Buy-to-let vs Flipping: which is the more secure investment?
December 4, 2018
Property has been one of the most reliable sources of investment over the last 50 years, with just 4 years where you would have lost money if you invested in a 5-year cycle. The rate of return on investment is substantial, especially in metropolitan areas like London, Manchester, Leeds, and Bristol. Property has proven to be a very dependable route for people wanting to make a safe and long-term investment.
Like all investment avenues, the buy-to-let market is constantly evolving and therefore hard to predict. Recent amendments to mortgage tax relief for landlords has made it more challenging to make money from buy-to-lets. Yet expectations that the Chancellor would continue to fiddle with buy-to-let regulations in the most recent budget failed to materialise.
One popular alternative to buy-to-let investment is ‘flipping’ - that is buying a house in an up-and-coming area in order to renovate it, and then selling it at a profit. It is a high-risk game as the market constantly fluctuates; while many people on the rich-list got there through property development, they represent the minority as it is a very challenging venture. This article will outline the main advantages of buy-to-let investment over flipping a house.
Buy-to-let properties are an excellent way to protect an investment. Renting out your property has a number of benefits that renovating cannot offer you.
- The property is occupied with tenants who are looking after it
- Your mortgage is being paid off (if it’s a repayment mortgage), and you have a relatively stable income
- Far less need to access existing capital
- You can avoid stamp duty increases
- Rents increase with inflation (and by extension interest rates)
- Longer term
- Not as important to micromanage as other investments
- Good for the overall market as more people can rent
Stamp Duty Land Tax
The Government and the Bank of England have made significant changes to taxes on investment properties. As of 2016, any additional property on top of the owner's primary residence will incur the standard stamp duty land tax (SDLT) plus an additional 3%.
Furthermore, these regulations increased the amount that second homeowners would be expected to pay in tax. Pre-budget analysis seemed to suggest that Philip Hammond would make significant changes to this, as there were claims that under the current legislation some people would be paying more in tax than their rental income from a second property. (Although there seems to be scant evidence for this as rents have not increased).
He did, however, commit £500 million to build extra homes, and promised to build an extra 650,000 homes. Given that almost every budget has made this promise and housing growth remains at fairly low levels, even this promise might be reneged on – especially post-Brexit.
It therefore makes financial sense to have a tenant paying rent in your property. Given that you will also have to be paying council tax on top of your mortgage contributions, the costs can quickly spiral out of control. The current legislation requires you to have a rental income that is 120% of your mortgage contribution, but this could be subject to change.
If you are intending to buy a property with the sole intention of doing it up and selling it, even a small delay could result in costs quickly racking up. As the old saying goes – ‘time is money’. The longer you spend flipping a house, the more money you will sink into it. It’s not uncommon for renovation projects to run over schedule and quickly become unprofitable. A house is only a good investment if you are able to afford it. If things go wrong, you run the risk of hastily selling the property at a loss or even having it repossessed if you fail to keep up mortgage payments.
Buffers from economic shocks
Given the turbulent climate, nothing is sacred in the modern economy. While investors have been drawn to property for its continued rise and historically low-interest rates these can be subject to change any time, and will likely increase in the coming years. By having tenants you are insuring yourself against future economic shifts. Equally, if inflation rises then you can put up rents, whereas if you do not have tenants you will have to swallow these costs yourself, thus reducing your rate of return. Given the likelihood of economic fluctuation in the near future - with the consequences of Brexit or maybe even an election - you should aim to make as long-term and secure an investment as possible, especially in property.
Smaller amounts of capital needed
Buy-to-let is an excellent choice for those who want to invest in property but who do not have large enough amounts of existing capital to buy a house outright. Flipping usually requires you to buy a larger portion of the house – or even the full cost – whilst a buy-to-let mortgage comes with the added insurance that you have a reliable means of making payments on a loan. You will still need to have between 25-40% of the deposit in order to qualify for a buy-to-let mortgage, but it is more expensive to buy a property to flip. Buy-to-let is an excellent way of ensuring that you have a diverse portfolio without having to keep all of your capital in one place.
Buy-to-let isn’t about 0.1%
Not all of us can be Warren Buffet. One of the reasons that property is a quality investment is because it does not require close monitoring (at least in terms of its appreciating value). In general, the longer you leave a property the greater the value of it, and this leaves you free from worrying about whether you are getting 3.6% ROI or 3.7%. One of the great things about a buy-to-let investment property is that, when it comes to appreciation, it is typically a case of letting it look after itself rather than worrying about fractions of a percentage fluctuations in value.
Using a letting agent will be even better, as they will sort out the renting and maintenance, which means you are not left to manage the nitty-gritty of actuarial management. On the other hand, refurbishing a property for a short-term investment leaves you prone to fluctuations in the market. While the overall trend has certainly been that of increase that is not to say that this can be guaranteed over a shorter period of time. If you buy a house for £80,000 and make £20,000 of improvements you have a £100,000 property. Once you have accounted for taxes, bills, and inflation if the level of growth is just 1-2% less than you expect you can be bitten hard.
Of course, buying a property is never going to be a hands-off experience. It is a challenging process – often said to be as stressful as getting married – but a buy-to-let house is an excellent long-term investment which can provide sustainable growth. While there are other ways of making money that may well pay out more in the short term, they lack the safety of having some bricks and mortar.
Flipping houses can be difficult, and with laws constantly being updated, regulations tightened, and general costs increasing it is not a sensible way of investing. Furthermore, it exacerbates the crisis of unaffordable housing, rather than promoting sustainable growth. While this may not seem like a big issue for an individual, it may well have contributed to the congestion of the housing market as the supply of affordable housing dwindles and ordinary people are priced out of the housing market.
Flipping may seem like a quick way to make money, but it can be very tricky and comes with serious challenges that even the most seasoned property managers can be tripped up by. If you want the benefits of a physical investment you’d be hard pushed to find better value for money than a buy-to-let property. No crippling building costs, no stressful time constraints and even a constant flow of income if you invest in buy-to-let properties with tenants already in place.
At Vesta, we believe that investing in buy-to-let properties with tenants in situ is the best way to minimise your costs, eliminate rental loss and reduce stress for both you and your tenants. For more information on how you can sell your tenanted property online, get in touch with our friendly and knowledgeable team today!