Jo Grimwood: Hello and welcome. I’m Jo Grimwood. This is Property Question Time, the show where you get to pose your questions to our panel of property experts. And today I’m joined with Simon Zutshi who is an author, speaker and founder of PIN and also Crowd Property. Welcome to you, Simon.
Simon Zutshi: Hello.
Jo Grimwood: We also have Paul Mahoney who is the MD of Nova Financial Group. Welcome to you, Paul.
Paul Mahoney: Hello.
Jo Grimwood: Great. And Evan Maindonald, founder and CEO of Melt Homes, which is a property development and investment company.
Welcome to you gentleman. Really great questions for you today actually from some of our viewers. So I’m actually going to start with a question for you, Paul. “I am looking at my options to moving house to be in the catchment area of a secondary school. I own my home, mortgage-free and another buy-to-let property with a large mortgage on it. I’m considering selling the buy-to-let property and taking out a new buy-to-let mortgage on my present home to pay for the new home. As much as I’m aware, if I was to sell my home and buy a new one or even rent a home for a year or two and then buy a new home, I wouldn’t be liable for the additional 3% SDLT, but I can’t work out if I’d be liable for it if I were to sell my existing buy-to-let, but keep ownership of my home and turn it into a buy-to-let.”
Paul Mahoney: Okay. The way that the 3% stamp duty premium rules are written, is it doesn’t matter whether it’s a buy-to-let or a home. It’s any second or subsequent purchase. So even if they were to sell the buy-to-let and turn their current home into a buy-to-let, in buying that second property, acquiring that second property, they would be liable for the extra 3%. So their understanding is a little bit wrong there because they would pay the 3% on the subsequent purchase.
There’s various things they could look at doing there. Assuming they really want to keep their current home and that current home makes sense as a buy-to-let, as a property investment as opposed to the place that they bought to live in, they could move that into a limited company. They would pay 3% on that movement or change of ownership but not on the subsequent purchase. That would only really make sense if the subsequent purchase was at a higher value because then they’d be saving themselves on that one as opposed to the one that they own.
They could take a buy-to-let mortgage on their existing home to allow them to buy the new property. Given they own that debt-free currently, they could do that before or after moving it into a company, if that’s what they were going to do, to release the funds. In doing so, they would be an accidental landlord in the eyes of lenders, so that does limit them a little bit or it makes the mortgage what’s considered a consumer buy-to-let, and so there’s more boxes to tick, less products available. So that’s something worth considering as well.
I suppose as with a lot of the questions that we get on this show, we’re presented with limited information, so what’s important is for them to have a very clear picture of what all the information is and speak with a professional who can advise them on what all of their options are and what works best for what they’re trying to achieve.
Jo Grimwood: So do your research. Very important. Okay. Simon, a question for you. “What would be the best way to invest £100,000 to create regular income?”
Simon Zutshi: Okay, so I guess whenever you invest, “Well what am I trying to achieve?” And there’s sometimes there’s a bit of a trade-off between capital growth and income. Personally, I like to get income from property because although I believe prices will go up in the future, there’s no guarantee it’s going to happen. So any investment you buy, it’s got to make cashflow. With £100,000, depending on where they invest in a property, I’d probably buy a couple of investment properties, splitting that £100,000 into at least two, maybe even three, deposits depending on the purchase price and buying properties where I get a really good cashflow.
So a couple of strategies in particular that you can use. So one of them is Houses of Multiple Occupation where you have a house where you rent out individual rooms. People like students, young professionals, working people, who can’t afford to live in their own apartment or studio, and sometimes they don’t want to live in a studio. They want to live with a bit of a community. If you’re a young graduate and you move to a new city and don’t know anyone, it might be quite nice to move into a house of people of a similar age, you’ve got an instant set of friends to go to the pub with. So there’s really good demand for this kind of accommodation.
However, lots of landlords are starting to do it and there is a little bit of over-supply in certain areas. So you always want to do your research as ever and actually going for slightly higher end properties… better quality, slightly higher rent… is better than trying to compete on price with all the other landlords that are doing that. So houses of multiple occupation is probably the best.
There’s another strategy which is called serviced accommodation, where you take property and you rent it out very short-term to people who are on holiday or corporate lets. There are a number of complications with that. One is if it’s a leasehold property, you need to make sure that the freeholder is okay with that. And also there aren’t actually many lenders in the UK that are happy for a property be used with a serviced accommodation because it’s quite a new thing, relatively speaking. People have been doing that for many, many years, but it’s become a bit more popular with investors.
