Is buy-to-let better than flipping?

Nikka Sulton

Is buy-to-let better than flipping?

Property flipping, the act of buying and swiftly selling for profit, is gaining traction in the UK. While it offers potential for quick gains, it demands effort like property improvements, unlike long-term investments. Finding suitable properties within budget is challenging, but flipping can yield substantial profits faster than buy-to-let. Nonetheless, it carries risks every investor must heed.

Investors should tread carefully, considering factors like market conditions, renovation costs, and the potential for unforeseen challenges. Property flipping may offer quick rewards, but it’s not without its uncertainties. Weighing the pros and cons is essential to determine if it aligns with your investment goals and risk tolerance.

Rental Property Investment

Rental property investment is a popular choice for long-term income. Investors benefit from a steady monthly income, unaffected by real estate market fluctuations. It’s advisable for investors to consult accountants for property-related tax advice. Both flipping and buy-to-let investments have their pros and cons.

Flipping Properties

Flipping can be challenging without a clear understanding of the process, and you may find your renovation budget depleted quickly. Renting a property can also be costly. Additionally, identifying rentals with the best returns can be tough. It’s crucial to seek advice from experts to determine the most suitable investment approach for your circumstances.

The Difference Between Flipping and Renting

Flipping and renting properties align with distinct investment strategies. Flipping is akin to speculation, involving short-term profit-seeking through market value fluctuations. On the other hand, renting signifies a long-term investment approach focused on capital gains and steady rental income. For those aiming for lasting success in real estate, opting for renting is often a more prudent choice.

Why buy-to-let mortgage?

Investing in buy-to-let properties presents distinct advantages over flipping-focused approaches. Here are key reasons why renting out a property can be a more favorable investment:

1. Tenant Care: With rental properties, tenants take responsibility for property upkeep, ensuring it remains in good condition.

2. Mortgage Payoff: If it’s a repayment mortgage, your tenants contribute to paying off the mortgage, providing a stable income source.

3. Capital Accessibility: Renting requires less reliance on existing capital, preserving your financial resources.

4. Stamp Duty: Renting allows you to avoid potential increases in stamp duty, reducing your overall expenses.

5. Rent Increases: Rental income can rise with inflation and interest rate adjustments, offering potential for increased earnings.

6. Long-Term Stability: Renting is a longer-term investment, offering stability in an ever-changing market.

7. Low Maintenance: Compared to other investments, rental properties typically require less hands-on management.

8. Market Impact: Renting contributes positively to the housing market, providing more housing options for people.

Consider these factors when deciding between buy-to-let properties and flipping projects as your investment strategy.

Stamp Duty Land Tax

The Government and the Bank of England have implemented significant tax changes for investment properties. Since 2016, any property beyond the owner’s primary residence incurs the standard stamp duty land tax (SDLT) plus an additional 3%. These regulations raised the tax burden for second homeowners. Philip Hammond had the opportunity to address these concerns, allocating £500 million for additional housing and pledging to build 650,000 more homes. However, housing growth remains slow, raising doubts about the promise’s fulfillment, especially post-Brexit.

Having a tenant who pays rent in your property makes financial sense. Alongside mortgage contributions, you’ll be responsible for council tax, which can add up quickly. Current legislation demands a rental income of 120% of your mortgage contribution, subject to change.

If you buy a property with the intention of renovating and selling it, delays can lead to escalating costs. Renovation projects often exceed schedules, risking profitability. A property is a good investment if you can afford it; otherwise, you may hastily sell at a loss or face repossession for missed mortgage payments.

Flipping is not technically considered ‘investing’

Flipping involves buying properties below market value (BMV) and renovating them efficiently to raise their value. Properties are often found at auctions, and the more dilapidated, the better the deal.

While the potential for significant profit exists, flipping isn’t a traditional investment. Even when outsourcing building work, you’ll likely manage the project daily. It’s a time-consuming endeavor, classifying it as active income rather than passive.

This approach isn’t inherently negative but should be viewed as a business endeavor. Most of your time will be spent on the flipping project, making it distinct from investing money and enjoying effortless returns.

What to consider when flipping:

Flipping properties can result in inconsistent income. It’s an active profit, earned while working on projects rather than a steady paycheck.

Taxes are a consideration. Buying and selling properties incurs costs, and if you own a property for less than a year, you’ll face a capital gains tax based on your income.

Flipping Benefits

Investors in flipping acquire properties below market value and undertake renovations, eliminating long-term property maintenance concerns. This approach frees up time for exploring other real estate projects and diversifying investments in various financial instruments.

“Profit Made from Flipping is Short-Term, Profit Made from Renting is Long-Term”

Profit from flipping is short-term; profit from renting is long-term. The UK’s limited accommodation supply and population growth drive long-term property price increases. For instance, in 2000, I bought a property for £42,000, renovated it for £8,000, making it worth £60,000. I made a £10,000 profit but chose to sell for a lump sum. If I had kept it, I could have refinanced and enjoyed steady monthly income for 20 years, totaling £5,000 to £10,000, and seen its value double twice, resulting in more significant profits.

The decision to flip or rent should consider not just immediate gains but long-term wealth. While flipping may offer quick returns, holding and renting properties can yield substantial and steady income over time, alongside potential property value appreciation. It’s essential to align your property investment strategy with your long-term financial goals and risk tolerance.