What is the state of the UK BTL market?
A recent report by the Department for Work and Pensions perfectly illustrates the changing trend in home ownership/private rental across the UK. In the last 20 years we have seen the number of UK renters in the private sector double from 10% to 20%. In a sign of the changing society, the number of 35 to 54-year-olds in private rental accommodation has doubled since 2007. In total, there are now an estimated 5 million private rental properties in the UK and while the headline suggests private landlords may be leaving the market, this does not give the overall picture.
While it is fair to say that many private landlords with relatively small portfolios are reconsidering their position, those with larger portfolios are taking a long-term view. Amid suspicions that the UK government would rather have a smaller number of private landlords, with large portfolios, than many with small portfolios this is exactly what we are starting to see. Therefore, those taking a long-term view of the UK buy to let property market have been able to cherry pick the better properties from those looking to exit the market.
Before we take a look at the UK buy to let market in more detail, you may find this long-term owner occupier/rental property graph of interest:
While this particular graph only goes up to 2005, it is more the history of the UK rental/buy to let market which is of most interest. Many people automatically assume that owner occupier properties have been the norm in the UK since day one. Well, if you look back to 1918, social housing was non-existent, private rental properties dominated the market and owner occupier properties were very much in their infancy. The early 19th century was a time of large private landlords across the UK who had enormous rental portfolios. They were in effect the forerunners to the buy to let market we see today.
It is also evident that in the 1980s the Tory government’s right to buy scheme encouraged tenants to buy their council properties while decimating social housing stock. Many areas of the UK only recently closed their right to buy schemes and switched the focus back to rebuilding social housing and housing associations. The problem is that these areas of the market were ignored for so long that private rental properties began to fill the void. When you also bear in mind the ongoing austerity across the UK, governments and local authorities are looking for alternative ways to fund new social housing.
What are the changes which have affected the market?
We will now take a look at some of the changes which have occurred over the last few years and those in the pipeline.
Buy to let/Second home stamp duty
Since April 2016 those looking to acquire buy to let/second homes have been forced to pay an additional 3% in stamp duty above and beyond traditional rates. For example, on the first £125,000 the buy to let stamp duty rate is 3%, between £125,001 and £250,000 the rate has increased from 2% up to 5%. Those acquiring properties with a value of more than £1.5 million will pay a stamp duty rate of 15% on the portion over this figure.
Courtesy of: Which.co.uk
To give a broader picture about the income created by stamp duty land tax (SDLT) it is worth looking back over recent years to see the relative volatility with income and the number of market transactions.
This data is provided by the HMRC and illustrates the volatility of not only transaction numbers but also SDLT income. In light of the 2008 US sub-prime mortgage crash, the UK government was effectively forced to reduce the amount of stamp duty paid by first-time buyers and those towards the lower end of the market. While this obviously curried favour with a specific area of the UK electorate, and supported the market to an extent, it is worth noting how the authorities at least partially funded this move.
It is safe to say that the higher rate additional dwelling (HRAD) tax income has certainly helped to boost cumulative SDLT income which has been extremely volatile in recent times. If we look back over the last decade the government has literally milked the property sector of tens of billions of pounds even during the midst of one of the worst recessions in living history.
This issue was heavily politicised and brought in under the auspices of ensuring that first-time buyers had access to local property markets. There were concerns that some second homes were used infrequently while first-time buys in the area were forced to rent or move away. This was a very narrow minded approach and failed to take in the benefits to the local economy from holiday rental and second home owners.
Erosion of tax benefits
While the additional 3% stamp duty prompted a short-term slowing of the buy to let market, investors adapted to this new environment relatively quickly. Then in 2017 the UK government began a further erosion of tax benefits for those properties held by private landlords. Between April 2017 and April 2020 there will be a gradual reduction of the portion of mortgage interest which is deductible against rental income. This will be replaced by a 20% tax credit which will have no impact on basic rate taxpayers but will increase tax bills for higher rate taxpayers.
