Friday 27 January 2017
Well it's been another busy month in property investing. Everyone is getting ready to tackle 2017, and by now very well underway to taking action to achieve their goals. If you are looking to invest further in property using good old-fashioned buy to let, be wary though as there are a few things to take note of...
I've discussed it before but I'll mention is again - the dreaded Section 24 (of income) tax means that you will be paying the taxman FIRST and then deducting your rental income costs. Brief example:
£30,000 Rental profits after repairs
£20,000 Mortgage/loan interest
£10,000 profit so tax bill based on 40% income tax = £4,000
£30,000 Rental profits after repairs
£30,000 Taxable income, 40% income tax = £12,000
£20,000 Mortgage/loan interest turns into a 20% credit = £4,000
So your tax bill is now £12,000-£4,000 =£8,000!!!! Point to note is that this will be phased in over the next 4 years, so in this example your net income will go down by £1,000 if you do nothing.
That's a whopping increase. Just to put these numbers into perspective it's probably your average owner of two flats in South London receiving a rental of £1800pcm each with a few repairs/improvements thrown in, with loans of about £400,000 on each paying about 3% interest. Could that be you?? Prepare to make less NET profit with your rental portfolio. But you're not alone. In fact, a lot of people did the same as you, kept hold of a flat as they climbed the ladder. Riding the wave of capital appreciation is now resulting in a crash landing. So seek advice and take action. One solution is to incorporate a limited company "newly poor landlord holdings limited" and transfer the flats into that portfolio. Problems arise however when you factor in Capital Gains Tax and Stamp duty, so it's likely that those costs will outweigh any savings for a long, long time (although you may be able to claim reliefs to put off the tax though). Plus of course that you need to pay 20% corporation tax on the profits and further taxes when you take the money out of the limited company. All food for thought and there is no "one-size-fits-all" solution. Seek professional advice.
Rental Stress Tests
Banks have, over the last month tightened up a little bit on lending. Whereas in the distant past a rental coverage of 125% of the interest payment would suffice (i.e. the rent was 125% of the mortgage payment), they changed it to 125% at a stress rate of 5% but now they have gone as far as to ask for 145% cover at 5% and sometimes even 5.5%. Why? Linked to the point above it's simply because taxes are on the increase and mainstream buy to let lenders are covering themselves, adding in several more layers of protection to make sure that payments are met.
So what's next for landlords in Clapham?
I remain unconvinced that incorporating and transferring the existing portfolio will be the best solution. If you are in Liverpool, Leeds, Sunderland, the outer Hebrides where property prices perhaps have not moved very much then CGT will be minimal, as will SDLT, Incorporating is the right thing because your rental income will be taxed at 20% (Corporation Tax) instead of 40-45% (depending on your income tax bracket). I will take a wild guess and assume that if you're reading this you will be in a good, stable job, enjoy what you are doing and are simply investing on the side. Very wise of course. But if you are looking to invest further I would certainly do it in a limited company going forward. It's a very straightforward process and shouldn't take more time than thinking of a name for a limited company and a few pounds to register it at Companies House. You can, of course, file your accounts and so forth yourself but if you are going through the trouble of reducing your taxes you will want to ensure you get the most benefits you can. I have a brilliant accountant of course, and she ensures I get all the tax breaks I can. If you'd like her details just drop me an email and I'll introduce you, no problem. Going forward I'd highly recommend seeking out a whole of market broker to enable you to get hold of some of the best deals from lenders that don't deal with the general public such as Kent Reliance, Precise and Paragon.
If you are a landlord and/or investor looking to maximise your portfolio profits then get in touch. I offer a range of things from portfolio reviews to site visits to give practical advice tailored to your property. Start the conversation by email.
Links for further reading on the matter:
Wednesday 18 January 2017
I was talking to an investor the other day and they were looking to budget for a new purchase. We had discussed finishing touches, how to decorate, the spend on the build and then she popped the question. Maybe I should have expected it? “Should I let my property furnished or unfurnished, Jeroen?”
It took me by surprise as she had brought me several properties to manage over the last year and I knew they were in good order. I had however inherited them from another agent she used to use and I must admit I didn’t check the details of every letting as yet. Turns out that they were unfurnished! She had let unfurnished all this time! I was bound to notice when the time came for renewal as I would have noticed the rents were a bit light though.
Here’s the thing…
If you are letting a property in Clapham and surrounds, I would say this easily applies to zones 2-4 in general, then furnish them. Furnish them well. If you are letting to DSS tenants then they will be used to supplying everything, even down to their own white goods. However professional, working tenants, they’re a different kettle of fish. Take a stunning new build for example. If you take out the furniture, really you’re left with a carbon copy flat. Furniture and décor is how you differentiate. Supply cast-offs from your grandma’s loft? Do so at your peril. They used to say location, location location – now it’s presentation, presentation presentation! As long as the flat is clean, tidy and well-presented you are already ahead of the competition! I’m not saying spend thousands upon thousands on furniture. Take this as an example, one from my most recent project: The bedroom furniture including beds and mattresses were sourced under £2000. FOR ALL THREE BEDROOMS! These are solid pine and an orthopaedic mattress no less. Add a few quid for matching curtains and lamp.
