Increasing our Portfilio, Buy to Let re-mortgaging...

PitRejection2359

Hi all,

I have a question you guys may be able to help me out with - hopefully its not too complicated - here goes!!

My brother and I own a house in Bristol. It was bought about 5 years ago by my parents as an investment for me and my brother using a trust fund that was set up when my grandparents died.

The house was initially in mine, my brothers, and my mothers names, but it is all now just in my brothers and my names (along with the mortgage). I'm not sure exactly how my parents did this, but it was all above board basically to avoid the inheritance tax etc!

So the house is now ours and worth probably £270k-ish, with about £100k ish left on the mortgage. The mortgage is a buy to let and is (obviously!) covered by the rent - the rent is slightly more than the mortgage to cover wear and tear, minor improvements, etc.

We are thinking that we would like to increase our portfolio by buying another property also in Bristol. We would like to simply re-mortgage for as much as we can and use that to buy the next house outright, making sure that the 2 total rents cover all payments etc. Once we have done this, hopefully a few years further down the line, we would like to do the same again, and again another few years after that etc.

This is our general plan, but we are a bit unsure as to a couple of points (and any other things you guys may think of!):

1) The tax implications - are we correct in thinking that as long as the rent we are 'earning' is paying a mortgage (plus a bit extra for wear and tear etc), it isn't taxable?

2) Will this still be valid if we own a larger number of properties - is there a cut off?

3) At the end of it all when we come to retire (a long way off, we are still under 30 - but you have to plan that far ahead now, right?!!), what would be the best way to go about getting to the money in the houses (trying to avoid as much tax as possible) - keep renting and live off the rent, or sell up and live off the lump sums & interest from a high rate account?

4) Would there be any benefits in the two of us setting up a company of some sorts and 'managing' our own properties that way? I have no idea if this is possible / feasible - it was just a thought!


5) Our current mortgage is with C&G (and I haven't checked all the rates & details as to whether it is currently a 'good' value mortgage), but could it be worth changing to someone else more specialised/appropriate if/when we go ahead with our 'plan'?

Please - all thoughts, pointers and criticisms welcome! Many thanks,

Cocksy

clutton_2

hello cocksy, you have obviously given this a great deal of thought, and have asked some very intelligent questions. Your plan has some merit, (but, there's always a but !!) - you need to do a fair bit of research before committing yourself to remortgaging.

Bottom line is - if you buy another house you will only be able to borrow 85% of the purchase price on a BTL mortgage, and the surveyor who surveys the house prior to purchase has to find that the rent the house will attract will be 30% more than the mortgage payments - otherwise the lender will turn you down. This is not an easy formulae to meet in Bristol. But, these figures should help you research which areas of the city and surrounds to be loooking at.

my best suggestion is to read https://www.singingpig.co.uk from front to back - it is THE best property forum in the UK. Thereis also an excellent book list on there - if you want this to be a long career - then read, read, read, and do more reading, it is a huge business to learn. I know that there is an informal property monthly meeting in Clevedon where property folks meet and chat over brunch. Networking is vital if you are not to spend years re-inventing the wheel.

i can reccomend an excellent mortgage broker who is fairly near to bristol and who can help you access products which are not available on the high street - there are literally tens of thousands of mortgage products out there !!

Re tax - you can claim a wide variety of expenses against your rental income - as any other business can
- including mortgage interest payments; CORGI gas safety certificates; managing agents fees; repairs; decorating; void periods; property insurance; travel to and from the property if self-managing; membership of such things as National Landlords ASsociation (i strongly recommend you join, you will learn a huge amount from them and get cheaper property insurance); telephone/admin costs; etc etc

When you come to sell the house you will have to pay Capital Gains Tax - no way round it - sorry !!

Whether or not to do it via a Limited Company is advice you should really seek from a good property accountant - as Ltd status has advantages and disadvantages. The property business is more complex than most tax-wise, and if you start off on the wrong foot it can cost you a lot of money in tax.

Are you managing your current property yourself - or is it in the hands of an agent ?