Courtesy of: HMRC
To put this into perspective, we will take in the following scenario of a buy to let property with a mortgage:
Rental income £10,000 per annum
Mortgage interest £5000 per annum
Additional costs £1000 per annum
Income after expenses £4,000 per annum
Under the current system the net income for a basic rate taxpayer or higher rate taxpayer would be £4000. This is the rental income less the full mortgage interest and additional costs. The individual tax charges would be:
Basic rate taxpayer:
20% x £4000 = £800
40% x £4000 = £1600
If you look at the new system which is being brought in stage by stage, when it is fully implemented there will be no mortgage interest relief as such. This will however be replaced by a standard 20% tax credit used to offset part of the mortgage interest. Under this new scenario, the same situation would see:
Rental income £10,000 per annum
Additional costs £1000 per annum
Income after expenses £9,000 per annum
(Before the standard 20% tax credit against mortgage interest)
As the profit is based upon £9000 in rental income, not taking account of mortgage interest, this creates a larger liability for both basic rate taxpayers and higher rate taxpayers. This is before the 20% standard tax credit against mortgage relief. As you will see below:
20% x £9000 = £1800
Less the 20% tax credit against mortgage interest = £1000
Tax charge = £800
40% x £9000 = £3600
Less the 20% tax credit against mortgage interest = £1000
Tax charge = £2600
So in practice a 40% taxpayer will be £1000 a year worse off while a basic rate taxpayer would have the same tax liability under the new system as they had under the old one.
Already we have seen a number of private landlords looking to transfer their properties into companies, where the offset system will remain unchanged. This is a trend which is likely to continue especially for those with high value buy to let property portfolios. The benefits may be borderline for those with relatively small buy to let portfolios – due to the increased administration costs associated with running a company.
Tightening / regulation of the lending market
In light of the 2008 US mortgage crisis, which resulted in a worldwide economic downturn, it was no surprise to see the introduction of tighter buy to let lending restrictions. While historically it was possible to incorporate future rental income into income calculations when applying for a buy to let mortgage, the regulations have changed. High street banks now require the applicant to demonstrate they have sufficient financial resources/income aside from any potential rental income. The impact of the 2008 US mortgage crisis is perfectly illustrated in the graph below.
In a sign of the times, at the peak of the market there were more new home purchase buy to let mortgages per year than re-mortgages. However, as the market bottomed out in 2009/10 there were signs that the trend was beginning to turn. Since 2009 the number of re-mortgage applications has increased gradually. While new home purchase buy to let mortgages increased until 2015, they have since turned down. As of 2017 there were approximately twice as many buy to let re-mortgage transactions as new home purchase buy to let mortgages.
When looking to secure a buy to let mortgage the applicant will need to provide a deposit of between 20% and 40%. While traditionally buy to let mortgages have been around one percentage point more expensive than owner occupier mortgages, this is not always the case at the moment. There is intense competition within the buy to let market as the number of transactions has fallen recently with some private landlords withdrawing from the market. Experts do not expect these relatively low introductory offers to continue for much longer.
Courtesy of: www.ukfinance.org.uk
When you compare the number of new residential mortgage loans for house purchases as a whole against the buy to let sector, you can see the difference. Year-on-year, buy to let mortgages used to purchase properties are down in number by 9% and 11% in value. Interestingly, the number of buy to let properties re-mortgaged is up 9.5% in transaction number terms and 9.1% in value terms. It is not difficult to see why more and more buy to let investors are using the historically low interest rates in the UK to re-mortgage their properties. It makes sense to take advantage of new deals on the market and reduce their mortgage outgoings.
