Timing is key to landlords quitting the sector - David Alexander

You’ve been on this earth for more than 60 years, almost half of it as a private landlord, and have come to the conclusion it’s time to consider an exit strategy.

David Alexander is managing director of DJ Alexander

A hefty Capital Gains Tax bill notwithstanding, you can still look forward to a substantial surplus built up over three decades, to be spent, for example, on exotic foreign holidays, giving young-adult children a financial leg up and perhaps also opening a Junior ISA on behalf of that first grandchild – the only conventional savings vehicle likely to provide a real return in the current climate of low interest rates.

But having decided to sell, the next big question is to whom do you sell? In other words to a fellow investor or to an owner-occupier? This is a particular dilemma – but not an unwelcome one – facing landlords who own properties in locations which are popular with both tenants and buyers, for example, Bruntsfield in Edinburgh and Hyndland in Glasgow.

Let us look at the first option. One advantage of this is that a sale could take place “under the radar”, so to speak, which would save on marketing costs although opening up to the wider investor market would obviously attract more interest and, consequently, the prospect of a better price.

However those “naïve” buyers of the early 2000s (e.g. a recently-retired postman from Ipswich investing the tax-free part of his pension lump sum in a former council flat in Airdrie, never having set foot in Scotland) have largely disappeared along with those “advisors” whose advice turned out to be questionable. Today’s investment buyer, especially if a company, is likely to cost any purchase down to the last 5 pence and this will be reflected in a price which the vendor might feel is lower than he or she could achieve on the open market.

Yet this type of sale has its advantages. Almost certainly the buyer will be happy – indeed, want - to buy with the tenant in situ which means the vendor continuing to receive rental income until midnight before the official day of sale. This also avoids the cost of preparing the property for viewing by potential owner-occupiers – i.e. redecoration or refurbishment to hide all the scuffs on walls and stains on carpets which are by-products of tenant wear and tear over several years.

On the other hand there will be an understandable temptation to widely advertise the property at an upset (or “offers over”) price just below the perceived market value on the basis that – assuming the right location – this is likely to generate a highly-competitive bidding environment which will lead to a substantial premium for the vendor.

But there are disadvantages too. Selling on or selling up is one of the few remaining reasons a landlord in Scotland can regain possession of a property seamlessly and without rancour. (Let’s hope the new Green party influence in government at Holyrood does not lead to tenants being given a veto on when a landlord can sell as this would destroy the private rental stock at a stroke). However repossession does inevitably mean a halt in rental income and this will continue until the property is sold – plus there are the costs (stated above) of making it “presentable” to owner-occupier buyers.

This does not necessarily mean capital values stop rising and, at the time of writing, the ongoing appreciation of an unlet flat is likely to equate to more than the derisory level of interest on a savings account from a High Street bank or building society. However with the recent hike in interest rates, and further rises likely, this advantage is likely to narrow and even go into reverse, albeit temporarily, especially if house prices stall or even fall back.

With so many imponderables, even a sought-after flat could be worth less six months from now than it is today. That’s the pattern with property: sometimes it takes one step back to be followed by two steps forward. So despite being worth less six months from now the flat could have regained its value – and even more – in another six months.

In summary, therefore, timing could be the most important strategy for any private landlord seeking profitable and hassle-free exit from the sector.

David Alexander is managing director of DJ Alexander