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  • Buy-to-Let

    Buy to let vs. Buy to sell - trying to compare an apple to an orange.

    I thought it might be helpful to discuss the differences between buy to let and buy to sell, because they often fall under the overall heading of "property investment".

    However, I don't see BTS in that light at all! To me, it is comparing an apple to an orange. [Image: images?q=tbn:ANd9GcQnIvf8xhEj5q2xSMOkq6G...UxFvTrUHnA]

    I thought I would make some comparisons here, to clarify why I think that:

    Buy to let is largely a passive income strategy.

    You purchase a property, you rent it out to a tenant, the property (hopefully) delivers net cash flow per month. In other words, set it up, and then minor interaction on-going to manage the tenancy, repairs etc.

    Buy to sell is much more like a J.O.B.

    You find a property, in some cases add value, then you then sell to release the profit. You pay tax on that profit. You need to have the next project in the pipeline to move on to to keep the cash flowing.

    It is much more hands-on and you have to be in the driving seat to ensure that you end up with a net profit after the sale. You have to bear the costs of acquiring and selling property too, and these eat into your profits, along with finance costs (if using bridging or private JV loans).

    Buy to let involves tenants.

    Tenants are our clients, therefore we need to think like "service providers" and we need to be compliant to over 140 government statutes and regulations.

    Buy to sell does not involve any tenants

    At the end of the project, you sell. The property remains empty, possibly eating into your profit, until the sale completes.

    A BTL'er has the mentality of being involved for the long term.

    That means long term thinking and delaying gratification for up to 25 years.

    A BTS'er has the mentality of being involved for the short term.

    That means short term thinking and seeking "instant gratification".

    A BTL'er is running a business with clients to satisfy.

    We may be in long term relationships with our tenants.

    A BTS'er is trading a commodity.

    There is an end user in mind - the buyer, but the relationship is very short term and, once the property is sold, the BTS'er will not have any further connection with that property or the buyer.

    BTL is an investment on which you seek a profit over the medium to long term.

    You can build a herd of cash cows that you can milk for cash flow month on month. Taking equity release from them is like breeding from them to build other assets.

    BTS is making a profit by trading a commodity.

    You buy a cow, fatten it up, and then slaughter it to release the profit and buy another cow.

    Both strategies are treated very differently from a tax perspective and it is advisable to seek professional tax advice on how best to set up whichever type of strategy you decide to adopt.


    What other differences to you see?

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    I agree Vanessa it's like comparing Apples to Oranges.

    Rob Dix and I had a similar discussion on The Property Podcast not so long ago that you can listen to here...

    Buy to Let vs Buy to Sell Podcast

    I would add to your list risk and reward.

    The risk levels of BTS are much higher as it's a short term approach and a negative change in the market could ruin your plans. BTL is normally a long term strategy so as long as you are well cash flowed short term changes in the market are less likely to affect you.

    However it must be said that the potential rewards of BTS are much higher in the short term compared to BTL.

    I much prefer BTL as I am sure many of The Tribe members do but it would be interesting to hear from people who adopt a BTS strategy.
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    You could always do both and diversify your risk. Also, what about buy to rent to sell? In other words, buy, renovate/refurb then do a rent to buy with a tenant buyer. Or this could also be a fallback strategy if a buy to sell plan doesn't sell quickly enough.
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    Are you an estate agent or property developer? Do you outsource your property marketing? Please take my survey now to let me know your views!

    hazeldineproperty.com
    Hazeldine Property on Facebook
    Thanks for the comments both.

    There are two areas I would like more detail on with regards to these strategies:

    Financing BTL vs. BTS

    Tax implications of BTL vs. BTS

    I hope some of the mortgage brokers and can advise and I will also try and get some tax input as well.
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    Hi.
    Im with Mark on this one. A combination of both is a great strategy, only problems with BTS is obtaining finance to be able to buy and sell quickly, obviously being wary of 6 month rule and cost of your loan if you fail to sell, ideally buy for cash!
    Darryl.
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    Interesting subject Vanessa,

    In practice, it is a little less clear cut when you consider the goal of investing is to grow your money as much and as fast as possible, while managing risk and workload.

    I don't think it's any more true for BTS that you have to do the work yourself to make profit, than for buy to let! In both cases, your profit is greater if you do everything yourself, but it is also possible to get others to do the work in either case and still make profits - as long as the figures are generous enough to allow for such.

    I also dispute that buy to sell is necessarily indicative of a short term, "instant gratification" mentality. Large lump sums of profit may come out of buy to sells, but we're not obliged to spend them!

    I used to be, as Jonathan would say, "a die hard BTL'er" but my thinking has shifted to be honest (sshhh..!) You see, when I started investing in 1995 and for the next ten years, it was possible to begin as we did with very modest amounts of cash and never have to add to that in order to grow a substantial portfolio:

    The first property we bought was a flat and it cost £33,500. It's now worth around £120k and has been milked thoroughly for cash to buy more! The deposit we put in was 10% or £3,350. If you want to do this, you need to get a time machine and... go back to 1995!

    Anyway, it could be argued that we never had to raise more than that tincy wincy £3,350, as the portfolio mushroomed almost of its own accord, with the rising prices that ensued. There was plenty of head room too, to draw out equity, as rents relative to values allowed it easily, at least until around 2004/5.

    The market dynamics are just not like that today. So who, I have to ask, is in a position to grow a portfolio at this time??

    It seems to me (notwithstanding buying below market value, which has equal benefits for BTS as for BTL) that it must be quite a narrow, happy band of men and women who earn a minimum of £50,000 and can live cheaply on £25,000 while investing £25,000 into buying one property per year and who are content to continue in that way for years to build a portfolio big enough to retire on (estimate 25 properties, could take up to 25 years unless capital growth returns - as of course we hope and expect it will, but cannot perhaps rely on at present??)

