Lucia France: Hello, and welcome to Property Question Time, where you ask the questions and we give you all the answers for anything you need to know about property. I’m Lucia France, and joining me in the studio today, we have Paul Mahoney. He is the Managing Director of Nova Financial Group.
We also have Joanna Leggett, and she is the Founding Partner of Leggett Immobilier. And last but not least, Tony Gimple is joining us as the Founding Director of Less Tax for Landlords. Welcome everyone to the studio today.
We’ll get on with our first question. Paul, you’re first in line today. So, “I want to understand the buy-to-let market. What is involved in being a landlord?” This is quite a big question. “Can you please advise me on the following topics: buy-to-let deposit and mortgage requirement, letting agents fees, and contract on what task-letting agent will do, EPC and safety inspections, tenancy deposits, cleaning, maintenance, and anything else I’ve missed out on.” So, if we’ve got time.
Paul Mahoney: Yeah, I … We need a bit more than a few minutes on that one. I’ll give a general overview. The first point was mortgages and deposits. The average maximum, if you like, for a buy-to-let mortgage is 75%. The reason I say average maximum is, that’s where you can go to without rates rising substantially. Some lenders will go 85, but the rates are significantly higher.
Lucia France: Okay.
Paul Mahoney: So that’s generally where people go to. 75%, ’cause obviously it makes sense to leverage, especially in the current market, when money’s cheap. So that would mean, if it’s a hundred-grand property, they’d need a £25,000 deposit, plus costs. So that hopefully covers that one.
Lucia France: Yeah, that’s it.
Paul Mahoney: Their ability for a mortgage will partially depend on their financial position, whether they currently own a home or buy-to-lets. Seems like they’d be a first-time landlord. If they don’t already own a home, then they’d be a first-time buyer, as well, and that does rule some lenders out, and it would be more about their financial position. If they own a home, then it becomes less about their financial position. Slightly. Because they’ve got a bit more security. And buy-to-let lenders do tend to be more flexible than residential lenders.
What was the second point?
Lucia France: Then we had letting agent fees.
Paul Mahoney: Okay. Letting agent fees differ depending on the location, mostly. Some of them in London are exorbitant. Up to 20%, which is … I just think is ridiculous, but people pay it. But generally, you’ll find outside of London, you’re looking at 8-10%. They said so far as what the letting agent will do, that there is both … There’s letting and management, or just lettings, or just management. Lettings meaning they find the tenant and sign them up, management means they manage the property and look after maintenance and things like that as well. Hopefully that covers that one off. It would depend on where they’re looking to buy, so far as what a cost-effective agent is. Some charge a lot more, but probably … In some cases, do a better job than the ones that charge much less.
Lucia France: And would you recommend getting a letting agent who does the management and everything as well? As a general rule?
Paul Mahoney: Depends on their situation, and whether it’s required. Generally, we recommend it as a good option to have full lettings and management in place if they don’t want to be going to the property all the time. So that’s … Yeah. If … Depends on how involved they want to be.
Lucia France: Okay, and then we had EPC/safety inspections.
Paul Mahoney: Yep. So, that … EPC meaning the energy ratings and safety inspections. EPC would need to be done on a yearly basis. Generally, you can get guidance on that from the local council, on what’s needed and who can do that for you. It’s generally fairly cheap to do it. But they’re really getting down into the nitty-gritty of actually owning the property. I’d say probably before starting to think about things like EPCs and safety checks is, where are they going to buy? How much money do they have? What’s their goal? What’s their strategy? Focus more on the goals, rather than the product, I would say.
Lucia France: [inaudible 00:04:13].
Paul Mahoney: Really focus more on what they’re looking to achieve from buy-to-let, and what’s their investment or financial goal? Rather than, “how much is the safety check gonna cost me?”
Lucia France: Exactly. Well, we’ve got cleaning and maintenance here. I think that’s about … Was under that bracket.
Paul Mahoney: Falls under the same basket, I think.
Lucia France: Anything else they’ve missed out on? Is their final question. Is there any other piece of [crosstalk 00:04:32]?
Paul Mahoney: I’d say just that … The main thing I would say is that they’ve missed out on, is the strategy side of things. Investing in property should be a business. It should be about achieving financial goals, not just wanting to own a buy-to-let so you can talk about it at dinner parties. So, focusing more on what the goals are, what the strategy is, how they can achieve that, and then finding the right assets to fit in with that, and then they can look at things like what the costs are going to be for that particular asset.
