The best property investing strategy for 2020

by Simon Zutshi

0:01 AM, 6th January 2020
About 7 months ago

The best property investing strategy for 2020

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The best property investing strategy for 2020

Not only is it the start of a new year, but a new Decade, and in a few years time, we will look back at 2020 and realise that it was probably one of the best investing opportunities of this Decade. The question is, are you ready for 2020?

In this first article for 2020, I want to explain why this month (January) in particular is so important and why it will create a huge opportunity for you if you are ready for it. Unfortunately, many people will miss out on this opportunity and I don’t want that to be the case for you, so please make sure you read this article carefully to really understand the opportunity in front of you.

By the end of this month, everyone who is a landlord will need to have submitted their personal tax return for the 2018-19 tax year, and paid any tax that is due from the rental income on their property. This will be the second year that people will see and feel the affect of Section 24, which came into paly in April 2017. As I am sure you know, the Government decided that they wanted to change the way that property investors are taxed. What this means, is that if you own property in your own name (which most long term landlords do) and you are a higher rate tax payer (which most people in property are), then you will be paying more tax on your rental income. If your property is owned in a Ltd Company, instead of your own name, then you will not be effected by Section 24, and if you are a lower rate tax payer, then there is no impact, although some property investors will slip from a lower rate tax payer, to a higher rate tax payer, because of the way that rental profit is now calculated.

So what does this mean for you, and why is it the opportunity of the Decade?

Every month my organisation run 50+ local property investors network meetings all over the UK, and so I am in a unique position to have my ear to the ground in 50 locations around the UK to hear exactly what is going on with investors at a grass roots level. I can tell you for an absolute fact, that in 2019 we had far more long term landlords coming to our pin meetings than ever before, because they are looking to sell some, or all of their portfolio, and retire early due to the impact that Section 24 will have on them and their income.

In any market you will also have new investors entering the market and some people retiring and exiting the market, but right now there are more landlords than ever thinking about selling up earlier than they had initially planned, because they don’t want ever decreasing returns from their property portfolio.

January 2019 was the first time that many landlords realised the true impact of Section 24, when they saw the amount of tax they pay go up, and their accountant will have informed then that things are only going to get worse as the true effect of Section 24 is phased in over a 4-year period. January 2020 will be the second year that people see the effect of Section 24 starting to bite more into profits. This will be the catalyst for even more landlords to seek a solution to this problem and for some of those 1.75m landlords in the UK, I truly believe that early retirement may be the preferred choice for them, especially as so many of them will have seen tremendous capital growth since they first started investing into property.

Whilst Section 24 is obviously very bad news for many landlords, there is always a silver lining in bad news, if you look close enough. For those property investors who want to expand their portfolio and acquire more property, 2020 will be a fantastic opportunity for a number of reasons.

First of all, we will see properties become available for purchase in previously locked down Article 4 areas. In these Article 4 areas, permitted development rights have been removed, so you have to get planning permission to convert a normal house into an HMO (with 3 or more unrelated tenants). However, if you do apply for planning in an Article 4 area, it will be automatically rejected because the local council does not want more HMO’s. You can of course appeal, and you might get planning permission if it meets all of the criteria, but it is very difficult. However, if you buy an existing HMO in an Article 4 Area, you don’t need to get planning permission. Instead you can just apply for a certificate of lawfulness as long as the property was used and an HMO before Article 4 was introduced in that area and has been continuously used as an HMO.

Prior to the introduction of Section 24, in Article 4 Areas, landlords were quite happy keeping their property, knowing that there would not be too much new competition. But now some of these landlords are considering selling, which means that you can get access into theses effectively locked down areas.

The main reason why 2020 will be such a great time to acquire more property is because of the way in which you will be able to add to your cash flow and property portfolio.  This is because those landlords who decide to retire earlier than planned have another problem. The main problem is that if they sell all of their properties in one go, they will have to pay a lot of Capital Gains Tax (CGT) on the profit from the sale. The best solution for anyone wanting to sell a number of properties is to phase the sale over a number of years so that they can claim their personal CGT allowance and so reduce the amount of tax they will pay. But this creates another problem. The landlord will have to hang around until they sell their last property, whereas they might rather be sat on a beach instead enjoying their retirement.