    I would go so far as to say in this climate that buy to sell, unless you are in that happy narrow band of men mentioned above, is almost a necessary addition for most people, to be able to raise their income to sufficient levels to enable them to get into and play the long term, grow a portfolio, buy to let game.

    Let's say at the other end of the spectrum also, there comes a time when we might want to stop buying more properties to let (or our husband might insist we stop!) Then we might be in a position where we have 100 buy to lets, with total mortgages around £10,000,000 and excessive income due to low interest rates. Now, we have another dilemma - what do I do with all this cash that keeps piling up?! I could just pay down mortgage debt of course, and ultimately that has to be the next 20 year plan to try and do that, or sell off up to 75% of the BTL portfolio (as it's 75% geared presently).

    So I can either use the excess cash that the portfolio generates to pay down mortgages straight, or I can put it into buy to sell projects with the aim of potentially getting into bigger deals as years go by and making bigger profits, hence ultimately being able to pay off more of the buy to let mortgages and keep more properties. I don't call that instant gratification, but part of a long term plan - in fact, a lifetime's plan.

    My only problem at present is not having enough time to do all the projects that I should be getting on with to execute my plan!

    Angela Smile
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    Author of The Complete Guide to Property Strategies and The Complete Guide to Property Investing Success
    Learn more at http://www.completepropertysuccess.co.uk

    I also post property updates on my Facebook Page

    "It is the small decisions you and I make every day that shape our destiny" Anthony Robbins


    Thanks Angela and Darryl.

    This thread was sparked by something said by Phil Stewardson at the Landlords United! event.

    He said that he had been focussing on BTS for the past few years, but the market was such that he was just at the tipping point (prices being low) to change to a BTL strategy.

    So I guess where we are in the cycle of the property market is also a determining indicator for which strategy to adopt?
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    Hi Vanessa,

    Sure, where we are in the market cycle may have a bearing on the strategy one might deem best to adopt at any given time, although each person's circumstances and reasoning are different. I don't believe any one of us holds 'the one best ultimate answer' - we're all just doing our best to do what seems right to/for us at a given time.

    The only time I would say it's probably "wrong" to buy to sell, is in a falling market - and I should know as many went broke trying, and some took my funds with them when I did bridging:-( !

    Angela
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    Author of The Complete Guide to Property Strategies and The Complete Guide to Property Investing Success
    Learn more at http://www.completepropertysuccess.co.uk

    I also post property updates on my Facebook Page

    "It is the small decisions you and I make every day that shape our destiny" Anthony Robbins

    I am a dyed in the wool BTL'er. I would not do BTS no matter what the market conditions!!

    Once properties are acquired, I believe in hanging on to them!
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    (27-06-2013 04:39 PM)vanessa warwick Wrote:  I am a dyed in the wool BTL'er. I would not do BTS no matter what the market conditions!!

    Once properties are acquired, I believe in hanging on to them!

    I must admit Vanessa, I was a little taken aback by this reply you gave earlier. It was one of those "okaaay!" moments. Maybe you were a little rushed at the time:-)

    You also didn't respond to my reply asking in that case what your plan is when the mortgages expire on your properties. When you think about it, our BTL properties are only 'on loan'. Unless we have a plan to pay off the mortgages, we won't be able to "hang on to them" once the mortgage term expires, assuming we've reached a certain age. Or the mortgage market may have changed by then, so that we cannot simply remortgage.

    I said that I know how you feel though, and perhaps you were just expressing a feeling more than anything? Sometimes we can hold opinions or attitudes that we are almost blind to (maybe that we take too much for granted?) so we don't see how they may not always serve us.

    To give a non-property example: my husband is so tight, he says "I never buy food and drinks from a motorway service station - they're too expensive!" But when I go on a long journey with him, I buy refreshments for him from the service station (if we haven't remembered to bring our own from home!) because I can see him getting weary, which could lead to an accident if he's driving. It's an unhelpful rule that he's made for himself.

    We can all be guilty of believing certain things we've just never thought to question: I know one of my 'weaknesses' if you like, is that I've always loved sayings and often quote a pertinent saying when chatting to my family... which annoys them for some reason! For example, if my car starts making funny noises, I might say that I'm going to take it for a service, because: "A stitch in time saves nine!" When I do that, my husband retorts sarcastically: "Oh, it rhymes so it must be true!" Sometimes he's got a point. In this example, for instance, I should let him take a look at the car first.

    I used to be close minded about buying property non-locally. But then I changed my mind and have since benefitted from many deals I would not have done before.

    Still, hopefully that's how forum discussions can be helpful, by challenging our beliefs at times.

    Angela Smile
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    Author of The Complete Guide to Property Strategies and The Complete Guide to Property Investing Success
    Learn more at http://www.completepropertysuccess.co.uk

    I also post property updates on my Facebook Page

    "It is the small decisions you and I make every day that shape our destiny" Anthony Robbins


    I know the feeling Vanessa,

    But I do think you have to take into account the points I made earlier (aside from the fact my husband won't let me add to our portfolio any more!) which are basically:

    a) How can most people afford to continually grow the portfolio? Some good buy to sell deals can help people to achieve buy to let growth!

    b) You say you believe in "hanging onto them", so what are you going to do when the mortgage terms expire:-)? I'm hoping that some strategic buying to sell will enable me to hang onto more of my portfolio for life than I otherwise would be able to.

    Angela
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    Author of The Complete Guide to Property Strategies and The Complete Guide to Property Investing Success
    Learn more at http://www.completepropertysuccess.co.uk

    I also post property updates on my Facebook Page

    "It is the small decisions you and I make every day that shape our destiny" Anthony Robbins