Jo Grimwood: Hello, and welcome. I’m Jo Grimwood. This is Property Question Time, the true interactive property show, where you get to send in questions to our panel of property experts who join us and are able to give some sage advice to you, whatever your question is about property.
Today I’m joined by a fabulous trio. We have Paul Mahoney, who is the MD of Nova Financial. Welcome to you, Paul.
Paul Mahoney: Thanks, Jo.
Jo Grimwood: And Evan Maindonald, Founder and CEO of Melt Homes.
Evan Maindonald: Hi.
Jo Grimwood: Great to have you back, Evan. Tony Gimple is our last guest. He is the founding director of Less Tax 4 Landlords. Hi, Tony.
Well, gentlemen, let’s start with our first question without delay. We’ve got some really great questions today for you. Evan, this one’s for you.
“I own a flat in a block of eight. We own the freehold and manage it ourselves, but it’s a lot of work for the people that do it. Now, we do try and share it out, but it’s not easy, as it’s a mix of owner occupiers and buy-to-lets, and some people do more than others. We were wondering about getting someone in to manage it for us. Is this something worth investing in?”
Evan Maindonald: My initial reaction is probably yes. I think things that you try to manage by committee don’t usually work out being managed particularly well. Unfortunately, when you have a group of different people, some of whom are living there, some of whom maybe are buy-to-let owners, it’s very difficult to manage and balance the needs of those people. So I think, absolutely in that case, the best thing to do would be to appoint an external management company to manage the block for you.
I would recommend going out and talking to two or three at least, management companies. Find one that you’re comfortable with that you think can work with the style of the people in the block. Obviously, you’ll need to get the consent of all the owners to appoint that management company to manage the block. Make sure that you’re getting good value for money.
The fact is that an external management company, they manage properties all day, so they’re set up to do it. They can do it a lot more efficiently than you as individuals can. You may save a bit of money by doing it yourself, but really, in the long run, I think the time and effort that you put into doing it, and the question of trying to balance everybody’s needs within the block while remaining independent of those needs or desires, can make it very difficult.
So I think, avoid the politics, save yourself some time and effort, focus on what’s important in life for things that you’re actually really doing, and get someone else to manage it for you. That would be my advice.
Jo Grimwood: Save the headache and stress.
Evan Maindonald: Save the headache and stress.
Jo Grimwood: Absolutely. Anything to add, gents? Any musings?
Tony Gimple: And it’s a legitimate business expense, so it’s tax deductible in its own right by applying the agent.
Jo Grimwood: Fantastic.
Evan Maindonald: That is a point that I’ve missed, yes.
Jo Grimwood: “Do the value of buy-to-lets at resale take into account the value of the income as well as the value of the bricks and mortar?”
Paul Mahoney: Okay. Well, if you’re selling to a landlord, it would certainly be a consideration in their minds as to the income that property can generate. Therefore, if it makes it more attractive to landlords and increases the demand for the property, then the value is likely to increase.
Taking it away from that question, the value of the property is only worth what someone is willing to pay you for it. So it’s all about supply and demand. If there’s strong demand for property or increasing demand for your property, then the value will increase.
Of course, if you’re selling to an owner-occupier, they couldn’t care less about the rental yield, so the rental income is not going to impact upon the value of the property because it’s not part of their criteria.
From a valuer’s perspective, I would say, probably not. The income isn’t really considered. It’s certainly considered as part of your ability to get a buy-to-let mortgage. So it needs to stack up. It needs to be a certain point to allow for a certain level of mortgage, but again, it is actually about the supply and demand. A valuer will look at what they believe you can sell it for in the resale market. If it’s a bank’s valuer, they’ll generally look at that quite conservatively, to sit on the conservative side of the fence.
So far as whether it’s considered in the value, it depends who you’re selling to as to what their criteria is.
Evan Maindonald: I can add maybe a bit to that. There’s a fundamental difference between commercial and residential property in terms of the way that it’s valued. Nobody buys a commercial property because they want to live in it. So there’s not a lot of emotion about it. It’s about money. Is this a good investment for me or not?
In essence, when somebody’s buying a home to live in, that decision is, do I want this? Do I desire this? Is this the best thing that I can get for me for my money? It isn’t necessarily… although many people do regard their home as an investment… the investment aspect of it isn’t necessarily the thing that’s at the front of your mind.