The good news for you is that there a solution which you can provide these landlords so that they get to sell all of their property over a number of years, minimise the tax, and not have to hang around until the last one is sold. They can do this with the help of an investor like you, who can use Purchase Lease Options (PLOs) to take over the properties and manage them for the owners, with a schedule to buy them over a number of years. This means you get cash flow and potential equity growth on property that you don’t own, whilst providing a fantastic solution to these retiring landlords.  You don’t need to have large desposits, or even be able to get mortgages to do this.

The only problem here is the PLOs are a massively misunderstood strategy. Most people who think they know about PLO’s don’t really know about PLO’s, otherwise they would have done a lot more of them by now. One of the main problems here is that PLO’s only work in certain circumstances, namely when the seller does not need the money now and they have what we call favourable mortgage conditions. Luckily for you, Landlords normally meet both of these criteria, which is why the strategy works so well for them.

Just in case you don’t know, let me give you the basics about PLO’s. This is where you enter into a legally binding agreement with a property owner, whereby you have the right (but not the obligation) to purchase their property, for a fixed price (The Option Price) agreed upfront, within a certain time period (The Option Period), and in the meantime you pay them a monthly payment (Monthly Option Fee), for which you are entitled to use the property.

There is also a consideration (Upfront Option fee) required to make this a legally binding agreement. This upfront fee can be anything from as little as £1, but can also be several thousand pounds in some circumstances. During the Option Period you look after the property as if it were your own, and take care of all of the maintenance.  For example, you might have the right to buy a property, for the current market value of £200k, anytime within the next 5 years. In the meantime, you pay the owner a guaranteed monthly payment and take care of all the bills, repairs and maintenance. You could then rent this property out in a way to generate a much higher income, such as an HMO or Serviced Accommodation, and you make a profit on the different between the rent you pay to the owner and the rent you achieve, less all the bills. This is cash flow for a property that you don’t own.

The main benefit for you as the investor is that you don’t need to put down the typical 25% deposit that you would need if you actually purchased the property. You don’t need to get a mortgage on the property, because you don’t actually own it. You can benefit from positive cash flow during the option period and potential capital growth of the property over the option period. If you value of the property rises from say £200k now, to £250k in five years time, you have the right to purchase it if you want, at the agreed option price of £200k even though it is worth £250k.

How do you find these landlords? Well you can always attend your local property investors network (pin) meeting and ask for referral of landlords who may want to retire, or you can write direct to landlords using your local council list of licensed HMO owners.

I do hope you can see the incredible opportunity you have right now by helping these retiring landlords finding a win win solution

Invest with knowledge, invest with skill

Simon Zutshi, Author of Property magic and Founder of property investors network

FURTHER LEARNING RESOURCES

I will be holding some complementary live 90-minute online Master Classes all about PLO’s and this incredible investing opportunity of the Decade, during the first two weeks of January. Please Click Here to register for them.



Comments

David Atkins

8:01 AM, 6th January 2020
About 7 months ago

At the moment I’m finding HMO owners are asking far higher than bricks n mortar values for their cash machines. Do you think owners will start to offload reducing prices?

JC

14:01 PM, 6th January 2020
About 7 months ago

For lease options, unless the current owner is prepared to take a big profit cut (ie. below 30 to 40% market rent) by setting a very low monthly option fee, surely when you take into account maintenance, estate agent, contract/lawyer fees, voids, possibly even sourcing fees etc... it is unlikely it will cashflow positively in the first few years. Hoping for a capital appreciation is just gambling/speculation.

Do you have real life examples of say your last 5 purchase lease option deals?

Mark Alexander

16:30 PM, 7th January 2020
About 7 months ago

Until I spoke to Simon earlier today I couldn't understand why any landlord who is looking to sell would even consider a PLO.

I laid out all of my objections and Simon provided logical responses to every single one of them.

