While property investing across the domestic market has lost its shimmer of allure, there’s little point in denying that property, if you know where to look, what to buy, and how to fashion the best deals, is still head and shoulders above many of the other less tangible investment opportunities out there.
As with everything, though, problems arise when people (a) get an idea in their head that, because they’ve watched Beeny, Homes under the Hammer, and Grand Designs back to back for a year that they know what they’re doing, and (b) act on misguided and unchecked impulses, and buy something in the wrong place, at the wrong time, and without conducting the sort of due diligence the majority of seasoned investors would carry out.
So today you have a high number of amateur landlords who have purchased property via a buy-to-let mortgage as an alternative or supplement to a pension, and have bought at a price that leaves them with little headroom. With any investment, it’s a good idea to have something play with, something for your baseline capital to grow into in the event of a rising market, and something to protect you in the face of a market dip.
Back when I was buying domestic properties—and I bought almost 500 for myself and on behalf of clients who wanted to passively invest and ensure they got a decent yield for their efforts—I was very particular about the kinds of properties I wanted to get my hands on. These were two and three bedroom houses in a pre-specified area (Barnsley in South Yorkshire, a town of less than 100,000 people) that were at least 20% below their open market value.
Being specific was a vital part of the investment strategy, and deviating in any way from these specifics would have undermined the business model that I knew had worked for me, and would therefore work for my clients in much the same way.
Now, at a time when, due to the increasingly punitive tax measures being phased in by two successive conservative governments there is even less margin for error, being pinpoint specific about what is and what isn’t going to work from an investment viewpoint is more crucial than ever.
A good spreadsheet with a formula that highlights any potential gremlins in a deal is a vital. Even when long experience and strong hunches tell you a deal is a good one, it’s still vital to test out the maths and make sure that the structure works from every angle. If it doesn’t stack up, it’s back to negotiations, and if negotiations don’t work, you lose less by walking away than trying to work a square peg into a round hole. Or to paraphrase Richard Branson: deals are like buses, there’s always another one just around the corner.
Since my early days of investing in domestic property so much has changed that what was once a gravy train has become an empty track running through investment badlands—one of the main reasons I moved into other types of property and now focus on hotels.
To put things in clearer perspective, back when I was buying residential property in Barnsley, buy-to-let landlords were able to offset all of their mortgage interest payments against tax, and they got automatic wear and tear allowance of up to 10% of the net annual rent. But now, wear and tear allowance is gone, replaced by tax relief on actual expenditure. And mortgage interest, once treated as a justifiable business cost, is calculated with growing hostility. Last year, 25% of the cost of mortgage interest to landlords was exempted from relief, this year that figure increased to 50%, next year it’s 75%, and then, in 2020, landlords will simply get a flat 20% tax credit.
Now if you’re a basic rate taxpayer, that won’t affect you much, but if you’re a higher rate taxpayer, with a new interest only mortgage or two, that’s going to hurt big time. Still some people are clinging on to what they have as if in doing so they can stave off the inevitable decline of their profits, while others work out the cost benefits of going limited.
However, even flipping properties from personal to company ownership is fraught with fiscal tension and might not be worth doing due to the high costs involved in making the transactions. And there’s also the freezing of the indexation allowance for capital gains to consider, which came into effect in January this year following Hammond’s announcement in the November budget. It really doesn’t take a brain the size of Stephen Hawking’s to spot that there’s been a heck of a lot of jiggery pokery going on at government level that’s having a painful effect on many with interests in the property sector.
Which gets back to my earlier point of knowing what you want to achieve with your investments, and if you don’t know, seeking the right sort of advice to find out what is realistic and achievable, what is slightly off the mark, and what is—when all is said, done, and analysed—pie in the sky. I don’t know about you, but when it comes to pie, I like to have it on the table where I can see it, and I sure as Sherlock want to know what’s in it.
More on this in the next newsletter…property, not pies!