IS YOUR PORTFOLIO ALL IT CAN BE?
TIME FOR A PORTFOLIO SHAKE-UP?
With new rules and requirements that have impacted on landlords and their property, many landlords are considering their options. With new legislation in place, this is a great time to re-evaluate your property portfolio. Whether you are reading this as potential real estate investor, a landlord with a single rental home or someone running multiple properties, you should be asking: is my money working hard enough for me, or is it time for a portfolio shakeup?
If you are a newcomer to the property investment market it may seem like a minefield. What type of arrangement will give you best ROI? How do you begin to digest the mountains of associated legislation? It can certainly all be a bit overwhelming. Firstly, here are some key changes:
The Tenant Fees Act 2019
Introduced in February 2019, the Tenants Fees Act 2019, letting fees were banned in England from June 1 2019, after already being banned in Scotland.
This ends all payments ‘in connection with the tenancy of housing in England’ unless they come under the list of permitted payments, which includes:
- Tenancy deposit, capped at a maximum of five weeks’ rent if the total yearly rent is under £50,000, or six weeks’ if it’s £50,000 or more
- The holding deposit which is now capped at a maximum of one week’s rent
- Default payments
- Fees for changes to the tenancy agreement capped at £50
- Fees for ending a tenancy early if requested by the tenant
- Payment for council tax
- Payment for utilities
- Payment for a TV licence
- Payment for communication services
This means that fees for inventories and other associated costs to the tenant are now prohibited.
Energy Performace Standards
From April 1 2018, new private rental properties are required to have a minimum of an E rating on the Energy Performance Certificate. Existing tenancies will need to conform to these standards from April 1 2020. Breaches of this rule would make renting properties with F or G ratings unlawful.
If you breach this rule you’ll be given a warning so you can get your property up to scratch. But if you don’t do this, you may face fines and legal action.
At the moment, you’re able to get tax-free profits of £7,500, but this is going to change as a way of stopping landlords from receiving tax-free profits intended to incentivise people to let out spare rooms.
After potential new rules are in place, you’ll have to be present and resident in the property for at least some time during the letting period to get this money tax-free – this is known as the shared occupancy clause.
This is where Property Management Specialists become an invaluable source of support. Here at Shape Property we have the benefit of over a decade’s experience in the sector and can offer unrivalled knowledge of all the issues affecting landlords.
Mortgage interest tax relief
Until 2017, landlords could deduct their mortgage interest payments from their rental income, reducing the amount of income that would be taxed.
The government has decided to change this rule and is phasing in a reduction in the amount of interest that can be used to offset income tax.
In the current (2018/19) tax year you can set 50% of your interest against your rental income. This reduces to 25% in 2019/20 and will disappear completely from April 2020. From this point, landlords will receive a tax credit calculated at 20% of your mortgage interest.
This credit will reduce the final tax liability by 20% of your mortgage interest. The overall impact will be to increase the amount of tax paid by most landlords with mortgages.
So, is it still worth investing in property?
Where to start when considering your portfolio?
The first step for most potential investors is probably …
So, you are ready to build your property empire, you just need to figure out where the funding will come from.
There are many routes of venturing into property investment, it is a case of identifying the best method for your situation and times are certainly changing, with more possibilities than before.
With the average property value in England currently £232,885, unless you have a large amount of cash at your disposal or can quickly save a significant amount each month, the most likely option for your property investment will be via a buy-to-let mortgage.
For existing investors looking to grow their portfolio, remortgaging may be a good option to consider with some very low buy-to-let remortgage rates available, dependent upon your personal circumstances.
Another option to consider as an investor with sufficient equity on your existing property is a ‘further advance’. This allows you to retain any existing mortgage deal whilst getting a further advance from your existing lender, albeit potentially on different terms.
Equity release schemes
A newer option growing in popularity is equity release schemes.
A buy to let equity loan helps raise the capital you need without increasing your monthly outgoings by taking cash that you have built up in the equity of your property. These schemes work by allowing landlords to increase their loan to value (LTV) ratio to invest in new property, whilst repaying the original loan along with a share of the property’s future value increase.
Crowdfunding is the new kid on the block as far as property investment is concerned, but is a great platform to consider if you’re looking for a slightly alternate (and remote) way of becoming a property investor.
It works by allowing you to put money into either loans to landlords, or directly into property companies and you then receive a share of the rent generated.
Seeking professional advice around your options and all the related risks is an essential next step in raising your capital.
PROPERTY DUE DILIGENCE
Property Due Diligence means finding out all you can about a prospective property. This should start with an RICS Homebuyer Report and if required, the more in-depth builders survey. Only by acquiring this comprehensive, expert information, can you make a fully informed decision about a property purchase.
Of course, due diligence shouldn’t end with a report. Prospective investors should also know the neighbourhood. Will it match your intended client base? For example, students, as a rule, don’t mind being near a busy road or areas with a lot of after-hours activity, provided there are good transport links and it is within relatively easy reach of the university and shops. Alternatively, if you are looking to let to families, your clients are more likely to be looking for a quieter area with schools and parks nearby.
Once you have found your dream investment property, it’s important to consider how you will manage your investment…
EFFECTIVE PROPERTY MANAGEMENT
Property management and effective property management are two quite different things!
Effective property management means more than simply arranging the occasional repair and collecting the rent. Rather it is about adopting a true marketing approach: treating tenants as valued customers to create a profitable long-term relationship that will establish your professional reputation as a landlord/property manager and ensure your portfolio goes from strength to strength.