So like everything always do your research, check with advisors that you’re not breaking any rules, but there are certainly ways of creating a really good cashflow from £100,000.
Jo Grimwood: Absolutely. And I think the point is, there’s many, many options, so what you can do with that £100,000 is you just need to find something that suits you and your lifestyle as well. I think it’s important.
Simon Zutshi: It’s not a lot of time to give that kind of answer, but that’s fundamentally it.
Jo Grimwood: Yeah. I mean, if you go for a serviced apartment, obviously you’ve got lot of factors like you have to pay for the cleaning, you have to pay for all kinds of different things.
Simon Zutshi: It’s more like a business and you need to take that into account, but I say the question was about high cashflow, and that’s one of the ways of getting good cashflow.
Paul Mahoney: Just something to add there. I agree with Simon said. I think very commonly people start out with that cashflow goal and talk about, “How do I generate cashflow?” Now I think the answer depends on that person’s situation because with £100,000, they might be able to generate a 10% yield let’s say, for example, which is pretty good going. That’s 10 grand a year. But for most people, 10 grand a year isn’t enough to live comfortably. That’s not going to replace their income. So sometimes there is some aspect, some requirement for growing that £100,000 so that they can grow their income as well.
So I think a lot of people, although the end-goal is generally enough income to replace your employment income and be passive, but it’s important to understand how you actually get there and what asset-base you’re going to need to generate the cashflow that you want. Just again, depending on that person’s situation, what they’re looking for.
Jo Grimwood: Excellent. Some great tidbits there.
Evan Maindonald: Well just to add to that, actually, it’s worth noting that if you’re converting a house to an HMO, unless the local planning authority has bought in something called an Article 4 Direction… which I’ll tell you what that is in a minute… you can convert a house to a small HMO, which means an HMO with less than six people living in it, or six unrelated people living in it, without planning consent. An Article 4 Direction withdraws the permitted development rights that were bought in that allow people to do that.
So that strategy can work very well in terms of maximizing your rental return and it can actually also add capital value to the property. So you would need to spend a bit of money potentially to convert, say, a house to an HMO but you can end up with something more valuable. So grow your capital and maybe remortgage the HMO once you finish doing it. Take some of that capital out and do another one. So it can be a great strategy to actually build your property portfolio while maximizing your income.
Jo Grimwood: Excellent. Okay, thank you Evan. And I have a question for you. “I’m a little new to this property industry. I inherited a house that is worth around £450,000 which I’m now renting out for £1,700 a month. I was thinking of potentially remortgaging the property taking £200,000 out, buying a second property worth £400,000 with the help of a buy-to-let mortgage and trying to invest for the future like that, gradually buying more properties when I can. Now with all the new tax laws on buy-to-let properties”… this is funny, you just were talking about that… “But is this a bad idea? Would I be safer to keep the house as it is with no mortgage and invest the rent money somewhere else, or long-term, could it pay off to try and build a portfolio of houses to rent?”
Evan Maindonald: I think if if you’re interested in building a portfolio of houses to rent, yes, absolutely, it could pay off. If you are just going to buy one property then it probably doesn’t make a lot of sense. What you would want to do if you’re going to build up a portfolio of properties is to set up a limited company and start using that limited company to buy buy-to-let properties.
You could use the house to HMO conversion strategy that Simon suggested earlier on, as a way of increasing your rental yields and potentially also increasing property values. It makes sense if you’re doing it with more than one property because it will cover the administrative costs of setting the company up in the first place and running the company. If you’re just doing it with one property, then it’s going to be a little bit more marginal.
So I think the answer is, if you’d like to generate an income and you’d like to grow your investment, then yes, absolutely, it’s a good idea. Just leaving the equity in your existing property and sitting on it isn’t likely to generate the same level of return.
Jo Grimwood: Okay. Excellent. Thank you so much Evan. We’re going to be taking a break. Stay tuned here at Property Question Time. We’ll be right back.
Hello and welcome back to Property Question Time. I’m Jo Grimwood. Today I’m joined with Simon Zutshi, also Paul Mahoney and Evan Maindonald. Welcome back gentlemen. Now we’re going to start off with a golden nugget from you, Evan. So fire away.
