Property investing needs to come with strategy – what is your strategy in the UK for 2013? You can buy to let (BTL) or buy to sell (BTS). You need to know ahead of time what exit you plan to take with the property before you understand which option will work best.
Buy To Let
The UK was introduced to buy to let mortgages in the nineties, however, the sector has only taken off in the past decade. Buy to let investors are becoming more comfortable with the option and are beginning to look deeper into the specifics of the option. Any proceeds received from a rental property are considered income by the HMRC and will be taxed. Most people consider this first when thinking over purchasing for letting.
Investors are also considering their personal tax brackets when considering letting options. If an investor has income and is classified in the higher rate tax bracket, or
£35,001 to £150,000, the taxes taken will be 40% of the generated income. Luckily, tax deductions do exist, such as mortgage interest and maintenance costs, which reduce tax liability for investors.
Buy to Let Yield
One very important factor in the purchase of a buy to let property is the specific yield. Yield is the measure of annual rental income against the value of the property. Both gross yield and net yield are essential; gross yield is the yield including cost and net yield subtracts cost. Net yield provides a more accurate image of the building’s return. Of course, higher yield means a more successful property. Gross yield should be in the 10% range to be considered profitable, while HMO’s produce greater gross yields at 15% or more. When investors manage the properties correctly, the buy to let holdings become a steady, safe investment which returns over time.
Buy to Sell
Any strategy involving buy to sell is intended to be a short term plan for increasing capital. The method behind buy to sell is usually purchase, renovation and resale. Investors will often require extensive knowledge of the local housing market to make sure the property is purchased at just the right price. The biggest unknown in this strategy is the selling point, as property market factors change consistently and quickly. Fast changes will reduce or increase not only prices but the individual’s ability to purchase a remodeled property.
The refurbishment specification always needs to be greater than the buy to let properties. Presentation is vital for selling properties quickly. Cutting corners will hurt an investor in the end and the property will not sell as fast as necessary.
The income received from a property sale is classified as capital gain by the HMRC, and is taxable. The current capital gain tax is between 18% and 28%. It’s obvious that buy to sell properties come with much more risk than buy to let options, but they produce results right away. The best way to analyse a property for a buy to sell strategy is to begin with a minimum of 30% return on your investment. This is the only way to make it worthwhile.
If you have a property in mind and you’re not sure whether to sell or to let, get in touch with us. An adviser we work with can look at rates, risks and costs for both options to help you make the right decision.