Time to get out?

by Readers Question

19:17 PM, 13th April 2017
About 3 years ago

Time to get out?

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Time to get out?

I’ve been an avid reader of Property 118 for a few years now and I’m frequently amazed at the wealth of information freely shared by its contributors. Long may it continue.

One question which surfaces from time to time asks “when do you start to enjoy what you’ve built up?” 

This usually refers to landlords who have spent years creating something which they hope will fund their chosen lifestyle and allow them to enjoy a comfortable retirement.

Well, after 22 years as a landlord, approaching my 63rd birthday, I find its now my turn to ask that question.

The raft of Central and Local Government initiatives over the past two years designed to discourage the Private Rental Sector has finally taken its toll. I thought the introduction of Section 24 was a step too far but the possibility of being asked to pay the missing duty on my tenants illicit tobacco sales just blew me away.

I’ve spent considerable time pondering the implications of selling up and I’ve asked myself numerous questions such as:

  • Would I miss the regular income?
  • Would I kick myself if property prices greatly increased after I sold up?
  • How much Capital Gains Tax would I be liable for?
  • Do I really want to give away 000’s of £’s to a Government who are doing their best to make my life so difficult?
  • Where would I invest the net proceeds of the sale?

I could probably fill a page with questions I have considered over the past 18 months, but I never seem to arrive at a definitive conclusion. There are always pluses and minuses for whatever decision I arrive at.

My current thinking is to reduce my portfolio to a level where the income derived keeps me in the 20% tax bracket. I think I could just about stomach that. But how do I go about this?

I read, so often, of these illusive Southern based investors who are keen to put their funds to work in the profitable North. I’m based just North of Manchester so how do I find them?

Where is the best place to advertise my properties?

Can I trust them?

Would they look after my tenants the way I do?

How do I ensure I won’t fall victim to some scam merchant?

If anyone can provide some insightful information, you would, as they say “make an old man very happy”.

Thanks

Tom



Comments

Anne Noon

11:23 AM, 14th April 2017
About 3 years ago

Dear Tom,

I understand fully where you are coming from as I am the same age. A few years ago, with the prospect of interest rates rising, I aimed to sell off my portfolio by the time I was 65, pay my CGT and invest the balance remaining, which would, at 3- 5% return on my investments, give me an excellent income for the rest of my life. Now if I did this, I would have to draw down my capital from Day 1, to enjoy my modest lifestyle. With Section 24 Rules coming in , I have spent the past 6 months angsting on what is the best thing to do for my situation, and had to consider all the issues you have had to do. I think that the people who are having most problems with the Section 24 are those who have a well-paid job to start off with, but my rental portfolio is my only income.

Four years ago , my Financial advisor was suggesting I sell my least profitable house and he could get me an11% return. On my last review with him, he didn't even suggest me doing so - as I would have to have a 4 million pound pension pot to give me the same income as I am getting - and congratulated me on my 40 year strategy to provide for my retirement. So I will share with you a few strategies I have considered and maybe that will help.
1) I am not sure about incorporation as my understanding is that you will have to pay CGT on the market value on the day of the transfer to the Limited Company. You would also have to pay 6% Stamp Duty as I am not sure that the common person between the two entities, where you only pay stamp duty on the extra over and above what the input cost of the original cost of the properties is still available. Also the Arrangement fees and interest rates are higher for Ltd Companies.
2)You may be on a very low rate for your existing loans - one of mine ( for a limited company) is 0.75% above base for the term - 12 years of which is remaining. So I am hanging on to that one and not remortgaging.
3) You may consider remortgaging one or two of your properties to release capital for you to enable you to enjoy your lifestyle. If you are a 20% tax payer, then this will not take you into the 40% tax bracket. You will have to pay an arrangement fee, but if it's on a five-year fix, then these will not be too onerous - pay the arrangement fee up front and you can put it against tax in the first year. Obviously, you will have to consider, as I recently did, whether the loss of a lower rate for the term can be balanced against the increased cost of the mortgage (again if you can keep in the 20% range, then this should not impact on your tax payments.)
4) If you do decide to sell everything, give notice to your tenants, and pay your tax, then you would have to support the mortgage whilst the sale goes through - in some areas this may take years , so a phased sale of your properties would be more appropriate. I have already done this with two properties and regretted it, due to the tax I had to pay, which didn't release as much money as I wanted two . (One of those would now be grossing me £30000 plus per year and worth £150000 more, so I could have remortgaged it to reflect the increased value, the other, the rent went up by 50% during the course of the sale and the vale up by 10%, so I could have released £50,000 by a further Advance)
5) If you are in the lucky position of having sold your properties, you are then in the position of having to invest the money across several business entities to protect your cash. These accounts have to be managed and monitored. Some of the investment funds you may want to put it into will invest in the Corporate housing schemes so favoured by our Masters, and you will not get the same return as if you managed it yourself.
6) If you are so fed up with managing your properties yourself (and its a real pain, it drives me mad at times) , you can put it in with a letting agent, and forgo some of your profit - the fees are a cost against the rent), you also have to trust the agent that they do not overcharge you for their services and that any repairs are reasonable. I realise I will have to carry on for a few years yet, but know that option is possible.
7) So in consideration of all these points, I have applied one or two of them to my (small) portfolio and decided that If I did want to do some great adventure travelling around the world I would rent my house out and put my portfolio into the hands of agents - my one in St Albans is brilliant, but not so sure about other areas, and then take over the management when I return.

I hope that you will find this helpful

Kind regards

Anne

Mark Alexander

11:24 AM, 14th April 2017
About 3 years ago

Reply to the comment left by "dp1 Django" at "14/04/2017 - 11:19":

That's going to be an incredibly interesting trip.