You can see the actual figures in this table:
Courtesy of: www.ukfinance.org.uk
The criteria for buy-to-let lending via high street banks are fairly standard:
- At least one applicant must own their own residential property
- At least one applicant must have a minimum income of £25,000 per annum
- Rental income from buy to let properties is not generally included in the affordability calculation
- Maximum loan size £750,000
- Maximum loan to value ratio is 75% for traditional houses
- Maximum loan to value ratio is 70% for new build flats
- General standard is 75% loan to value ratio
Here at Enness we have access to an array of private banks and niche lenders who are more flexible with their criteria. We will present your financial situation in the most favourable of lights as our experience and contacts have allowed us to widen the criteria significantly. As a consequence, when looking at the affordability calculations we would expect to take in not only annual income but also a percentage of the buy to let rent as well as the use of various types of collateral. This ensures that our customers get the best deal, deals not available on the high street, while our financial partners find a balance between financial exposure and collateral.
If you already have buy to let properties it is advisable to review your mortgage arrangements in light of the historically low UK base rates. It may be possible to package two or more of your buy to let assets together and re-mortgage on extremely favourable terms. Any reduction in interest charges ensures more mortgage income drops into the bottom line and increases your net income (or that of your company). Even though we are unlikely to see a significant increase in UK base rates for the foreseeable future, as we touched on above, many experts believe that some of the exceptionally good value mortgage deals available today may not be around much longer.
How has the market responded?
In reality, all investment markets fear uncertainty and confusion and often factor in a worst-case scenario. When the finer details have been announced, very quickly you will see investment markets and investors adapt to the new landscape. This is something we have seen with the buy to let market after the increase in stamp duty and tapering of mortgage interest relief.
Limited company buy to lets
Since the UK government announced plans to remove mortgage interest relief for private buy to let landlords, there has been renewed interest in limited company vehicles and SPVs. As we touched on above, high rate taxpayers will be significantly worse off once the old mortgage interest relief system is replaced by the new 20% tax credit. However, if a buy to let property is acquired within a company the new mortgage interest offset rules do not apply (any company loan is classified as a business loan). The company would simply pay basic corporation tax on profits – with additional tax on dividends for higher rate taxpayers.
So, it was no surprise to see a significant increase in demand for limited company buy to let mortgages. In recent years this market was not very competitive but this has changed and limited company buy to let mortgage rates have fallen more into line with personal mortgages. Despite the fact that recent tax changes have seen a slowing of the buy to let market, there is intense competition amongst lenders offering mortgages to limited companies.
Explosion in lending options and new lenders
When you consider there are 5 million private rental properties in the UK this has created a significant buy to let mortgage industry. Whether looking at a new buy to let purchase or refinancing of existing properties we now have a number of traditional banks, challenger banks and niche lenders. This has placed downward pressure on costs and headline interest rates although it is also advisable to compare and contrast one-off charges when applying for a buy to let mortgage.
High street banks
Over the last decade high street banks have seen a circa 10% reduction in their overall share of UK lending. Those who thought this may have prompted a review of buy to let mortgage criteria and approach to risk would be sadly disappointed. The truth is that many high street banks in the UK, seen as traditional buy to let mortgage lenders, still have a significant number of repossessed properties on their balance sheets. They will continue to let these properties flow into the market as and when there is appropriate demand but their appetite for increased exposure to the UK property market has diminished.
As we touched on above, what you will see with high street banks is a fairly rigid approach when looking for buy to let mortgages. They prefer to take a worst-case scenario and work forward from there. For many buy to let investors they simply do not make commercial sense and the decision not to include rental income from their buy to let property is confusing. High street banks will continue to attract traditional homeowner mortgage customers, and a number of buy to let investors, but there is no doubt their market share is under significant pressure. Perhaps the Northern Rock days of 110% mortgages; while simply running their mortgage book against money market debt, has left them scarred for life?
In many ways challenger banks should also come under the title of “niche mortgage market participants” with many of them focusing their attention on the traditional mortgage market as well as the buy to let sector. Rather than taking a broad brush approach to finance, mortgage finance in particular, challenger banks are more focused towards specialists’ areas. This allows them to create a specific structure around your specific requirements in the knowledge that very few customers are alike. There was a time for off-the-shelf mortgage arrangements but, especially for those in the buy to let market, a more focused and flexible approach is required today.