When you’re buying a commercial property, the valuation is based fundamentally on the investment income that you can get from that property, so it will be based on yield. That yield will be the yield that the investor is seeking on the investment. The yield that’s used for the investment will depend on the security of the income stream. In other words, if there’s a tenant in the property, the covenant strength of that tenant, the quality of the tenant… In other words, if you have a Tesco on your property, they have a very strong covenant strength, you’d expect a lower yield than if you had a one-man band that’s operating a hardware shop or a bakery.
That fundamental difference between residential and commercial property needs to be born in mind. Buy-to-let actually sits somewhere in the middle of those two things. There are ways that you can take residential properties and you can turn them into properties that will be valued on a commercial basis. A good example of that is a house to HMO conversion. By increasing the level of income that you get out of the property, you may be able to actually increase the capital value by getting somebody to view it as an investment rather than a residential property. So that’s something that’s worth thinking about.
Tony Gimple: Actually, it’s more fundamental than that. It’s, are they going to view it as a business?
Evan Maindonald: Sorry?
Tony Gimple: Are they going to view it as a business?
Evan Maindonald: Exactly. So how do you get… If you can get your property to cross over from being something that’s viewed as being residential to being viewed as a business, then you can potentially add value if you’ve got a high level of rental income and you can get it to be valued based on yield.
Jo Grimwood: Fabulous.
Tony Gimple: Being a landlord is running a business like running any other business.
Jo Grimwood: Yeah, absolutely, Tony. So I have a question for you now.
“I’m thinking of using my pension lump sum as a deposit to buy rental properties. I’ve heard that, if I use a limited company, I won’t be personally liable if the business goes bust. Is that true?”
Tony Gimple: No. Limited liability companies are wonderful things. Your liability is limited as a shareholder to trading losses. If you don’t service the boiler, that’s not a trading loss. As a director of the company, you have unlimited personal liability.
If a lender on a commercial mortgage term is lending to a limited company, particularly if you’re a first-timer with no balance sheet, they’re going to ask for personal guarantees from all the directors and all of the shareholders.
To think that investing your pension lump sum, all of it, in one thing, you really need to seek advice. Whilst you’ve got to look at the worst first, that “what happens if” through no fault of my own, if you’re starting up a business and looking to run away from your liabilities if something happens, perhaps you shouldn’t be in business in the first place.
Jo Grimwood: Okay, great, Tony. Now, do you happen to have a golden nugget for us?
Tony Gimple: Yes. On this show, you’ve got three people with three different sets of expertise. If you’re going to be in business as a landlord, it’s critical that all of your advisors work together as a team. You may well have an accountant. You may well have a lawyer. You may well have a business plan or a financial advisor. But when was the last time they all talked to each other socially, let alone about you and about your affairs?
So the golden nugget is, bring your advisors together in one place, make sure they all get the same message, and then collaborate to help you achieve your goals.
Jo Grimwood: Great. Well, we’re going to throw to a break. When we return, loads more questions for our expert panel, right here at Property Question Time.
Hello, there. Welcome back to Property Question Time. I’m Jo Grimwood. Today I’m joined by Paul Mahoney, Evan Maindonald, and Tony Gimple. Welcome back, gentlemen.
Now I’m going to start with a little tidbit, a golden nugget, from you, Evan, if that’s okay.
Evan Maindonald: Absolutely fine.
I’d like to talk a bit about a strategy that can be used to build an investment portfolio and to achieve great rental yields on properties. What I’m going to talk about is house to HMO conversions.
If you’re looking at buying a property to maximize your rental yield, then one way of doing that is to buy a house and convert it to a small HMO. Unless the local planning authority has brought in something called an Article 4 direction in the particular specific area that you’re looking to buy in… and you need to check that, obviously, before engaging in this strategy… then you can convert a house into an HMO without requiring planning permission as long as you don’t have any more than six unconnected occupants in that HMO. If you have more than six, that classifies the property as a large HMO, and you need planning permission for that.
The point is that, by doing that, by converting the house to an HMO, you can get up to four times the amount of rental income that you would simply by renting the house out as a house.
Not only that. Once the house has been converted to an HMO, then you may potentially be able to increase the value of the property so you can have it valued on a commercial basis, which means that you may be able to buy a property, increase the rental income from it, remortgage it, take out the money that you put in in the first place, and then go in and do another one. It’s a way, not only to build a stream of rental income, but also to actually build capital value in the properties that you’re buying.