You want top dollar for your rental? Break some eggs to make that omelette and by that I don’t mean break the bank. Look at items that LOOK expensive but are not expensive. Well if you want tenants you will have to furnish it… simple!
Professional tenants are more discerning. If you are looking to furnish your new property with cast offs of yesteryear you can say goodbye to rental success.
I hope you find this useful. Remember my name is Jeroen Hoppe, author of the Clapham Property Blog. Helping landlords and investors making the most of their investments in South London. If you need help or advice on making your investments more profitable email me on email@example.com or search and follow the Clapham Property Blog on google, Facebook or LinkedIn.
Saturday 14 January 2017
The new year is upon us. Now that the Christmas meal has digested and we are in full swing in our diets, gym sessions, yoga and other things that will take our mind off our immense indulgence it's wise to turn to our property portfolios to ensure successful letting in 2017. Here is what you need to know and do.
- Tax changes - mortgage/loan interestIf you have not heard already, you will not be able to fully deduct mortgage interest as a cost from your rental income. Instead, for this year, you can deduct 75% of it. 25% of the cost will be added as a credit at the end. See my other post here for further details. Don't, however, go restructuring and panicking. Especially if you have an expensive property in London the cost of incorporating will likely outweigh any benefits for years to come. Take independent advice though, this will vary person to person, portfolio to portfolio.
You will be pleased to know that repairs are still fully deductible. However the 10% wear and tear allowance has been scrapped. A fine time to replace, as these costs are now fully deductible. White goods are a common one to replace, but when you are refurbishing a property you've bought and the old sofa was part of the purchase price you may find that you are able to replace it and deduct the cost from your tax bill. You are, after all, replacing... Do take advice though as to which items in particular as there are exceptions.
Don't be that landlord that doesn't do repairs and ends up with a substandard property towards the end of the tenancy. Tenants will still be living there and likely to be putting off prospective tenants. Let's face it, if they are leaving they have little inclination to keep the place spotless, sure, but don't give them more ammunition to shoot you down in front of your new tenants or customers. You want a glowing recommendation from them, so email them now and ask if anything needs doing. Ultimately any repairs that are done properly will enhance capital value, rental value, make tenants stay longer and reduce voids because your property is desirable and well-maintained. And believe it or not landlords that are responsive and carry out repairs to a good standard are still a rare breed! On that note, if you do receive notice, talk to your tenants. You may find some shocking things that they just didn't bother reporting was ever wrong, but they thought it was easier to move than to ask you for repairs.
Don't be the landlord that everybody hates. You know, the one that wants top dollar for their mud hut. Let the agents decide, or the comparables on the market if you do let privately, what your property is worth. Remember that the cost of your holiday/mortgage/car payment/etc has no bearing on the actual value of your property. The lettings market isn't a flea market. Price competitively, get multiple offers, choose the tenant that suits you best. Don't start ridiculously high against everyone's advice, get no offers, then drop it last minute and end up getting one offer after you drop the price for a move date that allows a month void. Plan ahead and put your property on the market two months in advance of the move date so that allow time for professional photos and proper marketing. A tenant who leaves it until 14 days before their move date to make a decision is arguably not the most desirable tenant. I personally prefer one that makes plans in advance, like most educated, high earning tenants do. Exceptions are there of course - if they had a letting fall through last minute for instance - but these are rare for the demographic you are aiming for.
Make sure your house is in order. Have you done your annual gas safety/boiler service? Given it to the tenants? Did you register the deposit for any new tenants? Have you served them the "How to rent" booklet? EPC? If this is alien to you then by all means start the conversation and I can help you get acquainted with the legislation changes to make sure you comply!
Make sure that you are able to. This year the mortgage lenders have been asked to tighten up their lending, so your rent must be 145% of the interest only mortgage payment, not 125% like in days gone by. Here's the clincher though, they STRESS TEST at 5.5%. So it's not the payment that you pay today that counts, it's the interest payment at 5.5%! Be advised that there are a few exceptions to the rule but on the main you will be able to borrow a lot less. Make sure you are raising your rents in line with the market. Do your repairs, redecoration and increase those rents in order to be able to value up as high as possible. Even if you are not withdrawing money out of the equity you will have a lower LTV which means better rates.
Stamp duty, ugh, lots of it. Again if you are buying an additional property you are getting taxed a lot more than before. In a nutshell you will be paying a 3% surcharge on the whole amount. Details here in this article.
- The property market
Nobody knows the future, but I have predicted sharp rent rises in London over the next few years, namely due to the extra red tape in the sector, the consultation on agency fees to tenants being banned and various other costs that ultimately are going to be paid for by the customer, tenant in this case. Capital values in the 1mil+ sector will likely stay stagnant/fall slightly, and so will the bottom of the market, the 1beds and 2beds. This sector of the market will likely be fed by accidental landlords selling off their small flats as they have found they will be making a loss on them with the tax changes. I think the real winners are the people that are investing for yields. As tenants are not cohorting until they are older, and living independently and renting longer I foresee a sustained demand for bigger units, the 3/4/5 bedroom properties. As you know that is certainly how I'm investing my money.