The event was sold out within a matter of days but last I heard Ranjan was hoping to get a bigger room to expand from 230 seats to 350. Apperantly there are hundreds of people still wanting tickets.

I'm flying in from Malta that day and back to Malta first thing the next day with Mark Smith for a big client meeting.

This time last year my plan was to take life easier. i handed over control of Property118 to Neil Patterson but since then I couldn't have been busier helping landlords to restructure. I'm loving it 🙂
.

Mark Alexander

11:30 AM, 14th April 2017
About 3 years ago

Reply to the comment left by "Anne Noon" at "14/04/2017 - 11:22":

Hi Anne

Please read our Landlord Tax Tutorials, which are available as free PDF downloads, to lean about the reliefs which exist in legislation to enable landlords to incorporate without incurring CGT and Stamp Duty.

See https://www.property118.com/Tax118

I am also considering the selling copies of the Powerpoint presentation that Mark Smith and I will be delivering at the Baker Street Property Meet on 26th April. Watch this space in early May.
.

Anne Noon

11:32 AM, 14th April 2017
About 3 years ago

Reply to the comment left by "Mark Alexander" at "14/04/2017 - 11:30":

Thanks Mark , I will do so.

Anne

JohnCaversham

12:08 PM, 14th April 2017
About 3 years ago

Reply to the comment left by "Mark Alexander" at "14/04/2017 - 11:30":

Hi Mark, yes please do consider putting the presentation up for sale-i can't make the London date assuming i could get a ticket anyway, but i would be happy to buy a copy..

Many thanks John M.

Howard Reuben CeMap CeRER

13:26 PM, 14th April 2017
About 3 years ago

What interesting times we live in and it's absolutely horses for courses.

As a specialist BTL Broker with 3,500 Clients and hundreds of millions of pounds of mortgages arranged over the years, I can tell you that me and my Team are as busy as ever helping landlords who are on the hunt to buy more and more properties. Not all in a Ltd Company structure either.

Our remortgage business has gone through the roof (BTL rates now less than 2% on certain deals) as investors try to compensate for some of the extra tax burden by reducing their underlying costs.

Many people are fed up of BTL and are indeed selling up, but many others tell me they still very much enjoy it and continue to build their portfolios and businesses.

Mortgage borrowing will become even harder for people who own 4 or more properties from September/October onwards as the latest PRA portfolio underwriting rules kick in, but we know the lenders who a) will still stick to their own (more flexible) guidelines and b) who are not governed or regulated by the PRA and who are very much property investor focused lenders here in the UK.

In short, as long as the right 'adviser team' is consulted (tax adviser, business planner, legal consultant, mortgage broker), property investment can still be very much an enjoyable and long term profitable venture.

The need for homes isn't going away, why should we as landlords go away?

Mark Alexander

14:02 PM, 14th April 2017
About 3 years ago

Reply to the comment left by "Howard Reuben" at "14/04/2017 - 13:26":

You and Dianne have a large property portfolio Howard. May I ask what provisions you've made to mitigate the effects of s24 or are you waiting for the Baker Street Property Meet before you commit?
.

H B

14:22 PM, 14th April 2017
About 3 years ago

Reply to the comment left by "Mark Alexander" at "14/04/2017 - 11:30":

Why not sell it as an ebook in Amazon as well? That will give you access to a much larger market.

Mark Alexander

14:24 PM, 14th April 2017
About 3 years ago

Reply to the comment left by "H B" at "14/04/2017 - 14:22":

I wouldn't know how. Do you have a link I could read to get me started?
.

Jonathan Clarke

3:35 AM, 15th April 2017
About 3 years ago

Tom

You ask

``Would I kick myself if property prices greatly increased after I sold up?``

That answer would be surely yes. Imagine having to drive by one of your sold up properties in 2032 and seeing it on the market maybe 100% more than you sold it for today . It would be a cruel slow torture for you . That`s my money you would say to yourself - why on earth did I sell. . I worked so hard to buy it and nurture it but one day I just threw it away on a whim. I`m so mad with myself

And the reason boils down to the fact that you probably were just tired in 2017 and some young budding investor who wasn`t tired bought it

The hard work has been done though. You`ve built a portfolio - Dont sell it

Just deal with the tiredness issue

If you were 23 / 33/ 43 / 53 you wouldn`t be thinking like you are

If you believe as I do that in 15 - 20 years prices will be double what they are today then whatever this government has thrown at us it will be the case with capital growth that your wealth will still double. And capital growth is truly passive. You don`t have to lift a finger to get it

What is hard work is the day to day management. So lets deal with that. Get shot of that mental burden. The energy levels at 63 are simply not the same as at 23. The mind is still active but the body slows so you want a rest and you deserve one

I can quite happily survive on 20% less income than I currently earn now through my own portfolio. I largely self manage but when the time comes I will hand over to a letting agent or more likely a personal property manager and lose 10% of my income. The other 10% lost will be because ( in my arrogant mind ) they wont do it as well as me. I will get overcharged on maintenance and the voids will be longer and they wont chase some rents like i do .

But that`s ok. I dont want to spend my days stressing about their poor management. I just want to accept it will happen and factor it in then I wont be disappointed . so I will treat that extra 10% as a sunk cost. If they surprise me and dont mess up then that will be my bonus - but i wont expect a bonus

I will compartmentalise 20% loss of my income as the price for my freedom

Happiness is a clear horizon.

Prices I believe will double in 15 - 20 years

So in broad crude terms

Say your portfolio in 2017 is a million and your income is 100K......
Then imagine 2032 with a two million portfolio and an income of 80K - and no stress

Just work around your current dilemma - but dont sell.
.

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