As the result of a FANTASTIC response…
…to our 4th Birthday celebrations last week, we received an amazing numbers of questions and feedback on the most pressing and important issues in property business owners’ worlds right now. Along the theme of ‘getting started and building your property business’, I trust you’ll enjoy reading through the questions and answers below and that some of them will also help you. 🙂 I have kept the questions anonymous as I promised I would, however, I’d love to receive your thoughts, additional helpful comments and wisdom too! We are shortly going to be adding a comments box to this site, however, in the meantime, please do so by contacting me here. 🙂
During the course of the next few weeks, I will be accepting more questions, so feel free to contact me as above or drop me a line through the ‘Contact Us’ page.
(Disclaimer: Ahead of my answering these for you, I MUST emphasize that I am in not, in any way, a financial, tax or legal advisor and that I recommend you seek the advice of an industry professional for the answers to any questions you have related to these areas. The answers and comments I make below are what I offer as an opinion and are based on my experiences to date, and are not meant to ‘advise’ you, as such.)
QUESTION: Thanks for the opportunity to post questions, you provide great info each week.
I’ll keep it simple, given the new tax rules coming into effect over the coming years, if you were just starting your property portfolio how would you structure it to minimise exposure to tax and maximise returns?
ANSWER: You’re welcome and thank you. 🙂
This is a really great question and very forward-thinking. First and foremost, I must stress the above disclaimer at this point in relation to not being a tax advisor! I can answer giving you my opinion, personal experience and that of the clients I have worked with over the years.
When making a decision such as this, you really need to be thinking about several implications. The answer will not necessarily be the same for different people given different sets of circumstances.
If you are already a higher-rate tax payer, then you may well consider setting up a Limited Company (or other such ‘vehicle’) and buying properties this way, which is also known as an SPV (Special Purchase Vehicle). There are some pertinent points to note about this, namely the following:
- It is easier to claim certain expenses within a Ltd Co
- The impact of the removal of mortgage interest tax relief to basic rate levels will not affect a Ltd Co
- It is easier to add Directors and therefore share the profits of a company compared to owning individually
- It can be advantageous for inheritance planning in that you can add your children as Directors of a Ltd Co and your properties are therefore more easily ‘transferred’ to them
- Ltd Co tax rates are set to reduce over the next few years
- Your properties are outside of your personal affairs being a separate entity which you control which gives you an extra level of protection
- You have more control over how much/little you extract from the company in any given tax year
- Basically, a Ltd Co is a more future-proof vehicle in which to purchase ad run your properties
- It is currently harder to raise finance within a newly set-up Ltd Company (though I believe this will change)
- Interest rates are likely to be higher for financing purposes
- You will not be able to claim the Capital Gains Allowance on the disposal of a property
- Accountancy costs will likely be higher
Buying as an individual may be more beneficial if you are currently (and likely to stay) a lower rate tax payer for the time being, or are buying properties in cash. The implications are as follows:
- Buying properties and holding them in your own name with no borrowing (i.e. no mortgage) will mean that tax will only be paid on the net profit (thus having no implications from the reduction in Mortgage Interest Relief) although this would only benefit cash buyers
- You can benefit from the Capital Gains Allowance each year, for each person on the disposal of any property held individually/jointly
- Currently, raising mortgages is much easier in your personal name/s, although as mentioned above, the balance is likely to be redressed
- Interest rates on personal mortgages are currently lower
- Properties are not as easily transferable this way
- You will become subject to the reduction in Mortgage Interest Relief if you are or become a higher-rate tax payer
- Any mortgages remaining upon your demise will have to be paid off and therefore the property/ies sold, unless your beneficiaries can pay them off
Essentially, you could always buy the first few individually and then move to Ltd Co later down the line when you are more established and have more income coming in, or you may feel it is better planning to start as you mean to go along and set up a Ltd Co. I would always advise to consult with a professional tax advisor on this subject as each person’s circumstance is so different from another’s.
I hope the above has at least given you some clarification about what to think about before you make your choice and a guide as to what to ask your tax professional.
You may also find the link below a useful one to help you with the decision…
QUESTION: HAPPY BIRTHDAY!!!!!