Good luck

PitRejection2359

Thanks Clutton - I'll have to look at the figures and that other site very closely!! At the moment we are managing it ourselves - between the two of us we mange to get around and cover most things pretty quickly, and our tenants are friends and/or friends of friends, so we are very lucky there!! It does save a lot of money from agents, and the work sin't too much at the moment - that may change if we had a couple more properties!!

pinkemsy

Just wanted to say thanks to Clutton for the advice - I have been on the website you suggested and it's excellent.

clutton_2

cocksy boy = you have got a current CORGI landlords safety gas certificiate haven't you ? Where did you get your AST from ? You will only know if your tenancy agreement is a good one when you have to take a tenant to court to get them out - buying a good one from a professional source is crucial.

roswell

do you really want all your investments to be in property ?

chant1l

It may also be useful to consider actually selling the Bristol house to start the business off. The sale would realise somewhere around £160k ish equity after fees which can then be used as deposits for further ventures . This may seem odd as you will be exposing yourself to capital gains tax, however remortgaging the current house to gain more equity will be difficult. It appears on paper that you may be underrenting, the mortgage on £100k should be about £600 per month, on a £270k property investment you should be looking to return at minimum 6% or £1350......

I am not a fan of renting to friends as the friendship or the business relationship suffers. I always liken it to paying for friendship, after all could you get more from a stranger? If you could would you then take the surplus and give it to your mates? I am not trying to be mean here, just honest.
Selling the house then gets you cash to use for purchases as a cash buyer, your £160k will now bag you bargains which you then remortgage at 85% loan to value, and so on. There is comfort value of having cash in the bank as opposed to taking on greater debt initially as well. Aim for higher yields as they will help protect you against future interest rate hikes.

silvercar

if you do charge a realistic rent, that is well in excess of the mortgage, you could remortgage the house to release further equity to fund deposits on other properties- no need to sell it.

clutton_2

no need to sell the house - rental yields are VERY low in the Bristol area, and the one saving grace in going into property in the south west is capital growth - you dont get that if you have sold !!!

PitRejection2359

Thanks for all the coments guys - I'll try and answer a couple of points now!

I think we are slightly under charging rent as Chant1l suggeted - not by as much as your figures suggest, but I do see your point about that being a waste of money, and you are of course right!

The main problem I have with selling is that we dont have loads of time to spend browsing for houses, so keeping the property ticking over as is whilst looking to remortgage & buy the next place means we keep paying off our debts at the same time.

silvercar wrote:

if you do charge a realistic rent, that is well in excess of the mortgage, you could remortgage the house to release further equity to fund deposits on other properties- no need to sell it.

I think this is probably the route we will take, the current rent is about £150 ish more than the mortgage per month and the next place we buy would be on a completely financial basis (no friends - max rent possible to cover the remortgaging).

clutton wrote:

no need to sell the house - rental yields are VERY low in the Bristol area, and the one saving grace in going into property in the south west is capital growth - you dont get that if you have sold !!!

That is very correct, we may have made nearly £80k in the 5 years we have owned the house, I doubt it will loose much value all that quickly in clifton (famous last words!!).

clutton wrote:

cocksy boy = you have got a current CORGI landlords safety gas certificiate haven't you ? Where did you get your AST from ? You will only know if your tenancy agreement is a good one when you have to take a tenant to court to get them out - buying a good one from a professional source is crucial.

We do have landlords gas certificates, renewed only a couple of months ago. What does AST stand for - I hope we aren't missing something!! Our tennancy agreement was bought 'off the shelf' - I can't remember exactly where from, but I believe it covers the main points - I'll check up on it! Haven't had a chance tocheck out the other forum yet, but will do today some time.

Any other thoughts on the whole starting a business to run the portfolio - as in will that mean that we will be able to buy & sell property without as much capitol gains tax as the property will be in the nae of the business and not ours personally? I have no idea - just sort of clutching at straws here!

Many thanks for your suggestions - keep them coming!

Cocksy

clutton_2

AST assured shorthold tenancy. You really need good accountancy advice if you are going into BTS as well as BTL. property is a very complex business as far as the IR is concerned, as they view BTL as a different type of business than BTS - which they see as property trading.

https://www.singingpig.co.uk is the best property website as i said, and there is a superb accountant called James Smith who posts on there from time to time. I have recently used him and he has saved me thousands of pounds with good advice. There are all sorts of relief you can claim if you know about them !

There is a small informal property investors group meets on the first sunday in the month at Clevedon - Scarletts Cafe opposite the pier at 11.30 - you would be most welcome.