Surely I am not the only landlord worried about new EPC requirements?9:44 AM, 17th February 2021
About 2 weeks ago 126
Cashflow is simply defined as regular income. Positive cashflow is when income exceeds expenditure and you make a profit. So that’s important right?
Of course it’s important, but are you in complete control of your cashflow position?’ might be a better question. The truth is there are some things you can’t control. You can’t choose what interest rates will be for example. You may also get caught out with unexpected repairs, problem tenants and rental voids.
One thing you have more control over is your liquidity position. This is not to be mistaken with your equity position. Liquidity is easily accessible cash. Equity in property is the difference between the value and the mortgage. Equity is fully exposed to the ups and down of property values and accessibility to that equity is determined by lending criteria and the appetite of lenders to actually lend. The other way to access equity is to sell. However, the property market can be volatile and can not be controlled by an individual. Disposals also attract CGT (Capital Gains Tax) but that’s another story for another day.
All too often I come across property investors who are asset rich and cash poor. They work hard to manage their own portfolio’s, do their own tax returns and go about their business of living off rental income whilst giving a huge chunk of their profits away to the tax man. This needn’t be the case though!
Just the other day I heard of a story of two professional people who had also built a property portfolio. They are both high rate tax payers and their rental profits are circa £110,000 per annum. One of them now spends most of his working days managing the portfolio. They were seeking advice on restructuring using a complicated LLP (Limited Liability Partnership) structure that would doubtless have caused more problems than it solved in the longer term. They had been told that an LLP might reduce their tax bills. What they hadn’t been told though is what effects an LLP might have on their inheritance tax, capital gains tax and stamp duty position.
Their alternative was to restructure their affairs in a completely different way, i.e. sell half the equity in the properties to each other, and borrow to do this, release all possible equity from their portfolio and zero their rental profits. This might incur some stamp duty but there would be no CGT as they are married and an additional opportunity to mitigate IHT would also be created. In this example they would end up with over £2 million in the bank. They could then outsource the daily humdrum of accounting and property management. This has a cost but it also has a benefit.
With a couple of million cash in the bank they would be in a much better position to deal with any of the set backs they are not in control of, e.g. interest rate rises, void periods etc.
They could spend £200,000 of their capital per annum over the next 10 years on the lifestyle they really want. 10 years from now, inflation is likely to have increased their rental income so they will be back into making rental profits. If history continues to repeat itself then property values will have increased too, thus giving them an opportunity to repeat the exercise.
With the right strategy they would actually be in a position to retire now, outsource most of their property related hassles and enjoy life without the burden of tax.
The reality is that they’ve probably never met the right people to provide the right advice. Advice is usually provided piecemeal over a number of years and via a multitude of professional advisors and well intentioned friends. Accordingly, strategies are often cobbled together and tweaked when the next advisor comes along.
Sometimes it’s important to take a completely fresh look at your strategy.
To learn more about my property investment strategy please read the following posts in this order:
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