Now, let me say straight up that I have no problem with investors creating short term gains in property. I do it myself all the time. My favoured method of doing so is refurbishment – buying a property needing some work, whether repair, improvement, modernisation and upgrading, or perhaps a combination of some or all of these. The key is to choose a property requiring the type of work where the value of the property in its improved state will have increased by more than you spend. Because property is an “imperfect” market that is easier to achieve than many people imagine but now is not the time to go into a detailed explanation of valuation and property renovation.
The point is, I understand the principle and agree with its use. However, where I might differ with other investors is in what happens next. Many will want to release their profit and put the property straight back on the market. A few weeks later the property is sold and they pocket their cash, perhaps using it as the deposit on their next project.
However, I belong to the school of Never Sell Unless You Need To. I would instead prefer to let the property and to then release the profit, or equity, by taking a further loan, using the borrowed funds to roll into my next project.
Those who use the sell and cash-in approach might question this pointing out one or two apparent disadvantages of this approach. First they might point out that with typical buy to let LTV’s of 85% I will not be able to pull out all of the equity – by definition 15% will be left in property and will, in effect, be dead money. They might also, in some market conditions and depending on how the figures stack-up, be able to argue that I will be creating for myself a liability. The new mortgage payments might tip the property into negative cash flow and so will be a drain on my resources.
Yes, sometimes this might be true. How true will depend upon how carefully I have attended to my pre-purchase due diligence. I will have assessed the likelihood of arriving at a negative cash flow and will have assessed whether the amount of the negative cash flow is something I can live with.
Now, I hasten to add, I’m just trying to be fair and look at the whole picture. Often, the property will break even after refinancing or even create a positive cash flow. But sometimes things don’t work out so neat and tidily and the cash flow is negative.
“Ok”, say the sell and cash-in brigade, “you should have sold after all”. But should I? First off, I’m not paying any Capital Gains Tax (or, if I trade within a limited company, Corporation Tax). I’ve not paid out on solicitors’ fees. So actually, although I may have left 15% of my equity in the property, is the amount of cash in our respective hands actually that much different?
If the property is at break even or cash flow positive then I don’t see that I have a case to answer. But what if it is cash flow negative? Have I suddenly become an incompetent investor? Or is there more than one way to skin the financial cat? We’ll look at this more in the next post.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, Author & Property Investor
