After the recent global market turbulence and financial uncertainty, should you sell or hold your property portfolio?
I own 4 rental properties with interest-only buy-to-let mortgages. The combined Loan to Value (LTV) of the mortgages is around 67%. All four properties cash flow positive, but is there a point where I should think about selling them?
My real estate portfolio is in a solid position and the interest-only mortgages will help with short-term returns. Whether or not I should sell, depends on a few key considerations, both financial and personal. If you are in a similar situation and find yourself with the jitters, here are 6 factors to help you to decide.
1. Capital Growth vs Cash Flow
The first consideration is whether there has been considerable capital growth, versus what you are achieving from the rent. If property values have appreciated significantly since you bought them, you may want to consider whether you could crystallise those gains and reinvest elsewhere, either into higher-yielding assets or more diversified investments.
So, ask yourself if you expect future capital growth to slow. If this is the case, holding may not be as attractive long term, especially with interest-only loans where you’re not building equity through repayments.
At the time of writing this, the future growth forecast shows that there will be capital gains going forward, but always keep an eye on this.
2. Interest Rate Environment
Have your mortgage rates increased? If they’re still manageable and properties remain cash flow positive, you will be fine. But if rates rise further and cash flow tightens, it may be worth considering selling one or more of your properties to reduce exposure or repay some debt.
When are the ends of fixed terms? If you’re approaching a refinance and suspect tougher affordability criteria or higher rates, that’s a good moment to reassess.
Again, at the time of writing this, interest rates are starting to come down and the forecast looks like rates will continue to drop. This will help me lean towards holding my portfolio.
3. Tax Efficiency
The bane of the landlords is Section 24 (if you’re in the UK). This limits mortgage interest relief for individual landlords, meaning your effective tax rate on rental profits might be higher than it appears.
If you’re a higher-rate taxpayer and not operating through a limited company, this could eat into your profits over time.
Selling could help restructure your portfolio (e.g., fewer properties with lower leverage, or shift to a company structure for future purchases).
However, bear in mind that you will be liable for capital gains tax if you sell your property or transfer it into a limited company.
So, the two things to ponder here are what CGT you will be liable for and what is your current income tax rate.
If you would like to find out more about operating your portfolio in a Ltd Co, then read my post Setting Up a Limited Company to Buy Property in the UK. In that post I give you details on how to decide if incorporating is right for you and how to go about it.
4. Portfolio Diversification
Are all your investment eggs in the property basket? You might want to diversify. Here you could sell one or two properties and invest the proceeds in other asset classes such as equities, bonds, REITs, private businesses, etc.
5. Market Timing & Liquidity
Is it a seller’s market right now? If yes, it could be a strategic time to cash out at a high. I’m not a great fan of trying to time the markets for the sake of it. However, there are certain times where it might make sense. Revisit your motivations to invest in property in the first place.
Next, will you need liquidity soon? If you might want to access the equity, it will be better to sell when you’re not under pressure. There would be nothing worse than needing a fire-sale of one of your properties, because you need that cash desperately.
6. Long-Term Goals
As I alluded to earlier, go back to your motivations. Are these properties part of a retirement plan? A legacy for your family? Or just an investment vehicle for now? If they are just an investment for now then you may want to sell to get better returns elsewhere.
Have your goals have changed? Do you want less hassle, more passive investing, etc. Property investing can be stressful, so it may be worth offloading some or all, if you want the easy life. Alternatively, if you haven’t already, investigate outsourcing the management of the property to a lettings agent.
Various Options
Here are some options if you don’t want to sell up completely but wish to reduce your risks.
Sell 1 or 2 properties
Sell 1 or 2 and keep the rest ticking over. This will free up equity, reduce risk and you will still enjoy some rental income.
Refinance and reduce the LTV
Another option could be to refinance your properties to reduce the Loan to Value (LTV) ratio. If your cash flow is strong, reducing debt might provide some peace of mind and reduce interest costs longer-term.
Hold all and monitor
If you’re happy with the risk/reward balance you can always ride out the current volatility, especially if you’re not under pressure to sell. This was my preferred option, so to make sure, I ran some numbers together of potential returns, if I sold now vs. holding for another 5–10 years?
Here’s what my criteria are:
- 4 properties with average property value is £144,500 each
- Average outstanding mortgage is £96,210 each
- Average monthly rental is £862.50 each
- Average monthly expenses excluding mortgage is £155 each
- Av. interest rate 4.89%
- I expect an average growth in capital of 8% per annum
- Selling costs are 1% estate agent fees, and £1,500 other fees
- Capital gains tax on one property of around £16,000
- I would expect to get around 8% if I reinvested the sale proceeds into an index fund.
Here’s the 10-year comparison based on my figures:
Scenario 1: Hold for 10 Years
Total after-tax cash flow: ~£96,500
Equity gain from capital growth: ~£878,200
Total return (cash flow + capital growth): £974,739.90
Scenario 2: Sell Now and Reinvest
Net proceeds after mortgage, selling costs & CGT: ~£164,000
Future value of reinvested proceeds (8%/yr): £357,043.02
Conclusion
Holding my properties could outperform selling by ~£617,697 over 10 years, due to leveraged capital growth and ongoing rental income.
I then did the same exercise for if I added one more property, with the same average numbers. Here’s what that would look like over 10 years:
Scenario 1: Hold 5 Properties for 10 Years
Total return (cash flow + capital growth): £1,220,777
Scenario 2: Sell All 5 Now and Reinvest
Future value of reinvested proceeds (at 8%): £454,939
Difference
Holding outperforms selling by £765,838
Conclusion
So, there you have it. Holding my property over the next 10 years will net me an extra £600K+. If I buy another property and therefore hold all five for the next 10 years, I will net over £1M, which would be more than 3 quarters of a Million in additional revenue.
This shows the power of leverage and capital growth in buy-to-lets, when properties are cash-flowing and interest rates are manageable. I was thinking about adding a 5th property to my portfolio and this exercise supports the case, especially over a 10-year horizon.
If you’re navigating a similar conundrum and want to talk it through, feel free to message me. Always happy to offer perspective.