Lucia France: That’s great, thanks very much, Paul. And so, moving on to you, Joanna. “I’m thinking of buying a property in France, and I’ve heard about the cooling-off period when I’ve read about buying property in France. What is this?”
Joanna Leggett: The cooling-off period is actually part of the steps of the sale, as such. It’s a different system in France, to what it is in the UK. When you find a property, and you both agree the price, the buyer and the seller, then the [French 00:05:24] is drawn up, and that’s basically the exchange of contracts. If the agent or the [French 00:05:30] has all the paperwork within a couple of days, you can actually exchange contracts within a couple of days.
So, what the cooling-off period means is, usually the buyer will have to sign the [French 00:05:40] first, then it’s sent or signed at the same time with the vendor. Once both copies have been signed by both parties, it’s then sent by recorded delivery to the buyer’s home address. The day that that envelope is received, it will be noted of the date, you have a 10-day cooling-off period, in which time, if you change your mind, you have a right to pull out. If, by the end of the 10 days, you don’t, then obviously you have to send your 10% deposit to the [French 00:06:09] holding account, and then it obviously continues with the sale.
So, it’s basically … Usually speaking, if you’re in France, you were there for a couple of days, you fell in love with the property, you signed it all, went home, and thought, “Oh my God, what have I done?” You still have the chance to withdraw. However, after that time, you don’t. And so, unless there’s suspensive clauses that weren’t met, for example, you didn’t get a mortgage that you’d applied for, you have a certain period of time to get that in. And … Or, planning permission was refused for a swimming pool, or something like that. All of those reasons, you can withdraw from the sale with no cost, but if you just decide two months down the line, “I don’t want this house anymore,” then you would be subject to 10% of the value of the property.
So, the cooling-off period is just those 10 days, once the [French 00:06:51] has been signed and you’ve received your copy of it.
Lucia France: And in terms of those suspensive clauses that you were mentioning there, presumably that’s a good idea if you are worried that you might not get a mortgage, or if there’s some alteration to the property.
Joanna Leggett: There’s … Yeah. There’s lots. And your agent will advise you on that, as will the [French 00:07:07]. So before … When it … All of those clauses have to be put into the [French 00:07:12] at that time. You can’t put them in two months down the line. So, for example, if you wanted to change the use of a barn, and you wanted to develop it into a [inaudible 00:07:21] or extra accommodation, you would put outline planning in that as a suspensive clause. ‘Cause if that was refused, you weren’t gonna buy the property. Swimming pools, because again, in France, if it’s next to a church, you might not get that granted, and if that was really important, you’ve got the right to withdraw.
In a [French 00:07:37], you’d have to stipulate who you’re applying for the mortgage with. So, usually with a French bank, because English banks won’t lend on French properties. So you’d say, perhaps, Crédit Agricole, you’d put them in, the amount, the interest rate, et cetera. Then, if they sent you a letter, they go through the process as normal, if they sent you a letter saying, “No, sorry, you … We’re not going to give you the mortgage,” you have the right to withdraw from the sale. And that might be two months down the line, when you get the acceptance or refusal.
Lucia France: But it’s good to get those points in there first, and then you-
Joanna Leggett: Exactly.
Lucia France: You still don’t lose anything.
Joanna Leggett: Yeah. As a buyer, you’re completely protected. Unfortunately, for the vendor, once the vendor signs the [French 00:08:14] on that day, there’s no cooling-off period for a vendor. Once they’ve signed, they’ve signed, and they can’t sell it to anyone else. That’s generally why the buyer always signs first, because if we had a signed contract from the vendor, and it was then sent off to the buyer, and the buyer just decided not to send it back for six months, there’s still a contract out there that the vendor has signed, so he can’t sell it to anybody else. So that’s why it’s always the buyer that signs first.
Lucia France: Makes sense, right. Brilliant. Thank you very much, Joanna. That makes sense.
Now, Tony, another long question here for you. “I’ve been providing long-term housing for over 100 families for the last 20 years, and my current accountant has worked out that by the time I get to 2021, section 24 will mean I pay more tax than I make in profit. This seems absurd. If it’s true, I will have to sell up, and who will re-house all of these families? What if I was sued for breaching my ASTs? What do I do?”
