Please note: This is Chapter 7 in the Complete Guide to Property Investment Strategies, focussing on the Buy to Sell property strategy.
Buy to Sell Definition
Buy to Sell is straight forward enough to define. The basic steps are:
- Find a property to purchase where some kind of value can be added.
- Purchase property and add the value (e.g. a refurbishment).
- Sell the finished property on the open market – hopefully for a profit that exceeds purchase costs, holdings costs, refurbishment costs and exit costs!
Technically, this is not property investment, but property trading.
However, whilst the long term hold of property is essential to wealth generation, there are times (either personally or market driven) where buying a property with the intention of selling it on in the short term makes sense. For example:
- Larger properties in more expensive areas generally have much lower yields. In such cases, buying well and adding value might be better realised by selling for a profit than retaining.
- If you are trying to accelerate your accumulation of capital in order to purchase further properties to suit your buy and hold strategy, then undertaking some short term buy to sell activity will help achieve that.
It makes no sense to me to leave money on the table if you find a suitable buy to sell project, even if that is not your core strategy of wealth accumulation.
Buy to Sell Differences Compared to Buy to Hold
It should be noted that buying to sell is potentially less forgiving than buying to hold. Getting slightly less rent that you expected, or spending slightly more on a refurbishment for a rental property isn’t the end of the world. Such errors are inflated away over time. Will it matter that you spent £5,000 more than expected in 20 years time? Of course not as that amount is effectively amortised over the holding period of the investment.
But for a buy to sell project, it is a different matter. Getting less than you expected on re-sale, spending more than expected on adding value, or encountering expensive problems on route could be the difference between making a profit or losing money.
This is why I would place even a relatively simple buy, refurbish and sell on strategy as more advanced than a simple buy to let purchase. You need to be:
- Very accurate and confident with your purchase price, all costs and eventual selling price.
- Able to price up a refurbishment accurately, for both materials and labour.
- Fully aware of your target market and expectations. What features do they want? Where do they want to buy? What are deal breakers (e.g. parking issues)?
- Fully aware of the macro-economic environment in which you are operating. Is the sale market healthy? Is sentiment strong? Are there any impending changes that might impact that? Look no further than Brexit for a good example of the latter.
- Aware of an alternative exit strategy. You need to buy such projects with cash or some form of bridging loan or short-term financing. You cannot use a standard buy to let mortgage. Such loans come with expensive conditions attached should you overrun, which means you need an alternative if it turns out you cannot sell the property after all.
Build to Sell Suitable Returns
We will consider how exactly to find, price and manage such projects in future articles, but generally speaking you should be looking for a Return on Investment (ROI) of 15-20%, together with a minimum of £15-20k net profit after all costs. Anything less is not worth to the increased risks you are taking with this strategy.
Whilst both Build to Sell (like a traditional house builder such as Wimpey) and Commercial Conversions (such as converting an old office building into flats) are both sound buy and sell strategies, they are very much at the advanced end of the spectrum as there is less room for error as explained above and is really a different beast to a buy-to-hold strategy.
TKM Triangle: Build to Sell
This is kind of like asking how long is a piece of string. Clearly, Build to Sell or Commercial Conversions are going to require lots of time, knowledge and money. However, if we consider a simple buy, refurbish / add value and onward sell:
- Time. No different from finding a Single Let or HMO and refurbishing it to let, rather than onward sell. Clearly, if you are adding value via extensions, loft conversion or other structural works then this will take more management time, although you do have the option of employing a Project Manager on larger projects.
- Knowledge. If you are undertaking a heavier refurbishment, then you will need knowledge of how these work, the relevant planning or building regulations and good handle of costs. In all cases you will need to understand your target market, their demands and expectations and the macro-economic market in which you operate.
- Money. A simple refurbishment is aligned with getting a Single Let in condition for a tenant to move into and so no more costly. Obviously, larger scale works require a larger capital input. Unless doing proper development, works for refurbishment will generally have to come out of your personal resources than being able to be borrowed.
As the market is less forgiving to this strategy due to removing the inflationary and amortisation effects, this is a strategy best employed once you have undertaken some refurbishment works in getting a property ready to let.
Take me to Chapter 8: Commercial Conversions >> [Coming Soon!]