Property investment: To sell or hold?

September 25, 2013 by Usiere Uko 

The author of ‘Practical Steps to Financial Freedom and Independence,’ Usiere Uko, in this report writes about using various methods in real estate investment to build wealth.

When it comes to real estate investment, there are two schools of thought – build to sell or build to rent. A lot of investors tend to favour building to sell as a faster and relatively stress-free way of getting returns on their investment. This method has been made popular by estate developers who swoop on some neighbourhoods, buy up vacant plots and put up buildings virtually overnight for sale. The idea looks quite romantic – you go in and within six months to one year you are out with your money looking for the next deal. The returns are fantastic. It makes those who put their buildings up for rent look dumb. You pump in so much money into the building and then wait decades to recoup your money while dealing with tenants.

I will approach this topic from the standpoint of building a solid financial base, which becomes the launch pad for your subsequent investments. With that context, what you are trying to achieve in the long term determines what you need to do with every real estate investment opportunity. Hence, there is no right or wrong answer – it depends on what you are trying to achieve. Let’s look at each in turn before we draw our conclusions.

To buy or build to rent?

This is real estate investment in its purest form and you go in as a team. In your team you need your banker, accountant, insurance broker, lawyer, your engineer and architect, builder, facility manager, estate agent, etc. They don’t have to be on your payroll but they work for you. For some, like the lawyer and accountant, you can have them on a retainer while for others; they charge their fees only when they work for you.

With your experienced team members, you get better advice and make better decisions than you would if you go solo. If you have paid the price in real estate investment education, you have a good idea of what you are doing every step of the way. With your Team to support you, you do not have to look for tenants, manage the facility or deal with difficult tenants. They handle that for you.

Why would you want to tie down your money or the banks’ money in a property?

•You build a real estate portfolio, which acts as a store of value as you get richer.

•If you did your sums well, you get a predictable monthly net positive cash flow.

•Your net worth goes up as the property appreciates.

•As rent goes up (typically every two years), your cash flow increases

•You can borrow against your equity in the property to invest in another property or business, which means you grow your portfolio.

•You control the property, and can upgrade it to attract rent.

On the issue of tenants from hell, if you have a good team, you can screen them out at the door and if any manages to slip in, they know how to manage them with minimum collateral damage. That is the beauty of team play.

If you look at billionaires and multi-millionaires, those that got there through real estate got there through their holdings, not buying and selling or flipping. The most famous example is Donald Trump who has an impressive array of buildings named after him and golf courses. As the value of the properties skyrocket, his net worth goes up accordingly, including the cash flow from those properties.

Building a real estate portfolio like in the game of monopoly, may seem boring and may make you feel like the tortoise in a race, but decades down the line, you get to realise that slow and steady wins the race.

To buy or build to sell

This is also known as flipping property. Each deal is a short-term transaction with instant returns. You buy or build to sell. You get in and within a year you are out with your money and profit. You don’t tie down your money. In a typical example, someone buys a plot for N20m, uses N25m to build a duplex on it and sells it for N65m, making a profit of N20m before taxes. When a bank loan is involved, the pace is breathtaking. I have seen a building get decked on Sunday and by Monday block work had resumed on the first floor. I knew the owner must be a developer running against the clock as bank interest charges start to kick in. The integrity of such buildings is a discussion for another day.

It looks like a sweet deal and it often is, but certain things need to be put into consideration here.

• Taxes – Ideally, you should pay a capital gains tax on your N20m. Some may get away with it here, or pass it off to the buyer since they do not need to perfect the papers at the Lands Registry, but in developed economies, most of your gains are gulped by fees and taxes, hence continuous flipping of properties becomes an unattractive proposition in the long run.

•Interest rates – If you borrowed part of the money from the bank, your interest payments kick in the moment you leave the banking hall (hence the mad rush to the finish line). Consequently, your bank has a cut in the N20m pay day, and if there is a delay in selling the property, your calculations may go out of whack. In the event of default in repayment, the bank may auction the property to recover their money. If you used your money, this does not affect you.

•What do you do with your profit? There is a moment of temptation, whereby you may want to reward yourself (and maybe your long-suffering wife) by taking profit while you wait for the next deal to come through. That reward often comes in the form of cars, holidays etc. By the time the next deal is ready for your signature, most of your profit may have gone on liabilities, and you may be virtually back to square one in terms of financing. In summary, you may do a lot of deals to support your lifestyle without building a solid financial foundation.

Based on the above, you may see a veteran flipper of properties with a lavish lifestyle with pretty little to show by way of portfolio growth (climbing up the property ladder) and steady cash flow.  Without a steady cash flow, the ability to access bigger loans and invest in bigger properties may be hampered.

To sell or to rent?

A wise property investor looks at both methods as cards in the game with an eye on his long-term goals. Your main focus should be on building a solid portfolio while looking out for good buy-to-sell deals to boost your cash flow. Your starting point should be in real estate investment education. Invest in knowing what you are doing before you start doing it. That will spare you heart ache down the line.

Know what to own, what to hold and what to sell. Have a robust cash flow to back you up. If you run out of cash, you start to panic and may take dumb decisions. There is no one right answer. What you are trying to achieve in the long run determines what you do. Where you are going determines which road you should take. Flipping property for quick profit comes in handy when you know what you are doing. When you perpetually flip without building a portfolio, you are like rolling stone that gathers no moss. You need to become skilled in using various strategies in achieving your financial goals. Rather than be for or against, keep an open mind and use both as appropriate as you move from where you are to where you want to be.