problem!
The other person I met was a Jewish property veteran in his 60; amazingly he had managed to sell his properties prior to each recession hitting three times. Is that reading the market? Or is this having friends at the top?
The timing in between exchange and completion is also important as in a rising market this will increase the margin the longer the time to completion. Currently we have a deal we agreed about three months ago in Kensington, by the time we complete it will be another three months, during this time the price will have increased. However it can also work the opposite way too, as many investors know too well having bought off plan properties pre 2007 and being forced to complete at higher prices than the actual property is worth.
Buying and selling means you’re exposed to the market for short periods of time, typically over a three to six month time period; this isn’t a long time in property. It allows you to ride the market up and down if you can read the signals well. You can also pick and choose your deals, and be always on the lookout for deals. When buying and selling you are exposed to capital gains tax most of the time which tends to be more favorably than the income tax.
However in some ways flipping goes against the natural attribute property has. Property rises by it self without any outside effort , meaning it earns for you passively. Holding properties allows it to do what it does which is go up over the medium and long term. This does not mean you allow your money to be t rapped in the property, after a six month period you can either remortgage or apply for a further advance from your existing lender allowing you to extract typically 75% of the property value as opposed to the purchase price.
There are cost benefits to holding stock too, you save paying expenses such as stamp duty, arrangement fees, and agent’s selling costs etc again and again.
The other benefit to holding property is you never ever pay capital gains tax. Capital gains tax is only payable at the point of sale, if you never sell you never pay. Just to be clear this does not mean you cannot take money out of the property. You can in theory take all your deposit money out and more.
Another important point is the type of cash flow you require. Are happy with a lumpy one, meaning you get a lump sum a few times a year as opposed to a steady income which you will get with rents. Generally speaking trading properties gives one a more aggressive return on the money invested, but not always.
There is no single right or wrong answer to this question. It depends on many factors such as hassle factor, tax situation, the amount of money you have and will be getting, also the enthusiasm you need to have to be involved in buying and selling properties. If you have limited means but a lot of interest in property and pushing things hard, then trading is a good option. Whereas if you’re retired and depend upon a steady monthly income this may not be the right way.
Many investors go for a mixture of the two, keeping some money parked in a property for a long term investment and some of the money for trading.
Cornwall Gardens, London, SW7
Purchase Price: £900k
- Stunning one double bedroom raised ground floor flat
- High ceilings
- Share of freehold
- Communal gardens
- The property is coming in at £1,268 per sq ft while properties in this location are being sold at around £1,700 per sq ft
- We are confident this property will be sold quickly
Call us now to secure this deal!
Sow & Reap
A Property Investment Company
!Tips of the Week
There are three important considerations when purchasing property: the first is location, the second is location…….and the third? You guessed, it’s location.
The internet has limited use when researching properties. We have done deals where the statistics on the internet did not support our decision, but our local knowledge did and our clients made money from them.