My biggest thing holding me back is fear. Fear of saying the wrong things to the estate agent. Fear of not knowing if the area I plan to invest in, will work. Fear of stuffing up deals. Fear of getting into debt. Fear of losing money.
Yes, I know that fear is a good thing in certain circumstances but tied into that is having enough confidence in myself to know and believe that things will work.
ANSWER: Thank you!!
Some people have the ability to ‘feel the fear and do it anyway’, however in my experience, many are crippled by it and have had such bad experiences in the past (not necessarily in the same way) which have scarred them and now prevent them from moving forward.
Yes, the age old gremlin of fear is a biggie for many people – you are not alone! The problem comes when, as you say, the fear takes over and paralyses you from doing anything. As I say to all of my clients when I start working with them, ‘what is your biggest fear?’ When you can start to get them out in the open, this is half the battle.
Somehow, when you admit not only to yourself, but to someone else, that you harbour a deep-seated fear of something, this is the first step to overcoming it and developing a strategy which can help you mitigate that fear.
I often use the analogy of someone who is alcoholic. The moment they admit they are alcoholic is the moment that something can be done about it. It is shedding the light of day on the subject and can be looked at, worked with and start to dissipate.
My best-known way to deal with fear is to accurately conclude exactly what it is you are afraid of. The next step is to stare it big and ugly in the face and look to see where it came from. People are only ever born with 2 fears; the fear of falling and the fear of loud noises (for obvious reasons!) This is great, as it concludes that everything else is a ‘learned’ fear. This means that we have ‘picked up’ our fears along the journey of our lives. You can also equate this to having a negative beliefs about yourself. The way to unravel fear is to question it. Where did it come from? Why do I believe that? What happened to make me think that about myself?, etc. A belief (fear) is merely something YOU think is true and no longer question.
I have developed a really good exercise to start the ‘unravelling’ process and I really think you’ll find it very useful. You can find it in my book on page 70. I would love to be able to include it here for you, but it is quite a few pages long!
I have helped many people to overcome their fears (similar to yours) and it all boils down to helping you feel more clear, certain and, as you say, confident about what you are doing. As soon as you work through them and can start to plan your way properly towards what you are looking to achieve, they do disappear. It is a gradual process and you do have to be gentle on yourself.
I do hope this helps. 🙂
QUESTION: Hi Hazel, my biggest challenge is to get the deposit saved for my first property. I’m looking to invest in a property that brings me cash flow (more than £100 a month!) and in order to do that I will need to invest around £100k – £150. Will take two years to save for that deposit! Very frustrating!
My goal is to build a rental portfolio of 3-5 houses, but I’m wondering if I should start with another strategy…
ANSWER: I totally understand your frustration! It can seem like a million miles away when you are looking to get ‘on the ladder’ in the first place. It would really help to know exactly where you are thinking of investing as this seems like a large sum. I wonder if you are talking about the £100-150K as the deposit or the property value in total? If it’s for the deposit, then it sounds like you’re intending to buy in a pretty high-value area and therefore the cash flow will not necessarily really be there.
If I were you, I’d look perhaps further afield to a lower-value, higher-yielding area which fits the bill in terms of the cash flow you are looking to achieve. With that sort of money, you could buy several more properties and increase your cash flow much more. If you feel to, you can always post a comment below to clarify more and I’ll do my best to help you further on this one.
There are plenty of different ways to start off. Your strategy may shift and change as you progress, but it’s knowing which strategy is best to begin with. I can help you with this further if you email me again directly. 🙂
QUESTION: Hi Hazel – And read to the end I did!!
For me, it would be really useful knowing if I am paying the right price for the property in the first place!!
This is all down to research, research, research. I know what you’re going to say…so HOW do I do that?! The research element is a pretty massive topic and can cover many, many angles. To boil it down and keep to the point, the main way to know if you are paying the ‘right price’ for a property is to work on the best-estimated end value and work backwards from there.
The most important element to find out is the comparable evidence in the local area for the type of property you are looking at and its equivalent to what your intentions are for it. For example, if you are looking at a 3 bedroom terraced property which is in need of modernisation and you work out that there is a possibility of being able to turn it into a newly-refurbished 4 bedroom property, then you need to see what other good standard 4 bedroom terraced properties have actually sold for in the immediate area (ideally in the same street, and certainly no more than 1/4 of a mile away).
