Now is the time to incorporate

GreatApe

With many landlords now incorporating to avoid S24 and gain other tax advantages (eg 17% corp tax soon vs 45% income tax) would now not be a perfect time to try and set up a national or regional pure residential REIT

I am only a mid sized landlord so its outside of my scope but I feel there is a business plan somewhere in this.

Already thousands of landlords are moving into their own corporate structures. Why do this when landlords can band together and set up a large company holding a large number of properties rather than thousands of companies holding just a few properties

Just as an example if a London company could be set up with 2500 homes at 60% leverage it would have a market cap of £500 million which would get it into the FTSE 250. There would then be a big advantage to said company. The shares could be held in an ISA or a pension making capital gains and income tax free. The shares can be sold and bought without having to pay the huge stamp taxes and selling/buying fees.

Not to mention possible economies of scale for maintenance advertising on rightmove etc

I feel such a company could become a £10 billion market cap company, it never made sense that millions of landlords owned 5 million properties. like millions of corner shops, it was and is more efficient for a big 5 supermarket company


Any thoughts on the possible downsides? or general comments

padington

GreatApe wrote: »

With many landlords now incorporating to avoid S24 and gain other tax advantages (eg 17% corp tax soon vs 45% income tax) would now not be a perfect time to try and set up a national or regional pure residential REIT

I am only a mid sized landlord so its outside of my scope but I feel there is a business plan somewhere in this.

Already thousands of landlords are moving into their own corporate structures. Why do this when landlords can band together and set up a large company holding a large number of properties rather than thousands of companies holding just a few properties

Just as an example if a London company could be set up with 2500 homes at 60% leverage it would have a market cap of £500 million which would get it into the FTSE 250. There would then be a big advantage to said company. The shares could be held in an ISA or a pension making capital gains and income tax free. The shares can be sold and bought without having to pay the huge stamp taxes and selling/buying fees.

Not to mention possible economies of scale for maintenance advertising on rightmove etc

I feel such a company could become a £10 billion market cap company, it never made sense that millions of landlords owned 5 million properties. like millions of corner shops, it was and is more efficient for a big 5 supermarket company


Any thoughts on the possible downsides? or general comments

You then g t stung for More capital gains tax I think, it's only a very long term strategy.

GreatApe

Such a company would not necessarily grow the rental stock it would just slowly shift a small number of the million plus landlords from owning directly to owning indirectly.

westernpromise

The issues would surely be the costs of incorporation and the different quality of debt from property to property.

I would consider putting my £1 million 27% leveraged west London flat into a oortfolio with a lot of 75% indebted HMOs in Macclesfield to be an unacceptable dilution.

GreatApe

westernpromise wrote: »

The issues would surely be the costs of incorporation and the different quality of debt from property to property.

I would consider putting my £1 million 27% leveraged west London flat into a oortfolio with a lot of 75% indebted HMOs in Macclesfield to be an unacceptable dilution.

well lots of people are incorporating anyway so I dont see why it would cost less for a thousand landlords to incorporate into a thousand companies rather than 1 company.

The way I see it it would be for 12 distinct companies one for each region of the uk, possibly owned by one head company or more likely individually listed but perhaps run by a head company.

So instead of a thousand London landlords incorporating into a thousand companies they would incorporate to one large company and float as London Residential REITs PLC. This company could then grow either by raising capital and buying properties in London or buying new builds by the block in London. Or exchange London landlord properties for shares so in your case your £1m 27% LTV property = £670k equity could be exchanged for £670k worth of shares. You would effectively be selling them the property for £1m. I wonder if there would be some sort of incorporation relief for landlords that did this. Of course it might not be for YOU but it would seem attractive for people who are going down that road anyway.

The company could operate on maybe 60% LTV

The advantages are that someone could own property indirectly via a purely residential REIT. It would be all the positives of owning a BTL but much more tax efficent. Instead of paying 5-10% stamp duty you would only pay 0.5% shares stamp duty. Instead of paying 1-2% in sales fees to an agent and solicitor you would pay £10 to a broker to sell your shares. Instead of paying 45% income tax you would pay 0% dividend taxes inside an ISA or could even purchase shares with gross wages in a pension.


overall the idea is that surely a residential reit with thousands of properties would be more tax efficient and more labor efficent than thousands of landlords doing this solo

GreatApe

GreatApe wrote: »

The company could operate on maybe 60% LTV

This brings up interesting options. If house prices go up the company can borrow more to stick to the 60% LTV and purchase more homes. This is the wilsons model. On the other hand it could borrow more as house prices increase and use the sum to buy its own shares back which would be the same in terms of outcome as the wilsons model (in terms of returns for investors) but without the need to actually buy more homes.

Overall the uk rental market is largely spread wide and thin with 5+ million rentals owned by 1+ million owners all doing their bit. It would surely be much more efficient time/money/tax wise for a few large purely residential reits to do this job.

