Roger has grown his property portfolio from one property to five in the past couple of years. The value of the property held has increased from £95,000 to £420,000 in this period and Roger would now like to know what he could do to make the best of his position.
Sohan Jheeta, director at the Personal Investment Planning Service, says that a remortgage could be arranged for a period of not more than seven years and an LTV of 50% or less In the first instance, an analysis of the client's total income and expenditure should be carried out and his mortgage arrangements if any should be examined. Next, the rental income for each property should be assessed and the longevity of tenancies should be analysed. It is also important to ascertain the client's goals, ambitions and priorities.
If Roger is paying over the odds for the mortgages then perhaps his portfolio should be rearranged so that more competitive mortgage rates are obtained.
Recently many lenders have dropped their buy-to-let rates almost in line with residential rates. The problem with these deals is that the lender wants the mortgage to be arranged over 20-25 years which in my opinion is too long a term for rental properties. The housing market tends to be fluid and therefore anything could go wrong over that period of time. Roger may end up with nothing if things go wrong. It should be noted that lenders normally want to spread a mortgage over five properties and tie the client down to a long-term commitment in order to reduce their risk.
I would recommend that the mortgage be arranged over a period of not more than seven years and the LTV should not be greater than 50%. In this case rates may not be as competitive (they generally tend to be 2% above the base rate) but at least Roger will be able to pay off the loan quickly and start to enjoy his rental income earlier.
Anyone with a portfolio of properties will invariably have either capital gains and/or inheritance tax problems. Properties can be transferred to a limited company, thereby taking advantage of corporation tax thresholds, but initially the process will customarily create a CGT liability. It may be that the benefit is marginal thus rendering the proposal not viable. Further problems may arise when one comes to sell properties which are owned by a limited company in that limited companies do not qualify for personal allowance as do individuals.
On the other hand the big plus of a limited company is that if things go wrong only a limited liability rests on the director of the company.
Nevertheless, one should be wary of taking such a course of action. When an individual comes to sell their property they will qualify for personal CGT allowances and, depending on when the properties were bought, they may qualify for indexation relief as well. In addition they can reduce their personal tax liability by selling one property at a time in different tax years, especially during a period when their personal tax liability is the lowest.
Finally, IHT can be mitigated by taking out a life assurance (second death policy in the case of husband and wife) for the amount of possible IHT liability and placing the policy in trust. The premiums for the policy can be paid from rental income.
Nicola Severn, marketing manager at Mortgage Trust, says Roger should consider applying for a portfolio loan with a single lender to build a good record and make his future borrowing less painful Now that Roger has built up a small portfolio he should assess all his options. Firstly he should review his existing borrowing to ensure the rates are competitive. The base rate has risen and now may be the time to remortgage some of his borrowing onto fixed rate deals.
However, rate should not be Roger's only consideration. There are now a vast number of loans available in the buy-to-let market including fixed, capped and discounted deals, and with the introduction of alternative mortgage rate trackers such as LIBOR trackers, the choice has become wider still. One of the biggest innovations has been the introduction of flexible mortgages and this type of loan can be especially beneficial in buy-to-let. For example, switching to a flexible product and making use of the overpayment facility could allow the client to save for further property purchases at the prevailing interest rate. These overpayments can also be used to cover rental voids or fund maintenance costs.
Once Roger has made a decision on product type it may be wise for him to consider a portfolio loan with a single lender. Lenders may look more favourably on a portfolio of properties and demonstrating a proven record with a lender could mean their decisions on future loans will be less painful. Some lenders also provide an 'agreed reserve fund' allowing credit-worthy customers to agree a loan amount in excess of the amount needed at completion giving them the confidence to plan ahead. This can be invaluable when looking to secure deals quickly.
Roger should also consider tax implications. For example, he may decide that his tax position is improved by establishing a limited company in which to hold his property investments. It could be more beneficial to pay corporation tax rather than income tax. There may also be a number of deductions that can be made by a company that are not available to an individual. This is where good advice from an accountant is vital.
When growing a portfolio, property type and location are key. If Roger plans to make further property purchases he should ensure that his portfolio is balanced and his risk is minimised. Although rare, it is possible that all of a landlord's properties could experience rental voids at one time but with a carefully constructed portfolio this risk can be reduced. Diversity is key and a portfolio of properties varying in size and location can help shield the landlord from rental voids caused, for example, by oversupply in a particular area. By keeping such potential pitfalls in mind and by building a varied portfolio Roger can ensure he is not over-exposed to micro market problems.