Niche mortgage market participants
Over the years Enness have utilised the services of many private banks in the UK and around the world. While there is a time a place for traditional mortgage transactions, such as those on the high street, private banks are on the whole more flexible and considering of the wider picture. The fact that they have not been as scarred by the 2008 US mortgage crisis, compared to high street banks, may be part of the reason for their more positive approach to the buy to let sector. After all, the UK is estimated to be circa 300,000 new property builds short of current demand.
We fully expect niche mortgage market financiers such as private banks to increase their market share in the short, medium and longer term. We also see the growing influence of crowdfunding/peer-to-peer businesses, many of which are particularly well structured towards the property market. Competitive rates, competitive terms and greater flexibility on duration, the transparent nature of niche mortgage market participants are a breath of fresh air.
While the high street lenders tend to offer a vanilla buy to let mortgage arrangement, the challenger banks and niche market players are more flexible. If you shop around it is now possible to incorporate an array of personal and business assets as collateral when taking out a buy to let mortgage. Historically, this was not always the case with traditional high street buy to let mortgages.
Focus on niche areas – student housing, HMO, refurbishment / adding value
It is widely accepted that a rental yield of around 8% is required to cover property expenses and finances going forward (although in reality everything is relative). As the cost of traditional buy to lets increased in line with demand, many investors began to look elsewhere such as student accommodation, houses in multiple occupation (HMO), refurbishments and those situations where they could add value. This in itself has created a whole array of niche property market investments which are complemented by niche property market lenders.
Whether the economy is thriving or struggling, expenditure on education continues to grow each year. As a consequence this has led to an ever-increasing student population and, not to put too fine a point on it, a revolution in student accommodation. If you look at some of the thriving regional property markets you will see the likes of Leeds, Liverpool, Manchester, Birmingham, Nottingham and Glasgow, to name but a few, benefiting from growing demand for student accommodation. However, the old “student digs” are a thing of the past with many parents now assisting their children in finding more suitable accommodation. As a consequence, developers very quickly realised they were able to tap into this growing market. Large blocks of student accommodation, built to relatively high standards, with an array of communal areas and even facilities such as gyms are proving extremely popular.
One of the interesting factors which will likely see this market continue to grow for some time to come is the retention of graduates. Thriving student cities tend to have thriving local economies. Therefore, many graduates are choosing to live and work in these cities after leaving university with varying degrees of qualifications. This means that more and more student accommodation is being taken out of the market, by graduates remaining, therefore increasing demand for new student accommodation – and the cycle begins.
According to the Cushman & Wakefield UK Student Accommodation Report 2017/18, some of the main factors to consider include:
- There were 602,000 purpose-built bed spaces for students in the financial year 2017/18
- In the same year more than 30,000 new beds came online
- 87% of the new student accommodation was delivered by the private sector
- 43% of all new student beds are studios of which 97% were delivered by the private sector
- Average student accommodation cost £213 per week in London
- The rate for student accommodation outside of London averages £133 per week
We know there are currently in excess of 1.7 million full-time students of which 23% are from outside of the UK. Ongoing demand has led to headline rental growth of 2.9% in 2017 and with increasing student interest from China, Malaysia, Hong Kong, India, Nigeria and the United States, there will be further demand for accommodation going forward. It is worth noting that the six largest nationality groups making use of UK further education facilities are all from outside of the European Union. While Brexit may have had an impact on sentiment, with 70% growth in international student numbers between 2005/6 and 2015/16 there are reasons to be optimistic for the future.