Tony Gimple: Get me out of here, I’m a landlord. First, is the short answer, or get behind the eight-ball. And start running it as a professional property business. Sadly, the questioner is right on every single count. It is absurd. He or she will go out of business. The government has badly miscalculated. Basically, to win votes, to pander to first-time buyers. Which is not such a bad thing, it’s alright. The latter, that is. People who, effectively, are social landlords, albeit not local authority or housing associations, are being forced out of the markets, their tenants thrown out onto the streets, and there’s no money in the public purse to re-house them.
So yeah, they will be in breach if there are shorthold tenancies, there may be other contracts. Mortgage lenders will want to repossess the property. It’s one of the worst pieces of political legislation we’ve ever seen.
Lucia France: And is there any advice you can give this particular person, as to what to do going forwards?
Tony Gimple: Yes, absolutely. Just about every landlord, according to the government, has suffered the same accident. They became landlords simply [inaudible 00:10:35] properties spare, inherited one, and then grew thereafter. They need to take joined-up advice and start to visibly become a professional property business using the right structures, having succession planning in place, having the right tenancy agreements in place, having the right ownership structure in place. So that can actually pass on [inaudible 00:11:02] future generations. Keep housing those people who, from the sound of the question, I reckon have been there for a very, very long time.
Lucia France: Yeah. 20 years, they mention here.
Tony Gimple: 20 years, yeah. So, do it the right way. And yes, you’ll survive.
Lucia France: Okay. Fantastic, thank you very much there, Tony. Any more to add from that point?
Paul Mahoney: Yeah, just a comment on that one. The fact that their tax is going to outweigh the profits probably indicates that they’re not getting a very good yield on that portfolio. Now, if they’ve got 100 properties, that might be something that’s relatively difficult to fix. But it’s not only people with 100 properties that are going to find themselves in that situation. Lots of people with 5, 10, 15 properties, where they’ve maybe invested close to home, higher value, low-yield properties, are the most affected by section 24. Especially if they’ve got high mortgages on them. So, a lot of people that have bought in the past, solely for growth, with properties that’re kinda just breaking even, but they’ve been comfortable with that, because they’ve been growing in value. That is much harder to justify, now, with the changes that are coming into place.
So one way of fixing that is to either … Not necessarily liquidate, but rebalance the portfolio with some lower-value, high-yielding properties, which are much less affected by all the changes. Because there’s a much bigger buffer there, of profit. So, as I say, generally, you’ll find that people that are moving into lost territory by section 24, it’s because they’re not making an awful lot of profit at the moment, anyway.
Lucia France: So, would you maybe recommend to this person, maybe sell up some or all of [crosstalk 00:12:36]?
Paul Mahoney: Potentially sell up some. Look at ways of maybe getting a better yield from their current portfolio. If they have some equity, they could remortgage and buy some others that have higher yields. When you can borrow at 2% and achieve yields of seven or eight, it makes sense to borrow.
Lucia France: Yeah, absolutely.
Paul Mahoney: So seek advice from that, and see how they can change what they’re currently doing to remain in a profitable position.
Lucia France: Great. Okay, guys, I’m afraid I’m gonna have to stop you there. That’s all we have time for this half, but we’ll be back very shortly after this break.
Hello, and welcome back to Property Question Time, with our panel of experts. Paul Mahoney, Joanna Leggett, and Tony Gimple. Thanks for joining us, guys. Now, we will crack straight on with this first question for you, Paul, ’cause I think it’s the longest question we’ve ever had here on Property Question Time. Okay.
“My girlfriend and I would like to move in to a shared property. We both own properties that would perform well on the rental market, but it is unfeasible to live in either property together. My property, A, is worth 215,000 with 60,000 remaining on the mortgage, and I have 35,000 in savings. Hers, property B, is worth 160,000 with 119 remaining, and no savings. Potential rental income is 850 per month for mine, and 750 for hers. The property we want to purchase is £300,000, and our joint income is £78,000 with middle-of-the-road living costs. Would we be better off selling both, or keeping both as a buy-to-let, or keeping one as a buy-to-let? The prospective … ” Bear with me. “The prospective method we had in mind was to release equity in property A, e.g. 40,000 for mortgage of 100,000, and to sell B and combine my savings, equity release from A, and 40,000 from the sale of B for the deposit on the mortgage of our prospective purchase.” Advice please.
Paul Mahoney: Right.
Lucia France: If you can remember that far.
Paul Mahoney: Yeah, okay. So, essentially, just looking at what they should do with their two existing properties so that they can get a home together.