Jo Grimwood: Brilliant. What areas should you be looking at if you want do to an HMO?
Evan Maindonald: HMOs are basically houses where people take individual rooms. So they have shared facilities. The definition of an HMO is a property that has shared facilities. So it might have a shared kitchen or it might have a shared laundry. It might just be a shared washing machine. Generally, they tend to share communal facilities, and people have their own individual bedrooms.
So they tend to work best in areas where you’ve got a lot of students or people who maybe can’t afford the rents in that particular area, where rents are quite high and you have a community of people who live in that area or need to live in that area for some reason, but maybe will struggle to afford to actually rent a whole property themselves.
Jo Grimwood: Okay, fabulous. So I have a question for you, Paul.
“I’ve just come across the channel, and I’m hooked.” Fabulous. Keep watching. “I’m really interested in learning how to get into property. I have a 10-year business plan ready to go, but I need to find out how I can get finance to get started on my journey. I’m hoping someone from your team can give me some advice.”
Paul Mahoney: I think it’s fantastic that you’ve spent the time to put together a plan to work out what you’re going to do. I’d say the finance is probably quite an important part, or should form an important part of that plan. I’d be interested to see what the current plan is. I assume it’s acquire one property now and another one next year, and so on and so forth, which is a fairly common way of building a portfolio.
Certainly worth reviewing that plan. Ten years is a long time, firstly. So far as making a property investment, I’d say you probably want to be going into it with a seven to ten-year timeframe per purchase in any case, given that it is a longterm investment.
So far as sorting out the finance, it seems from what this person has said that they’re a first-time investor. They’re looking to get started. They need to work out… assuming the plan hasn’t already done it perfectly, which I’d say, given they’re a first-time investor, they probably should seek some advice reviewing that plan, make sure they’re very clear on what their current situation is, what their goals are, and what the best strategy to get them there would be, and then selecting the right assets to fit that strategy.
Finance obviously forms part of that. Obviously, different types of finance work best for different types of property investments. The types of property investments should be determined by the strategy rather than the other way around. It should be about the benefits rather than the features.
My best advice for someone who’s starting out is to seek advice. Make sure that you’re very clear on what you’re working toward, how you should do it, and then have someone actually help you start doing it.
As you know, a common recurring theme on this show with property investment, especially with all the changes recently, it’s a lot more complex than it’s ever been before. There’s a lot more to consider. Therefore, there’s a bigger gap between what works and what doesn’t.
Jo Grimwood: Okay, great. Great answer, Paul. So, Tony, this one’s for you.
“It seems that small accidental landlords will suffer the most under the Section 24 and the tie to buy-to-let mortgage lending rules. What would you advise those with only two or three properties to do?”
Tony Gimple: Stop worrying about it. There’s a perception that smaller landlords will be affected, but actually not so much. Probably at least 90% of the people we see don’t have a Section 24 problem.
In essence, if you’ve got two or three properties, you’re a basic rate taxpayer, keep going. Put the rents up to the maximum the market will bear in the area. Make sure you log all your legitimate business expenses. Speak to someone about how you can grow the portfolio so that Section 24 does become a problem.
Paul Mahoney: That’s good advice. Tony said, “So that it does become a problem.”
Jo Grimwood: Oh, I didn’t catch that. I thought he said don’t-
Paul Mahoney: What I wean from that is, create more income so that you have to deal with your tax problem.
Evan Maindonald: At that point, you can restructure the portfolio into a more tax-efficient vehicle.
Jo Grimwood: Yeah, absolutely. Like we were saying earlier on, obviously the more you’re bringing in, the less relevant tax becomes anyway.
Tony Gimple: For a couple, say, up to about 90,000 pounds total income between them, that’s when the problem begins. Actually, it’s just before that because the minute you’re about to go over, you move from basic rate into higher rate very quickly. So it’s just being aware of what’s going on, but with two properties, base rate taxpayers, don’t sweat it. Just get wealthier. Worry about the tax on the fly.
Evan Maindonald: It’s also worth noting that basic economics dictates that, ultimately, if additional costs or obligations are placed onto landlords, in the long run, rents will simply go up. Supply will shrink. The supply-demand balance will kick in, and rents will rise. So you need to think about what the market is likely to do as well as what the effect is in terms of cost on you personally.