I dont think I would have gone into direct ownership of BTLs if a purely residential regional REIT was available I would have invested in said shares. Plenty of UK REITs for officces, retail, warehouses etc but not pure residential reits

Thrugelmir

GreatApe wrote: »

overall the idea is that surely a residential reit with thousands of properties would be more tax efficient and more labor efficent than thousands of landlords doing this solo

Don't think this is a new idea. Already exists in a form. Consolidating existing LL's would be a non starter. Better to build bottom up with cash.

martinsurrey

GreatApe wrote: »

overall the idea is that surely a residential reit with thousands of properties would be more tax efficient and more labor efficent than thousands of landlords doing this solo

But then you need to set up a call center to deal with the calls from the 1000's of tenants.

Then you need an accounts receivable team to pay the maintenance costs.

Then you need a Collections team to deal with late rent,

Then you need a accounts team to deal with the statutory accounts and all of the output of the above.

Then you need a facilities team to manage the office all of the above work in

Then you need an IT team to make all the systems work

Then you need a legal team to deal with the listing requirements of the London stock exchange

Then you need non exec directors to meet the listing requirements of the combined code.

Then you need an HR department to manage all the above people

Then you need layers of management to manage all of the above and deal with the banks.

All of this costs money, money that isn't necessary if they are managed by smaller entities, as they do the bits they need "for free"

Malthusian

BTL investors own BTLs because they have a vague distrust, or sometimes a very concentrated and considered distrust, of the general financial system. Which is why they hold BTLs instead of a diversified portfolio of stocks and shares. Yes, I am aware that this is a generalisation. Point is, as the CEO of Consolidated BTL plc, persuading an individual BTL investor to sell your company his house in exchange for shares in Consolidated BTL is going to be an uphill struggle. Vertical, in fact. He doesn't trust you, he doesn't trust the general concept of having shares in someone's company instead of a house he can drive past and admire. If he was inclined to trust that kind of thing, he wouldn't have the BTL in the first place.

Attempting to consolidate hundreds of landlords into one company by this method would be quixotic in the extreme.

The only way to set up a company holding thousands of residential properties in this way would be to offer the landlords cash, since they won't consider a merge deal. (At which point they will take the cash and buy another BTL.) This means you will be competing with all the other players in the housing market to acquire the properties, and I suspect you will find it very difficult to raise enough cash from investors. BTL landlords will not generally be interested for the reasons discussed above. The general equity markets will take a lot of convincing to invest in your company given that the project offers pretty average return prospects and very high political risk in a crowded market.

All the advantages you list of this kind of company are already available in other retail investments.

It is also not necessarily the case that BTL via a company will be more efficient than an individual investor. Individuals have tax planning opportunities that companies don't. You can put the house in your non-earning spouse's name and the rental income is then completely tax free: no corporation tax, no dividend tax.

Malthusian

I was going to say something similar to martinsurrey but my post was getting long-winded. Economies of scale are grossly overrated as anyone familiar with mergers and acqusitions knows. I strongly doubt that a contract negotiated with a massive nationwide maintenance contractor would actually work out cheaper than local tradesmen and plumbers. The people who negotiate such contracts are rarely as motivated to get the best price as an individual BTL landlord. £300 call out to change a light bulb anyone?

GreatApe

martinsurrey wrote: »

But then you need to set up a call center to deal with the calls from the 1000's of tenants.

Then you need an accounts receivable team to pay the maintenance costs.

Then you need a Collections team to deal with late rent,

Then you need a accounts team to deal with the statutory accounts and all of the output of the above.

Then you need a facilities team to manage the office all of the above work in

Then you need an IT team to make all the systems work

Then you need a legal team to deal with the listing requirements of the London stock exchange

Then you need non exec directors to meet the listing requirements of the combined code.

Then you need an HR department to manage all the above people

Then you need layers of management to manage all of the above and deal with the banks.

All of this costs money, money that isn't necessary if they are managed by smaller entities, as they do the bits they need "for free"

Yes clearly there will be administration costs that an individual investor might not see. However if said invester is using an estate agent charging say 10% management fee I would suggest this type of structure would cost less perhaps nearly half as much so 5% of gross rent as management overheads. The non residential REITs seem to work just fine so to suggest layer upon layer of bureaucracy is mandatory is probably wrong

On the other side you also have economies of scale, ie a REIT with say 10,000 properties in London worth £5 billion and listed on the FTSE could issue its own paper. So no need to go to a broker every 2-3 years to get a mortgage x 10,000 times having to pay directly or indirectly 10,000 broker fees and mortgage fees and bank interactions etc etc. instead sell your own corporate paper. £3 billion (in multiple issues) at 1.25% backed by your properties is a lot more attractive than the individual BTLer getting a 2.75% deal. That alone is an annual £45 million saving on interest costs or £4,500 per property which is very significant.

But of course the big advantage is the tax. The £20,000 or thereabouts profit per property would see £3,400 tax so an investor in an ISA or pension would get £16,400
The same property in an individual name would get closer to £8,500 post taxes and higher costs. So its a very significant difference.

Plus capital gains tax free
Plus 0.5% stamp duty vs 5%+
Plus much cheaper transaction costs £10 to pay a broker to buy/sell the shares rather than £2000 to a solicitor to buy the property and closer to £10,000 to agents/solicitor to sell the property.
Plus shares held in a pension do not count for IHT purposes