You need to befriend your local estate agents into helping you to estimate an end value on this basis too, though you must be careful not to give too much away when you are intending to buy a property, so it’s all about striking a balance.
Essentially, you must then work backwards from the end value (on a worst case scenario basis), take off ALL your costs AND the profit/equity you’d like to make and, hey presto, you are left with your offer price! OK, so this is a simplified version of events and I’m not saying it doesn’t take practice to find out and know all these things, but that is the crux of it. At the end of the day, you must know your numbers in this business. Without knowing them, you could end up paying far too much and ending up with little return. When working with property on a business basis, this is vital.
QUESTION: Hi Hazel, my top question is:
What is the truth about the forthcoming MMR regs for the BTL market? Will It affect all mortgages and on what basis? I’ve heard so many different things!
ANSWER: Great question. Let me clarify a little for other readers what you mean by MMR. The MMR is an abbreviated term for the ‘Mortgage Market Review’. In April 2014, the MMR came into place bringing heavier regulation on mortgages in the residential sector. There are many articles written about this online if you care to look further, so I won’t go into detail here.
To date, the MMR has not affected the BTL market which is still currently unregulated. Your question is about the MMR changes to what is termed in the industry as ‘accidental landlords’ and, as far as I know, is not set (yet, anyway!) to affect BTL landlords.
To clarify further, an accidental landlord is someone who has ended up with an additional property to their own home by accident rather than by design for business purposes. These people include those who have moved out of one family home to another without re-classifying the previous property onto a BTL mortgage, or perhaps someone who has inherited a property and then let it out. As far as I understand it, it will be this part of the market which the new MMR regulations (due to come into play next April) will effect.
I have included a couple of links below which I hope will explain further and help you to understand the implications.
Please leave me your comments or further questions here…any additional supporting help/guidance to the questions above would be most welcome. 🙂
QUESTION: Hi Hazel, I have a question you may wish to comment on –
Would you remortgage indefinitely (if possible (?) and at age 71 years?) or would you simply sell, to convert a mortgaged portfolio to a much reduced cash portfolio?
Which route would you take?
Selling incurs Capital Gains Tax and retaining incurs the loss of tax relief as promised in the last budget.
Would really appreciate your thoughts on the subject.
Thank you and regards
ANSWER: This is a very individual question and hard to answer without having the figures to hand.
There are BTL mortgages out there up to age 90, so that isn’t an issue. By remortgaging indefinitely, the loss of mortgage interest relief will definitely come into play. As you mention, selling will incur CGT, so this would all certainly need careful planning.
Have you contacted a good tax advisor (perhaps not just your accountant)? If I were you, I would see what the implications were in both scenarios given your current portfolio. You would then be in a better position to make a more informed decision. I will therefore stay on the fence and would be happy to discuss this privately with you and point you in the right direction of certain professionals if you contact me directly.
QUESTION: My biggest problem (as I don’t use a letting agent) is to find reliable, trustworthy and competitive tradesmen who can be “on call” in an emergency.
ANSWER: In an emergency situation, you ideally want to have already built up a good team of people to call upon. You’re right, this isn’t always easy!
We have found a few different routes to finding good trades people to work with. Namely, the following:
- When first establishing yourself in an area, I (perhaps cheekily!) ask a couple of letting agents (whom I have vetted), to give me a few referrals. I can do this as we are often having to do work to a property before it is let and therefore there is no conflict to ask when you are actually self-managing the property once it is let. Good letting agents will have been through MANY trades in the local area and will most likely have whittled them down to the best and most reliable, so this really is a good source. If you befriend them in the right way, they can be a great ‘fount of information’. 🙂
- You can find some good contacts quickly by using recommended trades people on Checkatrade.com – although this can result in varying levels of success.
- Another good website is mybuilder.com where you can ‘post’ a job for people to contact you and quote for.
The most important aspect of building up a team of trustworthy trades people is ask for referrals from people you trust. This could be, as mentioned already, from a reliable letting agent in the area, or other, fellow landlords or friends in the area. We have found that asking someone who has done some great work for you in one capacity, to refer specific other trades. This can work really well. All trades know other trades and good ones always know other good ones!
