How to assess investment opportunities against your buy-to-let

Brett Alegre-Wood
September 13, 2017

Should you sell and reinvest in another investment asset?

I was asked a question last week about property investment opportunities, and how to measure an existing property investment against other investment assets. Specifically, Greg asked this question:

“A few years ago, having listened to your advice, I invested in an off-plan property in London. It’s increased in value tremendously since then, and I’m considering whether I should sell it and reinvest in a different asset. What do you think?”

It is a fair question. It can be tempting to take profits and look for other investment opportunities. Whether it is right to do so depends on individual circumstances, and you should certainly take advice before deciding. However, there are some general guidelines to follow. The grass may look greener on the other side, but it rarely is.

In this article, I explain some of these guidelines. Understanding these will help you make the right strategic decision as you shape your property portfolio to perform in all market conditions.

Compare income returns

The first thing you should do is to compare investment returns from different investment opportunities. You want to know how well your property is performing against the stock market, for example.

To do this, calculate your property’s net income, and divide it by the equity in the property. In Greg’s case, he had paid £180,000 for his off-plan investment, using a £80,000 deposit and £100,000 buy-to-let mortgage. The property is now valued at £300,000. His net rental income is £675 per month (£8,100 per year), and his return on equity is:

Net income/Equity = £8,100/£200,000 = 4.05%

It is a great calculation to figure out how the income on your investment property stacks up against the income on other investment opportunities. Were Greg to sell the property, he would have £200,000 available to reinvest elsewhere. If he is reinvesting for income only, then he might be foolish to reinvest the sale proceeds into a stock market fund which pays, say, 3% in dividends.

However, this isn’t the full picture.

Compare total returns

Greg is considering his investment options because of the rise in the value of his property. When you have invested in an income-producing asset, you often profit from capital growth, too. To calculate total return, you need to add this capital growth to the income the asset is making.

Greg knows that his buy-to-let investment is yielding an income on equity of 4.05%. Using the long-term history of the local property market, and after doing some research on what value expectations are, he expects the price to continue to rise at an average of around 4% per year for the next few years. That’s a conservative estimate, and lower than previous. But then he thinks there may be an economic slowdown that will affect all asset prices as the UK negotiates Brexit.

Adding this expected 4% growth to the 4.05% yield, the total annual return that Greg expects from his buy-to-let property is 8.05%.

For the switch from his current investment to be worthwhile, Greg would need the total return of his new investment opportunity to be greater than 8.05%.

Now we come to the third leg of the equation. Because even though Greg has £200,000 in equity available, he is unlikely to have this amount to invest.

Consider the costs of sale and purchase

When you sell an investment property, there are costs of doing so. Typically, these can be broken down into three types:

  • Estate agent and legal fees (to sell the property)
  • Capital gains tax (payable on the profit you made)
  • Fees to buy the new investment

Estate agent and legal fees are generally in the region of around 4% of the sale price. In Greg’s case, the sale price is £300,000, so these fees will be around £12,000.

The amount of capital gains tax you will pay depends upon the gain made, your tax position, if you have used any of your personal capital gains tax allowance, and any other deductions available (e.g. cost of improvements). In Greg’s case, he is a higher rate taxpayer and has already used this year’s capital gains tax allowance. He hasn’t got any other deductions available to him. Therefore, his £120,000 profit will be subject to capital gains tax at 28% – or £33,600.

Taking these costs into consideration, Greg will have only £154,400 available to invest (equity of £200,000 minus costs and tax of £55,600).

Greg is considering a stock market investment. The initial fees on this investment are 2%. So, from his initial investment of £154,400, Greg will only invest £151,312. It makes a huge difference to the total return the new investment opportunity would need to pay.

If he remains invested in his property, his expected total return of 8.05% per year will give a ‘cash equivalent’ of £16,100 in the first year.

To make the same ‘cash’ return, a new investment opportunity would need to give a total return of at least 10.64%.

What did Greg decide?

Greg’s property has provided him with a pot of equity that he wants to access to increase profitability. After review, he’s decided that selling his property wouldn’t give him a better return than remaining invested. But, the review process has shown him just how well his property investment and equity stacks up against other investments.

It doesn’t mean that releasing equity to reinvest wouldn’t be a good idea. In fact, during the review process, together we’ve identified two incredible off-plan opportunities and shown Greg how to release equity tax efficiently to reinvest in these new opportunities.

Before selling an investment property, contact one of the team today on +44 207 923 6100. We’ll help you review your current and potential returns, and assess against other assets and property investment opportunities in the UK. You may find that, like Greg, there are more profitable ways to use the equity in your current property investments and build your property portfolio faster.

Live with passion,

Brett Alegre-Wood


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