Lucia France: Exactly.
Paul Mahoney: That makes sense for them. Yeah, okay. Well, as we’ve said on previous shows, I would generally start with the default of trying not to sell properties, especially given that they’ve said that those two properties will rent quite well in the current market. If those properties rent well, they obviously work as an investment, so if they can keep them, that’s probably the ideal scenario. ‘Cause as we’ve said before, selling property is expensive, you’re going to pay capital gains tax. And then by putting that equity into your home, it might mean that your mortgage repayments will be slightly less, but it’s not really doing anything for you.
Lucia France: Right, okay.
Paul Mahoney: So, keeping them, I say … I would say, if possible, would be ideal.
Of course, they could remortgage them, to release the equity, which is the option that they mentioned. But as far as … That would depend on whether that’s going to release enough to allow them to buy. They say they have a £300,000 property, they’ve got £35,000 in savings, and they could probably release 40,000 from property A, so that brings them to a £75,000 deposit, which I would generally say would be enough to buy a £300,000 property. The only reason they would, therefore, sell property B, is if they wanted a lower mortgage. Or if they couldn’t afford the higher mortgage, I would say.
But again, as we’ve discussed previously, keeping those investments that are going to give them some income, and hopefully grow in value, as well, whilst potentially having a slightly higher home mortgage and potentially having slightly higher cost, so long as the returns from the two investments outweigh that cost, ’cause general … Hopefully they would be achieving a net yield from those two buy-to-lets, that, ideally, and generally what … Something I would aim for, is to have buy-to-lets that more than pay for themselves. So they could probably find themselves in a better cash flow position by keeping them. Even though their mortgage repayments on their new home might be slightly higher.
Lucia France: So … But they’d still have those other properties?
Paul Mahoney: [crosstalk 00:16:47].
Lucia France: I suppose you’re talking in terms of a more … More of a long-term approach for them?
Paul Mahoney: Well, yeah. Let’s say, for example, they have to pay an extra £100 a month for having a slightly higher home mortgage on their new property, but their two buy-to-lets are giving them £200 a month of net cash flow. They’re £100 better off for having … Solely from a cash flow perspective. But given that those properties will be leveraged, generally where you’re going to make your money there is in the growth of the properties.
They didn’t mention about whether it’s a growth area, but they said it would rent well, that’s great. Hopefully it will grow in value, also, and that will put them in a much better financial position than just having less of a mortgage on their home.
Lucia France: Definitely. Okay. And they said here that it’s not feasible to live in either property together. I guess if it was, that would make more sense, to just both move in to one, wouldn’t it?
Paul Mahoney: Potentially. If they’re both one bedroom flats, and they’re planning to have kids, that probably doesn’t work.
Lucia France: No.
Paul Mahoney: I don’t think it’s necessarily a bad thing to keep properties that you’ve bought as a home initially, just so long as they make sense as an investment, because the two criteria for buying a home versus buying an investment tend to be quite different. And generally, we … Quite often, I get questions around, “I wanna buy this place as a buy-to-let and move in to it in 10 years’ time.” It’s very hard to mold those two things. So, so long as they actually work as an investment, given they bought them as a home, then I’d say try to keep them, if you can.
Lucia France: Great. Thank you very much, Paul. Moving on to you, Joanna. Your next question is, “I live in London, and I want to retire, downsize, and buy a property in France with a budget of only around €500,000. Can anyone let me know where this would be best spent?”
Joanna Leggett: That’s a really healthy budget for France, to be honest. The average buyer … British buyer spends around 250 on a property in France. Realistically, you could buy anywhere in the country for that amount of money, even in Paris. So I think that you’d have to make a list of what your criteria is, what you’re actually looking for. Are you moving there for lifestyle? Do you want to be in the countryside, do you want to be in a city? Do you need to be near amenities? Particularly if you’re retiring, I would imagine that most of the people that come to retire want to be within walking distance to the village, shops, have a local doctor nearby, within half an hour of a city for hospitals, and things like that.
I think they probably need to narrow it down to the areas that they like. Have they been to France before? Budget-wise, in Paris, you’d have a one bedroom apartment. In the countryside, in the Limousin, that would buy you a chateau. For obviously downsizing, I think the chateau’s probably not a good idea. However, there are some lovely apartments in chateaus that could be bought, as well, and shared [inaudible 00:19:34] lands, and things like that. So I think they’ve really got to narrow down they’re looking for out of their retirement.