House in Multiple Occupation (HMO)
Even though the UK authorities have increased the cost base for those holding HMO investments through the introduction of licences and statutory building requirements, this is still a very interesting area of the buy to let market. In theory it is well within the grasp of many investors to lock in double-digit gross rental yields even after what may be costly refurbishments. Only recently we saw the government change the criteria covering HMO investments, which now covers:
- A property occupied by five or more people
- Forming two or more separate households
Prior to October 2018 the criteria for an HMO were:
- A property occupied by five or more people
- Forming two or more separate households
- Comprising of at least three stories
There are also specific conditions regarding health and safety which have resulted in many HMO landlords reviewing their position within the marketplace. Many of those who have chosen to remain in the buy to let sector will need to invest additional capital to bring their properties up to current regulations. While there is a general consensus that many of the new regulations regarding HMOs (and buy to let investments in general) are more tenant focused than they should be, this seems to be a trend which is unlikely to change in the short to medium term.
Many would argue that the authorities saw those investing in HMO buy to let investments as making “easy money” – even though there is always a risk. Citing bad landlords as the reason for tightening regulations, this has a feeling of using a hammer to crack a nut.
Perhaps these next two graphs will put everything to perspective (for the general buy to let market). As you will see, they show a massive reduction in the number of lettings made to local authority owned dwellings in England as well as a significant increase in local authority housing waiting lists. The only reason that local authority housing waiting lists have turned down since 2012 is because of the massive increase in the number of private rental properties. We’ve also seen an increase in the number of housing associations, many of which are now able to borrow significantly more capital, but the private sector is the main provider of accommodation.
Even back in 2017, English local authority/housing association property combined amounted to just 17.2% against a staggering 82.6% for the private sector. It is safe to assume that since 2017 the number of private rental properties has increased at a faster rate than combined local authority/housing association accommodation.
As the housing shortage across the UK continues we have seen a significant increase in the number of refurbishment projects up and down the country. The simple fact is that, when managed correctly, the earlier the stage of investment the greater the potential return in the longer term. As a consequence, many buy to let investors with experience of property development have picked up unloved properties, refurbished them and created significant buy to let portfolios.
There are a number of factors to take into consideration when looking at refurbishment projects which include:
- Is there sufficient local demand for private rental accommodation
- Are there any price ceilings with regards to property prices and rents
- What are the future prospects for the area
- Do the financials of the deal stack up
- Is there sufficient margin in the event of unforeseen expenses or time delays
- Do you have an exit route
Perhaps the best piece of advice with regards to property refurbishment/buy to let investments is the need to appreciate your local market. This will influence the standard of finish and whether it is indeed worth going that little bit further for extra rent. As we touched on above, many areas of the UK will have a ceiling with regards to property prices and rent which is difficult if not impossible to break. So, in some areas you may need to rein in plans for a luxury refurbishment development.
Whether or not you decide to refurbish properties and rent them to tenants, or flip them and make a profit, you will need to identify potential exit routes when applying for finance. We have experience right across the property development finance market and can create a structure which suits your finances, your project and your timeline.
There is a distinct difference between residential and commercial property investment with the three main categories of commercial property defined as:
- Retail property
- Office property
- Industrial property
Retail commercial property investment takes in the likes of shopping centres, high street shops, supermarkets and similar operations. It is fair to say that since the Internet redefined the retail sector the value of high street properties has in some areas been decimated. We have seen some of the best-known names in UK retail fall by the wayside, companies snapped up for next to nothing and high streets up and down the country stripped bare. We have also seen many high street retail tenants forcing their landlords into reducing rents to avoid CVAs. It is fair to say that both rental and capital values are under pressure on the high street.
That said, over the last few years we have seen a new trend emerge on the high street with regards to unused retail property. Many local authorities are now more sympathetic with regards to change of use applications in what could be a win-win situation for everyone. Converting empty high street shops into residential flats helps to tackle the systemic shortage of residential properties in the UK. In many cases it can also help to encourage the regeneration of communities. However, retail property investment in general has proven to be difficult of late with rental values under pressure and capital values struggling to create any forward momentum.
