When to sell, if investing for short-term returns
As an investment, property typically gives good returns compared to other investments - when invested for the long term and when you use ’gearing’ (leveraging your deposit funds and using the bank’s money to pay for the majority of the property).
After putting down just a 25% deposit, you can gear it with a mortgage to enable you to buy a property worth four times as much as you have invested.
Property is one of the few investments you are allowed to gear and this means if you buy well and the property increases in price, the return on your investment can be substantial.
If you buy a property for £150,000 with cash and it increases in value by 10% to £165,000, your gross profit (not including buying and selling costs) is £15,000 – a 10% return on your investment.
If you buy the same property with a deposit of £40,000 and take out a buy-to-let mortgage for the balance, that £15,000 increase in value gives you a return on investment of 37.5%.
Buying with cash
Of course, you will be able to retain more of the rental income if you buy with cash, because you will not have mortgage payments to make. However, borrowing allows you to buy more properties than you could afford to with just cash.
For example, by spreading a cash investment of £150,000 across four properties, you are likely to realise more total income and undoubtedly benefit from a lot more capital growth across a bigger portfolio than you would from the one cash purchase. As long as prices rise.
Gearing allows you to maximise your return on investment over time, but in order to make a lump-sum return from property investment in the short term, you have to buy something that you are confident will achieve a rapid increase in value.
This is a high-risk investment strategy, as property prices can rise and fall within a matter a months, which is why most buy-to-let investors hold property for the long term - 15 to 20 years.
The three main routes to good returns
There are three main routes to achieving good returns in the short term:
Firstly, you could buy a property from a ‘distressed’ seller - someone who needs to sell quickly, and is therefore willing to accept less from the right buyer than the property could otherwise sell for on the open market if there was no time pressure. Paying less than the ‘true’ market value means you instantly gain equity.
Secondly, you could buy a property that most people would not want to purchase because of problems, such as subsidence or serious damp issues. Not all lenders will lend on these types of properties, but our specialist brokers will be able to quickly identify the options available to you. Once the problems are corrected, the property can then be sold or re-mortgaged and rented on the open market.
If you have bought at a low enough price, carried out the work successfully and the property is fundamentally either desirable itself and/or in a desirable location, then you should be able to sell or let for a good return.
The third way of making a short-term profit is to buy something to which you can add value. That is usually achieved by adding rooms, either through converting existing spaces, such as converting garages or cellars, or extending the property. Basement and loft conversions can be expensive so it can take time to secure a return.
Providing you research the local market thoroughly before you buy, budget correctly and carry out the work efficiently, you should be able to sell the property for more than the original purchase price plus the cost of the works.
A rule of thumb when investing for profit through development is to aim to sell the property for 20% more than it cost to buy and develop, for example:
- You buy a property for £150,000
- Have an additional budget of £40,000 to cover the works, costs of borrowing during the renovation, plus buying and selling costs
- Your total ‘cost’ would be £190,000.
Ideally, the property would then need to be worth £228,000 (£190,000 x 1.2) to make the investment and the project worthwhile.
If you then decided to let the property, renovating would boost your yield returns. If you bought the property for £228,000 in a state ready to rent and secured rental income of £15,000, the yield would be 6.5%. Buying at £150,000 and renovating, giving a total purchase and renovation price of £190,000, results in a much higher yield of 7.9%.
It is always possible to make money from property, but to do so within a short time frame you need to build in the capital growth on the day you purchase, not just rely on natural house price growth.