Structuring BTL portfolio business?

by Readers Question

4 weeks ago

Structuring BTL portfolio business?

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Structuring BTL portfolio business?

I am taking the plunge into BTL and planning to build a property portfolio over 8 years. I would like to get general opinions and people with more experience about my business plan going forward.

Background:-

1. 2 people partnership A and B (husband & wife)
2. A has no salary, but will be running the property business full time
3. B salary PAYE £100,000 gross
4. Purchasing 15 single lets BTL over 8 years building up portfolio, leverage at 75% with equity release

Current suggested plan:-

1. Purchasing BTLs with Declaration of Trust / Tenancy in common A partner 100% and B partner 0% till partner A reaches rental income of £50,000 by 2020/21 (to stay under higher tax bracket), follow by purchase under limited company thereafter

2. Also all the property managed by a limited company (owned by A & B) charging 35% rental income for full management, helping to organise mortgages and remortgages/equity release, sourcing property deals

Are my plans work-able? All advice and feedback welcomed.

JC



Comments

Neil Patterson

4 weeks ago

Hi JC and hold up there,

HMRC will not allow you to hide rental profit in a management company by charging 35%. They will only allow the maximum of what is reasonable in the area so in London that might be 15% max.

You need an accountant to start with that understands property investors and works with P118 readers. Please see the members profile of Neil Barlow of Pacif Ltd >> https://www.property118.com/member/?id=452

Also around 80% of all new BTL purchases are in the name of a limited company. Please start with our Tax Planning page >> https://www.property118.com/tax/

And also do a P118 article search and type in the word "Newbie" as this is a recurring thread for new aspiring property owners.
Article search >> https://www.property118.com/?s=&cat=-1

J C

4 weeks ago

Reply to the comment left by Neil Patterson at 27/06/2018 - 10:37
I was informed by my accountant that, if it is purely for rental management, then it is limited to 15% rental income. However, if the company also provide other services, such as sourcing, helping manage the portfolio such as helping in coordinating mortgage brokers for mortgages / remortgages, point of contact for conveyance / mortgage broker etc... more can be charged. As the company not only fully manage both our properties, but will also manage other joint venture property purchase.

We just thought it would be more 'tidy' and credible to have a limited company running all the work to allow investors (both of us and JV partners) to keep a hands off approach.

Would this not work?

Sunny K

3 weeks ago

Hi JC,

Your strategy is sound.

We have followed similar strategy over the last 6 years. A few thoughts:
1. We bought our first four properties in personal name in London over the first 3 years. This keeps the net rental return (gross rental income - running cost) below 50k mark for partner A in your example for us. All the properties have 60% LTV at present due lower yield, affordability, portfolio landlord criteria etc. It's very unlikely to achieve 75% LTV in personal name mortgage in today's market especially in London.
2. We followed up the next 3 properties purchase in SPV LTD company where it is easier to borrow to 75% LTV. However lending rates are higher and yield are lower which makes ROI ((Gross rental return- running cost-mortgage)/(Purchase price + Purchase expense -loan amount))around 3%. We are now looking to add value by refurb, HMO, multi-unit conversion to make a good ROI. Also note our rate of acquiring properties have lowered due to higher capital growth in London.
3. I don't understand the rational of having a managing LTD company. You will pay corporation tax on any profits which will be similar to income tax in personal name properties if net rental return is less than 50k and is similar to SPV LTD company. If you factor in other hassles e.g. bank account fees, returns, VAT etc you might end up losing rather than saving money.
4. I don't foresee us buying 8 properties in next two years and hence we will not achieve 15 properties as per your strategy. In my opinion, rather than setting goal of property number, you should set targets on net property profit which is sum of weighted net rental profit (net rental return- mortgage expense) and capital growth. We weight net rental profit higher as its easier to predict/achieve and less capital growth as its more speculative. This goal setting might mean you achieve better net property profit by having 5 properties rather than 15.

Good Luck.

Sunny

J C

3 weeks ago

Reply to the comment left by Sunny K at 01/07/2018 - 09:24Thanks for the reply Sunny.
The Ltd is to allow 4 things:-
1) private pension for partner A (No salary)
2) incooperation if needed in the future
3) more credible and 'tidy' with accounts when help managing other JV investments
4) build up capital to be loaned to another SPV Ltd for solely BTL in the future
As for the yield, capital growth and building of the portfolio, I am working on properties needing outlays in the region of £25k to £35k, yielding 8% to 12%, and last 5 years' capital growth of about at least 7%. Hence the property portfolio build up over 8 years with capital release. Whether 15 properties will materialise is very much depending on the actual market growth, I used previous records for my growth estimation. Portfolio of about 3 million at 8 years is the aim.
Thanks for you feedback and opinion.

Sunny K

3 weeks ago

Reply to the comment left by J C at 01/07/2018 - 09:59
1) private pension for partner A (No salary): Okay. There are other ways e.g. Lifetime ISA.
2) incooperation if needed in the future: Not sure if only some of your properties are in personal name and if you think you might need incorporation in future, why do you go in LTD from start.
3) more credible and 'tidy' with accounts when help managing other JV investments: Most people have a separate bank account and record keeping for properties. I don't know why you would go to hassle of creating a company for that.
4) build up capital to be loaned to another SPV Ltd for solely BTL in the future: I think investing as director's loan is better than loaning company to company.
5) As for the yield, capital growth and building of the portfolio, I am working on properties needing outlays in the region of £25k to £35k, yielding 8% to 12%, and last 5 years' capital growth of about at least 7%. Hence the property portfolio build up over 8 years with capital release. Whether 15 properties will materialise is very much depending on the actual market growth, I used previous records for my growth estimation. Portfolio of about 3 million at 8 years is the aim: Very ambitious. Rental and capital growth are counterbalancing and to achieve both will be fantastic.

J C

3 weeks ago

Reply to the comment left by Sunny K at 01/07/2018 - 10:37
Hi Sunny

Point taken and well made. I will go back to my spreadsheet and calculator to see whether it is worth forming a limited company. Thanks for your feedback.

Any other opinion or feedback most welcomed.

J C

3 weeks ago

Reply to the comment left by Neil Patterson at 27/06/2018 - 10:37Hi Neil
When you say 80% form Ltd for property investment, from the points made above, I am sure my situation is not that unique and not going down the limited company route works better for me.
Regards
JC

Sunny K

3 weeks ago

Reply to the comment left by J C at 01/07/2018 - 20:44
Hi JC,

The 80% figure comes from mortgage broker data which are well publish. I believe the personal vs limited company calculation is quite close even for high rate tax payment and once should do all the sum quite diligently.
To give an example: Let say you have net rental return of 100 pounds PCM. For personal names, mortgage interest is 50 pounds and if you are a high rate tax payer you will have 20 pounds profit (100 - 40(40% tax)+10 (mortgage interest relief)-50). For limited company, mortgage interest will be higher (60 pounds) and net profit will be 27 pounds (100-60-8 (corporation tax)-5 (bank account, return etc)). So not a huge difference. The main advantage is that you will be able to borrow 75% LTV in limited company rather than personal name or if you are a large portfolio landlord with high yielding low value properties. I would highly recommended you to start in personal name as you can use no/basic rate tax allowance of partner A. Also for personal outlay of 30k, you will able to buy 100 k property and hence will require 30 properties to achieve 3 mil portfolio size.


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