A note of caution for 2019; experts predict a further 23,000 shops will close and 175,000 high street jobs will disappear.
Since the 2016 Brexit referendum we have started to see a shift in office property investment patterns across the UK. Historically previous governments had promised to decentralise many of the public sector services with little in the way of delivery. The situation has changed, with both public and private sector interest, and we have seen significant office developments in Birmingham, Leeds, Manchester, Nottingham and other parts of the UK. Interestingly, a number of local authorities have taken it upon themselves to become more active in the office property market. Perhaps more as a consequence of the relatively low rate on local authority borrowings as oppose to commercial opportunities?
A recent report into the UK commercial property market by Savills also highlighted expected growth in workspace, co-working and serviced offices during 2019. As investors/landlords battle for reliable long-term tenants there is a general feeling that landlords will need to go the extra mile to secure the best customers. In many ways the UK commercial property market has come full circle, gone are the days when tenants were at the beck and call of landlords, tenants now seem to have the upper hand as competition intensifies.
The report also highlighted expected regional growth with many of the areas mentioned above starved of office investment in years gone by. Ironically, in light of the Brexit referendum, demand for office space in London was far stronger than many expected in 2018. While there will be jitters in the short to medium term, there is only one year supply of office space left in the City and the West End which should offer at least some support to capital values and rent rates.
Investment in industrial property in the UK has historically lagged behind the likes of office and retail property. However, the situation has changed dramatically over the last decade with particular emphasis on the logistics market which has benefited from the e-commerce revolution.
As a consequence, Savills believes that the yield on logistics-related industrial property will fall below that of office and retail assets for the first time in history. This reflects growing demand for logistics assets and the sea-change that began when the Internet was launched. Who would have guessed that 20 years ago we would have seen a retail revolution which cleared many high streets and sought after logistic assets becoming an integral part of the commercial property sector?
It is safe to say that Airbnb has emerged from nowhere in 2008 to take the rental market by storm. The San Francisco-based company has a very simple business model; a marketplace which allows people to lease/rent everything from hotel rooms to hostel beds, apartments to homestays and much more. Income is created by charging commission to both the property owner and each guest with rates varying.
This is a huge multibillion dollar business now and, while it has attracted some negative headlines, on the whole the company has disrupted the traditional rental market to say the least. For many landlords with empty properties, or short-term vacancies, it offers the perfect opportunity to fill a void. At the end of the day, even a reduced rental income is better than nothing for a property which would otherwise have been empty.
Serviced apartments and Airbnb are often compared and contrasted. While broadly similar in theory, in practice there are very different. It is probably more appropriate to compare serviced apartments with hotel like accommodation because generally there is a reception area, customer services, etc. These are completely furnished apartments and while perhaps not up to the standard of a luxury hotel, they are more than adequate for a short-term stay.
The room rate on serviced departments will vary as a consequence of location, demand and the standard of accommodation provided. On the surface, the daily rate can seem relatively high but this must be considered with the likelihood there will be periods of vacancy. It is a case of trying to balance out short to medium term income against periods when the property may be empty. Interestingly, many serviced apartment investors will negotiate discounted terms with local/national businesses in exchange for a guaranteed retainer. This offers local/national businesses guaranteed accommodation while providing guaranteed rental income for landlords.
What are options if you have buy-to-lets?
In a perfect world, you would acquire your buy to let asset, find a tenant, collect the rent and enjoy the rest of your life. There will be situations where your tenant is relatively stress free but the more successful buy to let investors are those who constantly compare and contrast rates, consider their options and take action. There are many different areas in which you can maximise your income, reduce your costs and improve your net returns.