I explained to Simon that I suspect just as many Property118 readers fall into the category of possible sellers of property as those who want to expand. He agreed, and on that basis, his next article will explain why anybody who is thinking about selling their properties should also consider PLO's as an option.

JC

16:35 PM, 7th January 2020
About 7 months ago

Reply to the comment left by Mark Alexander at 07/01/2020 - 16:30
Hi Mark
Did you go into the figures on PLO?
Does not seem feasible to me unless you are prepared to run a negative cashflow in the hope for a capital appreciation.

Mark Alexander

17:14 PM, 7th January 2020
About 7 months ago

Reply to the comment left by Jun at 07/01/2020 - 16:35
Only in general, it was more the principles I was interested in at this stage.

Let’s await Simon’s next article. Maybe we will do a webinar too if there is enough interest

Regina Baidoo

0:46 AM, 13th January 2020
About 7 months ago

This seems a workable sensible solution if allowable.

Hypothetical question: if I’m a current landlord with property in my own name, assuming I set up a New Ltd Co with the sole purpose of PLO arrangement. If the arrangements for the monthly lease is set to a minimal amount, such as the same as the monthly mortgage payments level or a nominal £1 monthly lease, then the NewCo PLO rent the property at the market rate and paying corporation tax, I would think this will mean my position prior to the PLO means less income, therefore lower tax although still pay the administrative costs as this will not change.

However, I will now have further administrative costs with the PLO but the admin costs are tax allowable for the Ltd Co and I’m paying corporation tax rate on the rental income and relief on the cost of the monthly lease by Ltd Co instead of a 40% personal tax rate on rental income with no mortgage relief.

Just from an initial front loaded costs perspective, I would imagine PLO to be better than exiting now as a landlord and paying 18% or 28% CGT, then having to find a further 25% deposit, additional stamp duty costs and further legal costs to reinvest in a Ltd Co. From Simon’s article, it suggests this is a possibility but I’m not aware of any limitations to put such a structure in place if I already own the asset and I’m still a shareholder in the New Ltd Co that is the other party to the PLO.

Does anyone know if this is a possibility?

I just can’t get my head around who or how the ridiculous current situation for Landlords came about under S24. It seems the harder one works to be responsible and invest for one’s future retirement, someone else thinks one should be punished for being responsible. It sends the wrong message and suggest we should all be reckless and not invest for our old age and wait for welfare. Working and being responsible should pay. We already paid tax on the earnings that we used to make the initial property investment, we also pay taxes on any income we make and pay tax when we sell as well as when we die!!! We’’re already being killed off with this S24 regime which suggests we might as well be reckless and not save anything and rely on welfare at our old age, although as there’s no welfare pot and no landlords to pay some taxes into it, everyone looses including HMRC. I really wish there’d be a rethink of this strategy by current Administration as some are investing abroad now such as France where the system even pay some of the taxes back to the Purchaser - I don’t know all the facts here though. This strategy is disastrous for the UK market in my opinion unless there’s a rethink in the budget.

Small investors being prudent should not be treated penalised in this way whilst REITs are off the hook. I think I recall reading something here that the initiator or advisor of this was then made a senior person at one of the larger REITs, clearly he would get a decent pension there but is there a connection here???

Mark Alexander

8:12 AM, 13th January 2020
About 7 months ago

Reply to the comment left by Regina Baidoo at 13/01/2020 - 00:46
Hi Regina

I am sorry to inform you that there is no tax benefit to renting property to a company in which you or a connected party have a vested interest. Any income stream transferred to the company and resultant profits would be taxed as if the company did not exist, i.e. at the marginal tax rate of the property owner. The legislation in this regards is the Finance Act 2009 schedule 25 "transfer of Income Streams" legislation, a link to which I have provided below.

http://www.legislation.gov.uk/ukpga/2009/10/schedule/25

If the Section 24 restrictions on finance cost relief are causing you a problem then I strongly suggest you book a tax planning consultation with the Property118 Landlord Tax Planning Team via https://www.property118.com/tax/

We look forward to being of assistance.


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