Thanks to the Telegraph for publishing my thoughts on how to make your money back quickly on investment property.
Do you want to invest in buy-to-let but don't know where to start? In this weekly four-part series, we break it down, looking at the money you need to spend, how to strategise your investment, how to manage agents and tenants, and how to maintain a property.
In the second instalment of our four-part series on buy-to-let property, we're looking at how to structure your investment to get the most out of your money and avoid falling into tax traps. The key lessons? Stability is just as important as chasing the big numbers, and you need to be prepared for the landscape to change fast.
How to make your investment as tax efficient as possible
Investing in short-term furnished holiday lets is the most tax efficient form of property investment, according to Michael Martin of Seven Investment Management.
Investors do not pay capital gains tax on the sale of the property because they get entrepreneur’s relief. If they sell long-term buy-to-let properties, however, they must pay 18pc to 28pc (depending on their tax band) in CGT on the profit of the sale.
Short-term let owners are also able to offset their costs against their tax bill. While relief on buy-to-let mortgages is now capped at 20pc, and you cannot offset costs such as paying for repairs or furniture, on short-term lets, investors can effectively get this money back.
Crucially, the income from short-term lets is pensionable, whereas buy-to-let income is not. “If you get £10,000 in income from a short-term let, and you are a 40pc taxpayer, you can pay that money into your pension and get your 40pc tax back,” said Mr Martin, who owns a holiday let himself in Edinburgh. “It is very tax efficient.”
Short-term lets come with their own risks. They are more exposed to void periods – particularly in a time when travel restrictions can stop people from going on holiday.
Yet from an investor’s perspective, having an empty property can be less troublesome than having one with a tenant who becomes unable to pay their rent, said Mr Martin. There is currently a six-month notice period for evictions in England and Wales to protect tenants who have been affected by the pandemic. Still, many of the perks are largely dependent on tax policy that could easily change. “I’m worried that [Chancellor] Rishi Sunak is reading this and is thinking this is tax efficient,” said Mr Martin. The existing rules were put in place before short-term lettings websites such as Airbnb existed, he added. The landscape has changed hugely.
The question is, if the tax rules become the same as for buy-to-let, do you still want to own a [holiday let] property?” said Mr Martin.
How to make your money back quickly
Profiting from buy-to-let can be a slow business. Spencer Fortag, of Dockside Property Services estate agents, said: “The rough rule of thumb if you put in a 25pc deposit and don’t refinance, you should get a return on your capital outlay in seven years.”
More impatient investors may opt instead for a popular strategy of buying, refurbishing, and refinancing (known by some as BRR), which can bring a return on investment after just six months.
“Say you have a street where homes are typically selling for £65,000. If you can find a property that needs a lot of work, maybe it is being sold probate, maybe you can buy it for £40,000,” said Mr Fortag.
“You spend £10,000 to £15,000 refurbishing it, you add value, you refinance after six months and it is valued at £65,000, you get 75pc of that back and you have covered your outlay.” Finding the properties, however, is increasingly tough.
It is also best to invest in an area that you know well, he added. If you’re buying from out of town chasing high yields, “it is very easy to fall into the trap of buying a horrible property to have to rent”.
Max Armstrong of North East Property Investment, a buy-to-let specialist, said the key to refinancing is to be able to prove that you have added value. Lenders will take into account factors such as being able to charge higher rents than were previously paid for the property.
How to boost your yields with HMOs
Houses of multiple occupation are a well-trodden path to boosting yields well into the double digits
Stephanie Taylor, of HMO Heaven, which manages 100 rooms in Newport, Wales, offered an example of how to grow your money in this way. Five-bedroom HMO properties cost about £170,000 locally. Allocate £42,500 for a 25pc deposit, plus £5,100 in transaction tax (this will be unchanged by the Welsh transaction tax deadline on March 31 2021).
Then budget £30,000 for refurbishments. Adding en-suite bathrooms is a particularly effective way to add value, she said. These cost £3,000 to £5,000 each to install and can add £50 to £100 to each room’s monthly rent, she said. They also reduce void periods.
Good rooms in a well-managed property in Newport will bring in £400 per month or £450 if they have en suites, said Ms Taylor. In a five-bedroom property, that would mean a total monthly rental income of £2,250. According to Hamptons International estate agents, the average rent on a "normal" buy-to-let property in Wales in September was £675.
But there are added costs with HMOs. Budget £100 per tenant per month for utility bills. After deducting your mortgage costs, your monthly income on a five-bed will be about £1,000 per month, said Ms Taylor.
The easiest way to upscale this is to buy an HMO with more bedrooms, but these will require more time to manage, she added.
Coronavirus has not reduced demand for sociable living, said Ms Taylor. Normally, HMO has a vacancy rate of no more than 1pc. When lockdown struck in March and tenants left their contracts, that share jumped to 20pc. But since May the market has recovered. “Now we have only three empty rooms,” said Ms Taylor.
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