The key to any buy to let investment is to maximise your rental yield as this will improve cash flow and increase the long-term return. It is therefore sensible to consider a number of issues before you decide to rent out your property:
Refurbishing your property
While there is nothing wrong in refurbishing properties which require additional work, you need to consider whether additional investment would be reflected in an improved rental yield. In many ways this comes down to knowing your local market and having a particular type of tenant in mind. The danger is that additional investment refurbishing a property does not attract a higher yield and is therefore a cost which could have been avoided.
The key to maximising any investment return is to keep your costs as low as possible while maximising your income. Finding the balance between further investment and increased rental yields is not always easy. It is often advisable to err on the side of caution if you are unsure about the long-term benefits.
In years gone by many private landlords were quite happy to run their business in an informal manner, often leaving rent rates unmoved for many years. While it will obviously depend upon demand for private rental property in the region, do not forget that your costs will go up year-on-year. As a consequence, if your rental income remained static and your costs associated with the property increase then by definition your return is reduced. That does not make commercial sense….
Aside from the fact you need to know whether you are charging the market rate for the area, and maximising your yield, many landlords will write in an annual inflation rise in rent. In theory this maintains the net rental income after taking costs into account. Do not be afraid to introduce standard inflation rent rises because the chances are your competitors will be doing just that!
Maximise capital value
There are obviously two main elements to maximising your investment returns, rental income and capital appreciation. Rental income is in effect your short-term cash flow while capital appreciation is a reflection of the value of your property in the future and any additional changes you may have made.
Restructuring your property
In theory, the more rooms you have in a buy to let property the greater the potential rental value. The greater the rental value the stronger your cash flow and long-term returns. The structure of some rental properties may encourage investment in an extension and/or reducing the size of large rooms to create more accommodation. Again, there is a need to consider the local rental/capital value ceiling and the short, medium and long-term impact on the value of the property.
There is a general rule of thumb that a leasehold property with less than 80 years remaining will start reducing in value. In simple terms, once the lease on a leasehold property has expired the property is returned to the leaseholder. It is not quite that straightforward in the modern era with regulations introduced by the government to offer a degree of protection to leaseholders. However, there may well be occasions where you acquire property with less than 80 years remaining on the lease with the potential to extend.
Traditionally leases tend to be from 90 years up to 120 years but can be extended to anything up to 999 years in some circumstances. The value of a property with 40 years remaining on the lease will be markedly lower and the same property with 120 years remaining on the lease. As a consequence, on occasion it may well be worth approaching the landlord to extend the lease as early as possible. You would also need to appreciate the cost of extending the lease against the perceived increase in property value.
Build in the garden
It is fair to say that space is often at a premium in many towns and cities up and down the UK as the authorities look to tackle the housing shortage. As a consequence, where a property has a relatively large garden there may be the potential to build an additional home. This could have a major impact upon the overall value of the property and land and is worth investigating further. Even if the garden area was too small for a new build it may be possible to extend the existing property.
Even though local authorities are very keen to increase housing stock and alleviate accommodation shortages, there will no doubt be various planning regulations to consider. If you do intend to go down this route, which can have a significantly beneficial impact on capital values, it is worth taking professional advice.
Look at your taxation structure
While times have changed in recent years, in the past many people failed to give due consideration to the tax structure of their investments, often paying the price further down the line. It is therefore essential that you consider your potential tax liabilities and the tax structure of your investments going forward. As we have seen with the buy to let market, governments tend to tinker with tax regulations on regular basis and you do need to ensure that you are protecting your assets at all times.
Using a company vehicle
Ironically, the use of limited companies and SPVs is a very hot topic at the moment. The UK government recently announced plans to taper mortgage interest relief for buy to let investors. This will be replaced by a basic 20% tax credit which will mean that higher rate taxpayers have a greater tax liability. However, by acquiring buy to let properties in a company the mortgage interest will be treated in a similar fashion to business loan interest. It is therefore deductible from gross income reducing the net return on which standard corporation tax would be charged.