I hope you found that useful. If you are looking to make a change in your portfolio, or are looking to add to it, then by all means get in touch. I have built property portfolios worth millions of pounds for my clients over the years and I can certainly help you. Whether you own 1 flat or 10 or 100 - I have maximised profit to the tune of tens of thousands of pounds per client. If you would like to start the conversation do drop me an email:firstname.lastname@example.org or come along to the Clapham Property Meet on Tuesday 31st Jan. We have two main topics on the night: sourcing the best deals through estate agents, a talk that I will be giving, and Mike Holt, fellow investor will tell us more about unlocking your pension and using that money to invest in property.
Thursday 5 January 2017
I was disappointed to see that the video I posted in my last update didn't work, so do CLICK HERE TO SEE THE VIDEO of the deal in my last post, the hold and rent project in Camberwell.
On to the next update then. You'll remember that I had bought another property at auction. Again a lovely deal, this time purchased for £160,000. Again slightly further out than I normally venture (Thornton Heath). A property riddled with "problems" as some people refer to them as. I only see challenges, and moreover, an excellent way to pay less for an investment property. It had been on the market with two agents for over a year... what could possibly be wrong?
Well, problems included Japanese knotweed, modernisation required and the block was looking tired. No problem too big of course, but one thing I did notice was that the property used to be a 1bed! The previous owner (who had been repossessed) had cheekily split the living room to create an extra bedroom. Normally this would make the property very difficult to sell as it's a breach of the lease.
So what did I set out to do? Investigate further... After reading the legal pack in full detail it had emerged that there was actually a treatment plan in place for the knotweed (so that's one problem down) and the freeholder had given consent in writing for the internal alterations - another problem down. So the only problems remained were cosmetic ones. Lovely. Armed with this information I went to the auction room and the bidding commenced at £140,000. I started the bidding at £150k when the first of the two bidders had failed to increase and I outbid her £159,000 only for the gavel to fall at £160,000. I had exchanged contracts, excellent!!
Upon bringing the memorandum of sale back to my solicitor he asked whether he'd like me to complete it sooner than the planned 28 day timeline if possible. This was March and the stamp duty was going up considerably in April, so I was more than happy for him to act quick and save me on the purchase.
A mere week later I had the keys in my hand and the purchase had gone through. I made a schedule of works and a specification with the builder I had appointed and off he went, turning a landfill into a palace.
I have also made a walk around video of this project to explain what I did. Click here to watch it.
If you are interested in more videos as I make them please subscribe to my YouTube channel.
Naturally the proof is in the eating of the metaphorical pudding - after having booked a 30% return on this deal we can safely say that, even after sitting on the sidelines advising for so long, my clients appreciate my input and say that I certainly know my onions when it comes to property investment. So if you would like to grow your portfolio, or start one, or would like general advice related to property, lettings and so forth of any kind - do get in touch via Facebook, LinkedIn or old fashioned email. Don't forget, you can also meet me in person at the Clapham Property Meet. This month I will be doing a talk on sourcing the best deals through agents and revealing some of the estate agency industry's best kept secrets...
Wednesday 4 January 2017
I had purchased two properties to refurbish last year, one to hold and let and the other to sell on to an end user (be it owner occupier or buy to let investor looking for an easy purchase). I had some of my avid readers ask me for an update, which I happily provided and I thought I'd post the updates here as well for you to see. I'll post more over the course of the next few days, but I thought I'd show you a little video to show the before and after for the three bedroom apartment which I planned on holding:
This particular property was slightly out of my normal patch of Clapham, but as you know you sometimes need to trek a little bit further in order to get what you want. This particular project was a straightforward refurbishment of an otherwise solid apartment in Camberwell. The property had been neglected over the years so the programme of works included:
- New bathroom
- New kitchen
- New flooring throughout
- Redecoration throughout
- New front door
- New boiler & heating system
The project was completed within 2 months and allowed me to let out the property and to refinance, recouping half of the investment and hold the property for my long term hold and rent portfolio.
The initial outlay (including deposits, legal fees and refurbishment costs) was £110,000 and the investor was able to refinance £55,000 back out of the property due to the increase in value as well as retain a healthy cash flow of around £1000pcm. A healthy cash flow, and now on to the next one. I will be posting a further update on my other (auction) purchase in due course and will reveal more about my investing plans for 2017, focusing heavily on cash flowing properties and maximising the returns.
If you are interested in learning more about property investment then do get in touch. Don't know where to start? Come and have an evening of socialising with other investors, listening and learning from those that have made mistakes so you don't have to. Click here to join the Clapham Property Meet, a social meeting group for landlords, investors, old and new. You can start investing in property with little to no money if you have time to spend. For those that are time poor - I can walk you through the various options and do the leg work for you. Start the conversation by email on email@example.com.
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