Section 24 is something that all Landlords should be aware of as it could have huge tax implications. If you are a higher rate taxpayer, you will pay more tax. In some cases the 40% tax that is now charged will reduce profits by 50%.
Prior to this inconvenient piece of legislation, landlords were only taxed on profits gained from rental income. Now the tax is based on the entire rental income. So you receive £500 pcm, you deduct your expenses and you get taxed on the remaining sum.
After expenses this £500 pcm could drop to £400 pcm. So let us say you are a higher rate taxpayer, you will be charged 40% of £400, which is £160. So after expenses and tax you are left with £240 of the rent money. If for example your mortgage is £350, you are out of pocket by £110.
Section 24 has been introduced gradually over the last few years but the new measures have fully taken effect from April 2020. Many landlords will either find a way to become more tax efficient (buy properties via Limited Company) or will want to sell up.
I am one of the landlords who have decided to become tax efficient and start buying through a Limited company.
A big problem for many landlords, who are looking to grow their portfolio, is that eventually they are likely to run out of money. Even with a modest purchase price of £80,000, you are still looking at around £25,000. This takes into account the 25% deposit, legal fees (stamp duty etc) and any remedial works that are required.
You might be lucky and have £50,000 ready to put down. Not many potential landlords will be able to reach into their back pocket and produce £25,000 time and time again.
That is 2 rentals and you are stopped in your tracks. If you are serious about growing your portfolio, this is the point when it is time to get creative.
A couple of days ago I watched my very 1st webinar. A well-known property investor called Simon Zutshi was the man delivering the free training and I took some good points out of it. I knew there would be a sales pitch at the end but I managed to resist the mastermind training. The training worth £36,000 (or there about) that you can get right now for £1500 plus VAT.
If you buy the training in the next 10 minutes you will receive Si’s additional free expert/mastermind training, worth £999 plus VAT, for free. Now I enjoyed the webinar (I like anything that’s free) and Si comes across really well. His book (Property Magic) is one of the better property books as well if that is what you are into.
But please, please don’t spoil the webinar with some horrendous sales pitch at the end. Maybe I am being too cynical but I honestly think you can learn what you need to know from free sources (or relatively cheap) like webinars, you tube videos, podcasts, blogs and a property book or two.
Get out there and mix with property investors at network events. Please don’t get pulled into spending thousands of pounds on training that you can get for free. It would probably be worth it if you got one-on-one training with Si but it isn’t happening.
Anyway I’ll give you a brief summary of what I learned about a creative property buying strategy.
If you are wanting to buy rental properties but have ran out of money, or have little capital to start with, a potential option is an option.
The two option arrangements discussed where Purchase Option (PO) and Purchase Lease Option (PLO). The PO is when you are looking to purchase Buy-to-Lets and the PLO is when you are looking to make more cashflow and go with a HMO or Serviced Accommodation.
As my preferred strategy is currently single buy-to-let’s I was only really listening to the PO information.
PO Main points
- Right to buy but no obligation to purchase
- Agree to buy within a certain time – usually 3 or 5 years but it can be anytime really
- Again there is no obligation to purchase and you can pass it on to another investor at the end of the agreed time period
- The agreed price is fixed
- The Buyer benefits from potential cash flow if they can find a tenant – if the property does not have a tenant for a period the buyer is responsible for the mortgage and council tax so there is an element of risk
Benefits for Buyer
- Property management experience – as you take over the management on the agreed start date
- Cash flow
- Potential equity growth
- No large deposits at this stage – you can save for the deposit and utilize the cashflow to help boost the savings
Benefits for Seller
- Less hassle
- Full asking price – not likely under current market conditions
- If you are looking to sell a portfolio or part of a portfolio the sales can be scheduled to reduce Capital Gains Tax (CGT)
This isn’t for everyone. It isn’t for a landlord looking to sell his portfolio and needs the money now. It is for the Landlord who doesn’t need the money and wants less hassle. He or she might want to retire to Spain and live a stress less life in the Sun.
Si is adamant that there is a big property crash around the corner because of the after effects of COVID-19. The Bank of England is apparently predicting a 16% fall in prices. With this in mind, the PO might be worth considering for Landlords who have simply had enough and are now looking for a suitable exit strategy.
Seen as though I want to do property full time, I am going to attempt to speak with landlords who have had enough. I am ready to manage a large portfolio and this strategy might be my way to get into property full time.
One thing I would add is that you will need a specialist solicitor and an estate agent who is clued up with regards to PO deals. This is all explained in the £1500 training that Si was offering but I will figure it out for less than £1500.
If I manage to do a PO deal in the next few months, I will write a blog about it and let anyone know the relevant information for free. If you follow me on this blog, I will also answer any questions you may have on the subject or any other property subject I can help with.
Latest property news
On a separate (positive) note for anyone interested in buying rentals, Rishi Sunak has implemented a stamp duty ‘holiday’. If I go and buy my 5th rental for £80,000 I won’t have to pay 3% on stamp duty. This will save me £2400 and this could go towards my next rental purchase or pay the legals for my 1st PO.
This incentive for buyers in the UK will remain in-place until March 31st, 2021.
Through word of mouth and social media, I am going to put it out there that I am willing to speak to landlords who are looking for a suitable exit strategy. For a deal that is structured to suit both parties.
So if you are reading this blog and know a landlord, mention this blog and see if I can help them out. You might be helping me out and a friend out or even a friend of a friend.
And as I stumble my way through PO deals (if I do any), the added bonus is that all my mistakes and lessons learned will be passed on via DUFF MONEY.