Move ownership between husband/wife
All individuals in the UK have what is referred to as an annual personal tax allowance which means that no tax is paid on the first £11,850 of income. As a consequence, it may well be sensible to consider switching ownership of rental properties between husband/wife (and common-law partners) to make full use of this allowance. There may also be further options if one of the parties is a higher rate taxpayer as any additional income, in the form of rental income, would also be taxed at the higher rate.
On the matter of tax it is essential that professional advice is taken and we can offer you guidance as part of any financial package.
Managing your finances
How many times have you seen an advert for a fixed-rate mortgage and thought that looks attractive, but taken no action? The vast majority of investors are guilty of this lazy approach when they should be grabbing this low hanging fruit, reducing their mortgage payments and increasing their net return.
Long term fixed rates
Prior to the 2008 US mortgage crisis it was common for US homeowners to fix their mortgage interest rate for the full duration. The situation in the UK is slightly different but there are relatively long term fixed rates available. It is worth considering locking yourself into a long-term fixed-rate as this allows you to plan ahead and can protect you from future interest rate rises. As nobody can predict future interest rates with any real confidence there is a degree of educated guesswork.
Equity release can be used to effectively withdraw profits from a property to fund financial commitments or a deposit for an additional property. If looking to release equity to fund an additional investment you would need to compare and contrast the cost of refinancing your equity against the expected return on the new investment. When you consider the historically low interest rates at the moment, reflected in mortgage rates, this may be the best time to consider a full or partial re-mortgage.
Balance your assets/spread the risk
Placing all your financial eggs in one basket is dangerous at the best of times but if markets turn it could decimate your finances. Even though there may be a temptation to over invest in a particular region or type of asset you should always consider this against the potential risk. Property investment, perhaps more than any other, is a long-term commitment although there is nothing wrong in taking short term profits if they present themselves. However, chasing the next short-term capital gain may seem attractive at the time but one miss-timed investment could undo all of your previous good work.
Don’t be afraid to sell!
It may seem strange but many people find it easier to buy an investment than they do to sell one, especially if the value continues to go up. While they know in the back of their mind that nothing goes up in a straight line, they fear they may miss out and can become greedy for that extra pound or two. So, there will be a time and a place to sell an investment and move onto the next one, never be afraid!
Ditch underperforming assets
The longer you maintain an underperforming asset the greater the impact on your long-term finances. While many of us may fall into the trap of assuming that “things will pick up in the end” this is not always the case. Be ruthless, look at the financials and be honest with yourself, would your funds be better invested elsewhere?
Keep one eye on capital gains tax
If you have a potential capital gains tax problem then it shows you are doing something right with your investments. However, it does not mean you should expose yourself to a potentially large capital gains tax bill. As we touched on above, there are ways and means of reducing your potential tax liability through switching of assets between husband-and-wife or a company. If you simply let your capital gains build and build then eventually one day, when you liquidate them, the day of tax reckoning will come. Tax planning is not a myth!
Don’t be emotional
It is human nature to be emotional, to have our favourites and sometimes let our hearts rule our heads. However, when it comes to property investment, indeed any type of investment, those who allow themselves to become too emotional rarely succeed. As they say “fools rush in where angels fear to tread”. Stick to the cold, cold, cold hard facts.
There are many different areas of the buy to let market to take into consideration when looking at your long-term strategy. Market trends to lending options, interest rates to different types of buy to let assets not to mention tax planning. In years gone by many people simply bought a property as their “long-term pension” using the rental income to cover their mortgage and cashing in their property assets in retirement.
The situation has changed dramatically today. In order to maximise your investments in these fast-moving markets you should review them on a regular basis, consider tax planning and take advice from the professionals. There may be scope to reduce your mortgage payments by switching lenders or it may be time to sell your assets in a particular area. Property investment should still be seen as a long-term commitment but that does not mean to say you cannot review and rearrange your assets as and when appropriate.
Contributors to this article: Gurch Kharay https://www.linkedin.com/in/gurch-aran-kharay-1231652