To Sell, or to Let, that is the Question

It’s boom time for property investors who are benefiting from improved mortgage
deals, rising rents and house prices that in many places are still yet to reach their
pre-crash levels. Media coverage of skyhigh rents and cheap mortgages are an
easy sell, but buy-to-let is not for everyone. Some investors prefer to venture down
the short-term route of buy-to-sell, and make a quick gain before moving onto the
next project.

In this article we’ll take a look at the merits of each approach, to help you decide
whether buy-to-let or buy-to-sell property is the right investment for you.

**Buy-to-let**

With rental yields on the up, taking advantage of high tenant demand and a low
supply of affordable rental properties is an increasingly popular option for property
investors. First-time buyers are continuing to struggle to take their first step on the
property ladder, and more tenants are being forced to continue to rent. This has
been dubbed ‘generation rent’ by observers, and there’s no sign of a reversal in
fortunes for buy-to-let investors anytime soon.

Following the introduction of buy-to-let mortgages in the 1990’s, people are now
comfortable with the idea of an investment that’s specifically buy-to-let, and the
sector has really taken off. All these factors combined mean that at the moment,
the market is slightly skewed in the favour of those looking to buy-to-let, but that
does not mean there are not healthy returns to be made if you buy-to-sell.

Buy-to-let properties are long term investments that can help you become
financially free by generating a rental yield that can replace or supplement your
salary. However, they can also benefit from the capital growth the UK property
market can bring.

**Rental yield** – One of the most important considerations when investing in
buy-to-let property is the yield, which is simply a measure of the annual rental
income against the value of the property. The higher the yield, the greater return
the property will produce. As a guide, an excellent gross yield (including costs)
would be in the region of 8-9 percent.

To calculate the ‘true yield’ or net yield of the property, you should deduct the costs
of owning the property, such as the mortgage and the ongoing costs of
maintenance, insurance, ground rent and service charges. If this leaves you with a
net yield of 34 percent, that still represents a very attractive investment.

**Tax** – Proceeds from renting out a property are treated by HMRC in the same way
as your salary, and subject to income tax. Therefore, if you fall within the higher
rate tax bracket, you will be taxed 40 percent on the income a buy-to-let property generates. However, there are also a number of tax deductions that can be made to reduce your liability. This includes expenses like mortgage interest and maintenance costs on the property.

**Releasing equity** – When managed correctly, buy-to-let properties represent a
safe and steady long term investment. If you hold onto the property for a long time,
you can also see a considerable capital gain. If the property has increased in value
from £120,000 to £160,000 over a period of time, you will have gained £40,000 in
equity. You can then remortgage the property and release this equity tax free.

**Buy-to-sell**

The buy-to-sell approach to property investment is much more of a short term
strategy for maximising your capital. The formula itself is very simple? you purchase
a property, renovate it to a higher standard, before selling it for a profit. Although
the process might sound simple, the success of your project is subject to a wide
range of factors.

Firstly, it’s essential you have good knowledge of the local property market so you
can buy at the right price. There’s also the ever fluctuating property market which
can damage your chances of making a profit. Then there’s the cost and
specification of your renovation.

**Specification**- If you’re planning on selling an investment property, the level of
spec and refurbishment should always be better than a buy to let property.
Presentation plays a huge part in maximising the return on investment and
achieving a quick sale. Any corners that are cut when refurbishing a property will
only come back to haunt you, so you should always do the best possible job.

**Tax** – Income generated from the sale of the property will be classed as a capital
gain by HMRC and will be subject to capital gains tax. Capital gains tax is charged
at two rates. Those who pay basic rate income tax will be charged capital gains tax
at 18 percent, while higher rate tax payers will have to hand over 28 percent of any
gain they make. However, you do not pay capital gains tax on the full amount, as
everyone has a yearly tax free allowance of £11,100 for 2015-16.

**Risk** – Buy-to-sell is generally accepted to be a riskier strategy than buy-to-let,
but with plenty of know how and little bit of experience to boot, you can benefit from
quick and substantial. The best thing you can do to maximise your returns is to get
to know the local property market inside out before you make a purchase. Try to
work to a minimum of a 25 percent return on your initial capital outlay to make this
strategy worthwhile.

For more information about buy-to-let or buy-to-sell, please get in touch with the
experts here at Martin & Co, Camberley. With over 25 years’ experience in the
local property market, we can provide the advice you need to maximise your return.

t: 01276 691510
e: giles.mugford@martinco.com
w: www.martinco.com/lettingsagents/camberley