We’ve had good working relationships with certain trades for over 12 years and the key is always good communication and punctual payments. There’s an element of trust between the trades and you, so quick payment is crucial for an excellent mutual relationship.
As another quick tip, we always contact the tenant to check that the work was carried out satisfactorily before making payment.
QUESTION: Hazel, here is a question(!):
If I am currently in the process of buying a new BTL, should I buy it personally or set up a company to acquire it?
ANSWER: I have already answered a similar question to this quite extensively already in the first post on here.
The main factor affecting your decision is likely to be the tax implications going forward. The government, as part of the Summer Budget 2015, brought out the Finance Bill 2015-2016. The main implication of this new bill was the impact it will have on the interest element of any financing on a BTL property.
Essentially, this Bill will mainly affect existing higher-rate tax payers, however, it could push other lower-rate tax payers inadvertently into the higher-rate bracket. It is quite a complex situation and I have included a link below to help you to understand the overall implications. The section on the Finance Bill to which this relates is called Clause 24. I would recommend that you speak to your own tax advisor in relation to how this could impact you. Please read more below…
Interestingly, many other organisations are not addressing this issue with their clients as it has had quite a negative impact on the implications of owning BTL properties. However, wherever there is a block put up, there is always another way! I believe that issues like this need to be tackled head on and the correct advice sought before you even think about going into property. Your ability to be flexible in this business and see ways around doing things will determine your level of success.
In this instance, setting up a Ltd Co may be the best way forward and will certainly mitigate the implications of the above Finance Bill.
In essence, I would suggest that you find out the facts, given your particular situation, and once you are more informed you can decide the best course of action. Again, I am happy to help if you contact me directly. 🙂
CLIENT UPDATE: Hi Hazel
Just a note to let you know I am a couple of days away from completing the purchase on my 4th BTL property which gets me over half way to my financial freedom number!
I also completed my first flip at the beginning of this year which provided a year’s salary in one go. Even more amazing was the fact that I only owned the property 12 weeks and didn’t change a thing other than clean carpets inside and spend a weekend cutting back the garden! An incredible result but only proving that you make money when buying!!
I’m also negotiating my 1st refinance and it looks like I’ll be taking out 30k in equity on a property that has none of my own money left in it so that will help fund the next investment.
Thanks for the prompt to take stock of this year’s achievements! And there are still a couple of months to go!
I guess my next biggest challenge will be raising finances now that I am coming to a point where my ability to raise conventional mortgages is getting tight in light of BTL applications starting to be judged on affordability in line with European directive changes. Especially when one does what one can to reduce tax burden both on the property and self employed basis.
All the best!
ANSWER: (To give you a bit of context, I worked with this person just over a year ago)
That’s great news. 🙂 Really glad to hear your property business is coming along nicely since we worked together. It just goes to show that it doesn’t take many properties to make a real difference to your life! You are an inspiration to others’ that if you follow the right model and take the appropriate steps, then you get the results…well done and keep up the GREAT work. 🙂
I couldn’t agree more that you make your money in this business when you BUY…not when you SELL!! Great to hear you’ve taken this by storm and have a good handle on the numbers, as the results are evident.
In my email back to you, and just to clarify, you found the restriction on the further lending with one specific lender and under a particular set of circumstances. Others’ may be interested to learn that this is not common and I have highlighted in a previous answer that this ruling will mainly affect ‘accidental’ landlords in the near future.
QUESTION: Hi Hazel, thanks for your email.
Like many landlords, I’m really concerned by the bad press we get, there are some nightmare landlords but many private landlords are diligent and responsive. I like to think I fall into this bracket and have many longstanding tenants and renewal rates are extremely high, in fact, I’ve only had to remarket once in 2 years due to the tenants having to move back to the North.
Anyway, the government is looking to reduce interest relief on BTL mortgages from the current top slice of income tax relief to a maximum of 20%. The government argue that no other investment can be leveraged the way property can (i.e. shares have to be cash purchased). They also talk about equalising BTL owners with residential owners. Again a flawed argument.
A petition exists and the Finance Bill proposing the changes is going through Parliament now. I’ve signed the Petition and written into the Finance Bill Committee, and I’ve let as many fellow landlords and estate agents know of the issues.