Having a dedicated team in place that can be responsive and who know how to handle any situation that arises is key to providing an effective property management service.
Outsourcing your property management to an expert agency like Shape Property means all these needs are taken care of on your behalf, around the clock.
SECTION 24: WHAT EVERY LANDLORD SHOULD KNOW
You have probably heard Section 24 of The Finance (No. 2) Act 2015 – also known as the “tenant tax” – is due to be phased in over a four year period from April 2017.
This controversial move by the government created fears that landlords will be forced to sell up or pass on the costs of diminishing profits by raising rents.
But what does section 24 actually mean for private landlords?
The changes are quite complex, but will affect private landlords who hold mortgages i.e. those with ‘finance costs’.
Mortgage interest relief is set to be phased out and landlords will be taxed on revenue not profit. This means mortgage interest costs will no longer be deducted prior to income tax calculation, instead, all rental income will be considered personal income.
The amount of income tax relief that landlords can claim on residential property finance costs will be reduced to the basic rate of tax: 20%. This will affect landlords who pay the higher rate of income tax and as a result currently benefit from up to 45% of income tax relief.
The Treasury suggests that only 1 in 5 landlords will be affected and of those, many will not be forced into making any changes at all to how they operate. Be sure to watch our blog for future Section 24 news.
QUICK GUIDE: KEY ISSUES TO CONSIDER IF YOU WANT TO OPERATE AN HMO
HMO was certainly last year’s property buzzword. This term refers to a ‘House in Multiple Occupation’ where a property is rented out to 3 or more individuals not of the same household (i.e. family) with shared bathroom and kitchen facilities.
Providing quality, low-cost accommodation and offering a solution to those who cannot afford to rent a property individually, this rental framework holds strong appeal with students, but can also cater well for professional tenants or company lets.
Despite the strict regulations and the inevitable hard work involved in managing such a property, HMOs captured the attention of investors because of the high returns and reliable demand for such accommodation.
Do I Need A License?
The Housing Act 2004 introduced licensing for HMOs and sets out standards of management for this type of property.
Licensing is mandatory for all HMOs which have three or more storeys and are occupied by five or more persons, forming two or more households. Additional licensing may apply to HMOs falling outwith this remit and along with the licensing fees will vary according to your local council.
Licensing safeguards that occupants of an HMO are living in a safe and healthy setting.
What Kind Of Legislation do I need To Comply With?
Regulations aim to ensure your property is a safe and healthy environment and includes observations such as:
- Upholding an annual gas safety certificate
- Electrical appliances are regularly checked and maintained
- Smoke alarms are installed and regularly tested
- Terms of the tenancy are supplied to all occupants
Control of Legionella
Under the Control of Substances Hazardous to Health 1999 and Health & Safety at Work Act 1974, HMO owners are accountable for the control of legionella bacteria in water (both in cold and hot water systems). This involves a regular risk assessment taking place.
Deregulation Act 2015
The Deregulation Act 2015 heralded significant changes for the private rental industry and places new obligations (and penalties for failure to comply) upon landlords around termination of agreements and tenancy deposits. All landlords must be well informed of its implications and ensure they are meeting all requirements.
WHAT CAN I EXPECT IN TERMS OF HMO RUNNING COSTS?
Running costs will vary according to your property, but will likely include:
Other factors to consider when costing what you will charge should include mortgage payments, wear and tear and general upkeep costs.
Costs should be tax-deductible where incurred wholly and exclusive as a result of the property rental business.
WHAT HEALTH AND SAFETY CONCERNS SHOULD YOU BE THINKING ABOUT?
Space and overcrowding
Overcrowding and shortage of space in HMOs increases the risk of disharmony amongst occupants and causes a safety risk. Adequate space is needed to ensure occupants can easily access all facilities within the building and will ensure the household operates smoothly.
Thinking about the layout of your HMO, sleeping accommodation should afford sufficient privacy. The amount of useable space (space used for everyday activities) required per room will depend on whether there is also a communal living space.
The risk of fire and the damage a fire could cause is multiplied in an HMO dwelling and it is essential that measures are put in place to mitigate these risks. For instance, smoke and carbon monoxide detection meters. Doors capable of achieving full 30-minutes fire resistance are equally important in an HMO.
GETTING AN HMO MORTGAGE
When shopping for a buy-to-let mortgage for a House in Multiple Occupation, it is wise to seek expert advice. Although there are some universal factors, each lender has unique criteria for establishing whether a building is an HMO. Lending limits will also differ and lenders may only accept applications from property owners with an established track record.
In essence, if done well, an HMO really is not much different from operating single tenancies. Much of the rules and regulations apply in both cases and so it comes down to personal choice and of course consideration of market demand in your property’s location.
SO WHICH DO I NEED IN MY PORTFOLIO – SINGLE LET VS HMO?
Our quick answer is a combination of both ideally.
Our experience of the current marketplace is that those investors who own a varied portfolio comprising both tenancy framework types are seeing the best performance.
This may seem a somewhat daunting prospect if you have only operated one tenancy type to date. However, keep in mind that any tenancy – provided it is well-placed and operated efficiently – will result in a positive ROI.
A combination of single let and HMO properties adds value to your portfolio and most importantly protects you against the inevitable leaner times as either arena fluctuates.
Interested to learn more about making your portfolio work harder?