Evan Maindonald: Okay, so I just want to talk a little bit about capital growth versus rental return. A question came up recently from an audience member regarding this and I just wanted to share a small observation. If you’re looking for capital growth, then probably investing in property somewhere like London or where the property market is very active, is a better way to get that capital growth. But what you will get is you’ll get a lower rental return on your property. The trade off in terms of capital growth versus rental return, is that in areas where there’s a higher rental return like perhaps in the north of England or maybe in Wales… further away from London… is that you will get higher rental returns, maybe up to 10% or 12% but you probably won’t see the same levels of capital growth that you’ll see in a busy market like London. So if you’re thinking about investing in property, just bear in mind that trade off.
Jo Grimwood: Great. Fabulous little tip. Okay. So straight over to you for a question, Simon. “I’ve decided to buy my first property. What should I look out for when buying?”
Simon Zutshi: Well, I guess it depends if it’s a residential property for them to live in or if it’s going to be a rental property. So I’m going to assume that it’s a residential property, if that’s okay? Because what I did, was I bought a property that I lived in myself and then I subsequently rented it out. And I think that’s a great idea for first time buyers to do because when someone buys a property it’s unlikely they’re going to stay in that property forever. So what I advise people to do, if it is their first residential property, is buy something that’s suitable for you, but make sure if you moved out, it would work as a rental property as well. Because then that’s a great way to slowly build your portfolio, if that’s indeed what you want to do.
So things I would look for, obviously there’s the house itself. There’s the room sizes. Very often houses have small boxrooms aren’t really utilized for much. So I want to make sure there’s good size rooms. Always look for storage, especially in new properties. They look lovely, but when you actually move in, you think, “Where am I going to put my stuff?” So storage is a really important thing.
Obviously you have to look at the energy rating to make sure, understanding how much is it going to cost for the bills. Some new legislation has come in, so if you’re renting properties, there’s certain standards that have to be met. So that’s kind of the property itself. Obviously there’s all the things like if it’s an older, you’d look around, are there cracks around the doors and the windows? Look at the double glazing, is it sealed or has it kind of got little condensation inside?
Has the property you got central heating? If it has, how long has the boiler been in? Is it serviced regularly? Look at the fuse box. Does it require rewiring? Is it the old-fashioned fuses or has it been done recently? So you could ask the owner of the property, the person who’s selling it, what work have they done and what certificates do they have to make sure things were done properly and correctly. If there are extensions and things, have they been done to building regulations? Was there planning permission required for any works done?
So some of these things your solicitor would do and when someone moves out, they have a Home Buyer’s Report. They fill a lot of information and they talk about renovations and things that have been done to the property. So always, always do your due diligence.
Another factor to think about is the actual location of the property. It’s got to be convenient. Obviously transport links are really useful. Local facilities and amenities. If you have a family obviously schools and catchment areas are really important. If you’re going to be then renting to a family in the future, that’s relevant. So think about what your requirements are, but try to think a little bit beyond that. If you’re going to rent the property out when you move on, would it be suitable for potential tenants to move into afterwards?
Jo Grimwood: Absolutely. And be incredibly thorough, like you say. You need to know absolutely everything about that property.
Simon Zutshi: Yes. And again, that’s a very short amount of time, but there’s a lot more I could do. I’m just conscious of time here. Those are probably the key things to look at.
Paul Mahoney: Just one point on something that Simon mentioned there about energy ratings and the changes recently with them, something that actually surprised me was that it’s not just about worrying if you’re not meeting those energy ratings in properties you’re buying now. Previously it was just about getting a small fine from the council and fixing it. Now you can’t actually get a mortgage if you don’t have those energy ratings. So part of the regulations of mortgage lenders now is that they need to see that the properties are up to those standards. So obviously very important now because you can find yourself to have a property that’s on mortgageable unless you fix that.
Simon Zutshi: The one exception to that is if you have a listed building. They’re kind of exempt because sometimes you can’t put double glazing and things in so they’re not as energy efficient. But yeah, that’s really good point.
Jo Grimwood: Absolutely. And I think just don’t let your heart rule your head because even though you’re buying something, perhaps for your own benefit, as your own property, a lot of the time… We had a question in the past show, actually. A couple that fell in love with a very, very old house that had a lot of problems, and they were just trying to find a way around it…. you’ve really just got to make sure that that property’s up to scratch before you make the plunge. Absolutely.