From my point of view, the issue is more about the additional administrative burden that’s placed on landlords in terms of ensuring that their properties are energy efficient, ensuring all of the right certification is in place, getting safety certificates: all of the other things you need to ensure… and mandatory licensing is being brought in by many councils now as well. All of that stuff adds quite a big administrative overhead.
If you have multiple properties, you can spread that over multiple properties. If you’ve only got one, that can start to become a bit of a burden.
Jo Grimwood: Okay, great. So Evan, question for you.
“My property isn’t selling, and it’s been on the market for over a year. I’ve lowered the price, but still no luck. What am I doing wrong?”
Evan Maindonald: Okay. Well, I think you need to take a good close look at the way that the property’s being marketed. When I say the way that it’s being marketed, I mean both in terms of the way it’s being presented online through the portals… Rightmove and Zoopla, I’m supposing, are probably where it’s being listed on… and also the way that the property is presented when people come around to look at it.
It’s important to get other people’s opinion on this. Because it’s your property, you’re not necessarily going to see the things that a buyer will come round and notice. You might think that your property’s tidy. They might think it’s messy. To get the maximum value for your property, you need to have it presented in perfect condition. Otherwise, the buyer will simply try and knock the price down.
Another thing that you could think about doing is getting a new agent around to have a look at the property. Get a different perspective. Ask the new agent to be as honest as possible with you about the reasons why they think your property’s not selling, whether it’s price, whether it’s the photographs, the presentation, or maybe even the property, just the description. Also, perhaps ask a friend for some independent advice on what they think about the way that the property’s being presented and marketed.
Finally… well, actually not finally. I’ve got a couple other things. Talk to your existing agent about the buyer feedback that you’re getting from those people who have maybe viewed the property or have inquired about it. Ask them if there are any particular reasons that are coming up over and over why people are not maybe putting an offer in or maybe not going for a viewing. That, I think, will give you some interesting research and information.
Just one other thing. If the property’s been on the market for a long time, it can become a little stale. Often what happens is, when a property’s first listed, it can generate a lot of interest. When it’s been on the market for a long time, it tends to drop down the listings. People don’t notice it because they see the same thing come up over and over again. So taking it off the market, getting some fresh photographs, a new description, and then relisting it two weeks or maybe a month later, can result in some sudden interest being generated.
If you do that, make sure that you put it back on the market at a good time of year to be selling properties. Don’t put it on the market when everyone’s away on holiday in June, July, and August. Put it back in at the end of December so that people will see it over the Christmas break, and it’s on the market in January. That’s a great time to be selling property or when people come back from their holidays. Just make sure that you think about what the right time of year to be selling the property is.
It is isn’t necessarily when you think it would be. A lot of people think that it’s in the summer months. They’re actually probably one of the worst times of the year to be selling properties. So hopefully that helps.
Jo Grimwood: It’s interesting what you were saying also about how you don’t notice things in your own property. People forget how integral it is to have the plug-in air freshener in each room so it smells fresh when people walk through the door because you can be desensitized to things like that if you’re living in a house.
Evan Maindonald: Well, and you can be used to leaving things in certain places. That may look messy to other people. Maybe it doesn’t to you.
Jo Grimwood: Excellent. Okay, I think we have time for one last little piece of advice from Paul, a little gold nugget from you, Paul.
Paul Mahoney: We touched on it earlier. There’s been some recent changes around energy efficiency of properties, specifically buy-to-lets, essentially a raising of the standard. So far as I know, this was previously enforced by local councils. By not following it, you are risking a fine by your local council.
One of the recent regulatory changes is that lenders now need to certify that you have these things in place. So, if your property or properties aren’t up to that standard, then you won’t actually be able to get a mortgage. That’s something you need to be aware of because, if you buy a property that is going to be very expensive to get up to that standard, that’s a massive extra cost or the property may be unmortgageable.
Jo Grimwood: Well, that’s all we’ve got time for today, ladies and gentlemen. Thank you to Paul Mahoney, to Even Maindonald, and also to Tony Gimple, our panel of experts today.
Now, if you’d like to pose a question to our panel of experts, you can do so by sending it into us by email, which is firstname.lastname@example.org, or logging your request on our website. We look forward to seeing you next time here at Property TV. Bye for now.