I would recommend not being too rural, because obviously in retirement age, you are going to need hospital appointments, or doctor’s appointments, dentist, et cetera. And France is huge, and hospitals can be an hour away. I always say, choose your major city where your hospital and everything is, and draw a half-hour circle around that, and then buy within that area. In the areas that you like.
Then there’s the climate, of course. Because some areas are much hotter than others. The southwest of France reaches the same temperatures as it does in the Côte d’Azur, although the Côte d’Azur has longer summers. So that might be nicer, if you’re looking for a nice sunny place to retire to, then the south of France might be a good idea. And you’d get probably a nice two bedroom apartment in the south of France for that sort of budget.
Then there’s the Alps, you’ve got the nice, healthy living. Where you’ve got beautiful summers in the mountains, and again, 500 is a very good budget there. Annecy, particularly, is a beautiful town with a great lake, and if they like outdoor activities, that would be a great place to buy, as well.
Lucia France: They’ve got so much choice, really. [crosstalk 00:20:44].
Joanna Leggett: So much choice, yes.
Lucia France: What … Is there anywhere that you’ve noticed people have been buying a lot more than others? That is a good place to [inaudible 00:20:51]?
Joanna Leggett: Well, there’s … If you look at the actual statistics, the biggest place for mainly international buyers is the Côte d’Azur, followed by the Alps, the Languedoc-Roussillon, because the Languedoc-Roussillon is the south of France. It’s on the border of Spain, but the prices aren’t that of the French Riviera, so you can get a lot more value for money in the Languedoc-Roussillon than you can in the Côte d’Azur.
I think they’ve really got to make a list of what their ideal property would give them, and the lifestyle that they want to do. Do they want to be part of a local community, or part … Do they speak French?
Lucia France: French? Yeah.
Joanna Leggett: That’s another valid point.
Lucia France: And base their decision around …
Joanna Leggett: Exactly. And then speak to agents. Agents all live and work there, they can give them advice, they can tell them what’s going on in local areas, and give them advice. Go to property shows, that’s another good idea, to go and listen to some of the talks on different areas. That always works, as well.
Lucia France: Brilliant. Thank you very much, Joanna. Okay, over to you Tony. Your last question for today. “I’m thinking about giving each of my children one of my buy-to-let properties as a way of getting around inheritance tax. If I do that, though, will I have to pay capital gains tax? And, as all of my properties are mortgaged, do I have to let the lenders know?”
Tony Gimple: Yes.
Lucia France: Okay, thank you.
Tony Gimple: We’ve covered some of this in previous shows. There are all sorts of problems in doing that. Even if you’re giving the properties to your children for no money, it still counts as consideration, regardless of whether there’s a mortgage on it or not. And so, there’ll be liabilities, capital gains tax, which could be as high as 28%. Not pleasant. If there is a mortgage, you’re gonna have to get lender’s consent, so are the children credit-worthy? If you’re looking to do it for inheritance tax purposes, you’ve gotta survive seven years, and it has to be a gift without reservation. In other words, all of the income has to go to the children and not you. Otherwise, the gift will be deemed not to have happened. And if you can’t give up the income, and certainly don’t want to give up control, because you’re then liable to what happens in your childrens’ lives, and nothing’s certain. You could be in a very, very difficult position.
A better way of looking at it is to understand that you’re trying to build something that can be passed on to your heirs as a [inaudible 00:23:20] in a highly tax-efficient fashion. In which case, you need to look at legitimate business structures, which will allow you to bring your children into the business, where yes, you can pay them income or dividends, but not give away any control until you and your partner eventually pass away. And when done properly, the business will not be subject to inheritance tax.
Lucia France: So, for this particular person who’s written in, what would you suggest they do with the buy-to-let properties to each of their children?
Tony Gimple: They should keep them. In their own names, take joined-up professional advice, and then work out what the best situation …
Lucia France: Is for each child.
Tony Gimple: Yep.
Lucia France: Okay. Fantastic. Thank you very much, Tony.
Tony Gimple: Pleasure.
Lucia France: That is all we have time for today. Thank you to all of our panel. Paul Mahoney, Joanna Leggett, and Tony Gimple. Please do get in touch if you have any questions for us here at Property Question Time. The website is www.property-tv.co.uk, or you can email email@example.com. Thanks very much for watching, thanks to all our guests, and we’ll see you next time.