How to operate in the property industry? Retaining vs Selling Stock.

How to operate in the property industry? Retaining vs Selling Stock.

There is a large magnitude of property information out on the market and with all of this information it can become overwhelming especially when you are first starting out in the property sector.

Understanding the basics of retaining stock vs selling stock will help you to start to determine what your deal structures and strategies will look like and ultimately help you decide how you will operate within the property sector.

The easiest way to understand these two terms is to look at…

Retaining = Investing
Selling = Developing

My Company, Dapatchi Group is a development company therefore it would fall under the selling aspect. We do development, construction, architecture, and we very much work as property developers. As a company we have previously touched on the retaining strategy, although found that this approach wasn’t the best way forward for us.

So, to really understand these terms you need to understand the negatives and positives behind both aspects. Once you have a strong understanding of these, you can then make an informed decision on what strategy is best for you.

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RETAINING STOCK

Retaining stock could be beneficial to you if you are wanting to become an investor, this includes being a buy to let investor or even a commercial investor. Overall, this aspect refers to any strategy where you retain the property on completion. This could be rent to rent or serviced accommodation.

In the investment aspect people hold stock. Some people do it purely for cash flow and they will put their properties on an interest only mortgage meaning they never really pay the debt but they are withdrawing more cash from the deal and others, who are less interested in the cash flow aim to build their portfolio for the long term advantages. For example, a pension pot.

Positives

The great thing about this method is that it’s instant and provides an ongoing income so you would be getting income on a month to month basis which gives you much stronger cash flow. This strategy is also highly achievable and it provides the opportunity for capital growth, so if you are thinking about holding these properties for a long period of time as well as having the cash flow value you should consider the capital value side of things.

I always talk about adding value, and time generally adds value on its own. For example, if I purchased a property in the 80’s, that property will be worth an awful lot more today than it would have then and this is what I mean when I talk about capital growth.

Negatives

A potential negative of this strategy is that the income from each property isn’t hugely substantial. It’s a systematised model and you would need to build up multiple properties to get you to a stage where the income is more significant. Another reality of this model is that it is going to take time to build up, you are not going to click your fingers and have a full portfolio of properties overnight, it will take time.

Additionally with this strategy a potential negative is that you become a landlord to the future tenants which opens you up to people and problems such as unpaid rent and damages, which ultimately means your cash in is not always what you may expect it to be.

Using this strategy may also give you lower returns for your property and you will become more exposed to market risks such as market crashes as you have multiple properties.

One of the biggest problems that I find with this retention buy to let strategy is that it can be more challenging to finance. Financing a single buy to let can often be more challenging than financing a £5 million pound development proposal due to the nature and the returns. Within this retention strategy there is a stricter criterion of who the banks are lending to compared with the development strategy which is more about the deal viability and due diligence.

So if you are thinking about going into the retention strategy it may be a good idea to go in with some equity behind you or if not maybe you should look at a rent to rent HMO strategy or a rent to rent to serviced accommodation strategy.

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SELLING STOCK

This is the strategy that we do at Dapatchi Group and I believe that this is a great strategy as you get much bigger returns because you are selling the capital of that property back out on completion, therefore you generally get larger chunks of cash coming into the business.

Positives

A positive to this strategy is that there is less exposure to market risks. For example, if there is a crash in the market and you are using this strategy, you may only have one or two developments compared to the buy to let strategy where you are generally more likely to have many buy to let properties. Therefore, it limits your risks slightly.

Another reason as to why I believe this is a great strategy for me and Dapatchi Group is because there are no tenants involved and therefore no people problems such as rent not being paid and rental damage. With this strategy I like the fact that instead of growing a property portfolio, what I am growing is a property business that brings in specialists skill sets. For example, in the buy to let space you will generally be working with someone like the local handyman compared to in the development space you will more likely be working with professional contractors. And I believe that this often makes the people side of things a little bit easier enabling you to focus your energy into more valuable places.

Negatives

The main key thing to takeaway from the developing strategy is that you get the bigger profit in your pocket there and then, however it can have an impact on cash flow. Most developers when first starting out encounter cash flow problems because it may be that deals take longer to work out and come through than expected, therefore the problem arises of how do you cash flow yourself for that period. Therefore, you need to be especially diligent with your monthly finances as the cash flow really is the biggest hurdle when being a developer because you have no residual income as you are not retaining stock.

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So, that’s the two different strategies explained in terms of both the positives and negatives and ultimately when deciding which one of these strategies is best for you it truly comes down to who you are, what you want to achieve and your long term goals.

If you are struggling to decide which strategy you want to take, you need to think back to your goals and your passions. I have developed a strong passion for developing and have a genuine interest in adding value to different buildings and people. You need to find what drives you and then choose the right space to be able to fulfil your ambitions.

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