Evan Maindonald: Perhaps I could just pick up on something that Simon suggested as well, with a little story of my own. So the first property that I bought was in London, that was in Hammersmith, was a four-bed house and it was in the mid-’90s and at the time before I bought the house, I was renting a room somewhere and it was costing me about £500 a month. So I bought a house, it had four bedrooms. I rented out three of the bedrooms to other people for £500 a month each. My mortgage cost me about £500 a month. So I went from paying £500 a month to having an income of £1,000 a month. Or a net income after paying my mortgage of £1,000 a month. So that can work very well as a sort of a combined ownership and investment strategy if you’re prepared to let your rooms out to other people.
Jo Grimwood: Brilliant, yeah.
Evan Maindonald: It certainly worked very well for me and provided me with a great platform to start investing in property.
Simon Zutshi: That’s how I started as well. I rented out rooms in my home. So if you’re in a relationship with kids and things, that might not be so appropriate, but at the time of life it can work really well.
Evan Maindonald: Well, interesting. That’s why it stopped because I got into a relationship and so yeah, that all then changed.
Jo Grimwood: Very smart. Yeah. I wish I’d have had those brains for property when I was your age at those times, gents. So a question for you, Evan. “My mother has recently passed away, kindly leaving me her estate in her will consisting of a property worth around £500,000 and bank accounts with over £250,000. Shall I use that money to buy another property or put it into a trust for my children?”
Evan Maindonald: Well, I think if those are your objectives, you could combine the two.
Jo Grimwood: Yeah, absolutely.
Evan Maindonald: And that that might be the best approach here, in fact. What you can do is you can set up a trust. It has to be the right kind of trust. I think there’s two kinds. A discretionary trust and someone else will tell me what the other one is called, perhaps. Anyway, it’s the other one.
What you can do is you can use that to buy a property in your children’s name and the reason that it can’t be a discretionary trust is that you otherwise get caught with stamp duty implications in terms of ownership of multiple properties. So what you could do is you could set up trusts for your children and buy properties with those trusts or in your children’s name using the trust. That that would allow you to retain a degree of control over the property until your children reach the age of 18, but it would also mean that they have the advantage of having a property in their name as an investment. So my advice would be, if those are your objectives, then combine the two. Set up a trust and use it to buy property for your children.
Jo Grimwood: Great Advice.
Paul Mahoney: Quick comment on that. By buying in trust, you do limit your mortgage options significantly. There’s only one or two lenders to my mind that I can think of that will actually lend to a trust. And I think the major benefit investing in property is the leverage that you can get when investing in property. So it’s not a bad investment buying property cash, but it doesn’t really set the world on fire. Whereas the leverage is what makes a really great investment. So that’s something worth considering.
Evan Maindonald: Absolutely. And again, as we’ve discussed on other programs, if you’re going to start buying properties using a buy-to-let mortgage, you probably want to set up a limited company to do that. But obviously the tax implications of that arrangement of quite different.
Simon Zutshi: And obviously this is for people who are watching in the UK. Obviously people watching around the world, for example in Australia, actually using trust is a very popular way of buying properties. So we are talking UK market really.
Jo Grimwood: Okay. So we’ve just got time for a golden nugget and we’re going to get that one from you Simon.
Simon Zutshi: Okay. So when you’re investing, we talked before about it’s really important to get a power team around you. You need ideally a good mortgage broker, you need a good solicitor. You might need an architect, you’d need builders, you need estate agents, property managers. And a great way to build your network is get recommendations from other investors who are using those people instead of just trying to go on the internet and find people.
So you can find investors online, on various chat forums. You can go to property network meetings. If you know other investors, just pick their brains. Go and have a coffee with them. Ask them lots of questions and most people were pretty abundant. They’re happy to share that kind of information, but try and get a support team around you. Don’t do this stuff on your way.
Jo Grimwood: Well thank you very much gentleman. That’s all that we’ve got time for here at Property Question Time. If you would like to get involved, you can pose your question to our panel of experts by just logging that request on the website. Or you can email us at info@ property-tv.co.uk and the next time your question might be on the show.
We look forward to seeing you at Property Question Time very, very soon. I’m Jo Grimwood and bye for now.