What are your thoughts on this area? I know Martin & Co have done a fantastic job of reporting these issues in their newsletters, but I have to say there has been very little from other agencies and I would have thought this would have been in their best interests to fight.
ANSWER: Indeed, this is a very hot topic at the moment and will affect a vast number of higher rate taxpaying landlords, as well as those who will be forced into the higher rate of tax due to the different method of taxation.
Obviously there are many accountants trying to work out different ways of mitigating the possible increases in tax. So far, the most common theme I’ve heard being to transfer all existing properties into a Limited Company! This in itself will cause many more factors to consider such as CGT, mortgage changes to Ltd Co finance, etc and will therefore not be particularly easy or practicable.
My own thoughts on the matter are that we (decent!) landlords are providing a good service to the community. Our portfolios are run as a business and therefore should not be subject to a reduction in what is clearly classified as a ‘business expense’. I don’t think the government has fully thought through the ramifications such a decision could incur.
If we are forced to continue to run our portfolios through a Ltd Co structure, then the interest payments being seen as an expense would not be affected, so why should they be if we are running them under our own names? If we do not run them through this type of structure, then it will potentially have a big impact on the overall cash flow of the business and make it a much less viable prospect if we, individually, are paying tax at the highest rate.
As you say, the argument for ‘levelling the playing field’ between residential homeowners and BTL landlords is totally flawed, for many reasons.
I’m sure there will be a lot more discussion on this topic depending on the outcome of the final Finance Bill. I have just found out, ‘hot off the press’ that the Chancellor will deliver this year’s Autumn statement on Wednesday 25th November in which he will make further comment on the above subject.
Again, you may find it interesting (if you haven’t already) to read this set of objections I found on the internet which support a very good argument against the original Finance Bill in the Summer budget.
I’ll be continuing to keep you up to date with any developments as much as I can on my blog and via my Martin & Co articles.
QUESTION: Hi Hazel
Congratulations! 4 years!
In answer to your question the hardest thing for me is to manage the transition between “other business” life and the property business. Time is short and I am pulled in 2 different directions.
On the one hand is the handyman business. That demands a lot of time for a reasonable return. Then the property business takes time too. It does not give me any returns as yes as I leave all the gains in the business to grow the portfolio.
The hardest thing is to balance the 2. So something on time management and systemising would help me.
ANSWER: Thank you!!
This is a fairly common question, as most people have to start building their property business whilst they still have their job/career/business. It is true that whilst this is going on, you need to ‘juggle’ many things in your day. The lack of ability to focus when getting your portfolio going can be extremely frustrating!
I have found it very useful to ‘block off’ certain amounts of time to be able to concentrate on one thing at a time, e.g. Tuesday afternoon from 2-4pm for example, or Wednesday evening from 7-9pm. This way you keep the job/business cash flow coming in whilst also starting to allocate time to your property portfolio. I did exactly this when transitioning from my music career to our property business. I then had to do it again when setting up my property coaching and mentoring business.
Turning off ‘distractions’ is also extremely important to your ability to focus. Switch your phone onto silent, turn your emails off (unless you need them to complete your allotted task!) and lock yourself away if you need to get something done. The world won’t stop turning if you’re out of the picture for a few hours! This will help you to ‘get stuff done’. Make sure you prioritise that which needs doing so that you are making the most efficient and effective use of time. 🙂
I have created a sheet with all the tasks needing to be done within the property business. I have then gone down the list and ticked them either ‘do’ or ‘delegate’. Follow your instincts as to what you are good at and will enjoy in this business and then delegate the rest! In the beginning stages, it is true that even the actions you have decided to delegate, you may have to do yourself. As you learn them and know what needs to be done, you can them start to find the appropriate person to delegate them to. For example, we started off by self-letting and managing our portfolio. It gave us great insights and experience in terms of what to do (and what not to do!) From this, we were then able to find the right person to give the work to, or whether to keep on doing it ourselves.
As your portfolio starts to grow and is bringing in a certain amount, you can then decide to allocate more time to it. By doing this, you create a system/plan to follow, so you know when to spend time on the job/business and when on the portfolio. It’s very easy to spend too much or too little on either, so some time on planning will be necessary to ensure success.
A great rule of thumb to follow as you go along, and one which my business mentor taught me, is:
“Only do what ONLY YOU can do” – hope that helps!