Now is the time to incorporate

GreatApe

Malthusian wrote: »

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.

Clearly not all landlords would consider a REIT.
Personally I think I would have gone down the residential REIT path rather than direct ownership but there are no pure residential London REITs. Plenty for offices, warehouses, retial, etc, but none for residential

It does not have to be landlords transferring in, it could be as you suggest large institutional investors just buying stock off the market to create a residential REIT. As for average returns such a residential London REIT would have returned much much better than the FTSE100 average. Sure property yields gross only 5% and net less but geared to 60% with 1.5% financing your rental return side will be closer to 9% plus any geared capital apriciation which over the last 20 years has been an average 9.25% with gearing at 60% its 23% return. Overall it means London has returned over the last 20 years ~30% annually. This is of course better than the performance of many of the worlds best fund managers. Its how nobodies managed to increase their initial investments 200 fold by reinvesting in the London houisng market over the last 20 years

GreatApe

Malthusian wrote: »

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?

why would the shareholders stand for this?

The primary cost savings would be in the much lower finance costs.
Not having to pay 10,000 x broker and admin fees every 2 years and getting access to the corporate paper system rather than going to a broker who goes to a bank and adds layers of management.

Also maintenance is not as big an issue as you might imagine. I use a plumber regularly who does plumbing and non plumbing tasks for me and charges a reasonable rate I do not see why such a system could not be expanded. Also some landlords already contract out to companies like British Gas which offers maintenance contracts where the tenants directly call them to have work done. It must be reasonable value if landlords are willingly doing that now.

martinsurrey

GreatApe wrote: »

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.

You think you can get £3b of London Resi backed corporate paper away at 1.25% on a 60% geared company... you must be really smoking something strong.

British Land (FTSE 100 with £6b market cap) corporate bonds with a 10 year maturity with a 5.357% coupon are trading at 116 (4.618% yield). You think you can get an almost 75% discount?

padington

When one new mortgage is applied for, all others would need to be audited from what I understand, which would make a lot of paper work.

martinsurrey

GreatApe wrote: »

With many landlords now incorporating to avoid S24 and gain other tax advantages (eg 17% corp tax soon vs 45% income tax)

And you are forgetting the 38.1% tax on dividends if you are an additional rate tax payer.

so you get a divi of 83% from the corporate, taxed at 38.1% gives you a net 51.38% of profit, BELOW the 55% as an additional rate tax payer. so the only real benefit is the offset of interest cost, but as shown above, you'd be looking at rates north of 5% in a highly geared property company so the ability to offset would be vastly less than the extra interest.

and if you are talking about REIT you don't understand the taxation of them, they don't pay corp tax, they pay dividends that are treated as rental income in the hands of the owner.

GreatApe

martinsurrey wrote: »

You think you can get £3b of London Resi backed corporate paper away at 1.25% on a 60% geared company... you must be really smoking something strong.

British Land (FTSE 100 with £6b market cap) corporate bonds with a 10 year maturity with a 5.357% coupon are trading at 116 (4.618% yield). You think you can get an almost 75% discount?

Short term debt is a lot cheaper than long term debt. Also your quoted yield is a simple yield you need to calculate the yield to maturity.

I do believe the 2 year paper would be cheap. Why wouldn't it be cheap when I can personally borrow in my own name at 1.74% fixed for 2 years and that is for 65% LTV and yes this is for BTL not residential. If for no other reason surely a bank would offer a discount simply as they don't have to deal with the time and paperwork for 10,000 applications.

martinsurrey

GreatApe wrote: »

Short term debt is a lot cheaper than long term debt. Also your quoted yield is a simple yield you need to calculate the yield to maturity.

I do believe the 2 year paper would be cheap. Why wouldn't it be cheap when I can personally borrow in my own name at 1.74% fixed for 2 years and that is for 65% LTV and yes this is for BTL not residential. If for no other reason surely a bank would offer a discount simply as they don't have to deal with the time and paperwork for 10,000 applications.

So you'd be issuing £3b of paper every 2 years! I would LOVE to see the going concern statement where the average security of your funding is 1 year, no way would your auditors sign them off!

The reason your BTL loan is cheaper is because its backed by you, the bank has extra security, and you pay fees every few years.

Corporate funding is not as cheap.

GreatApe

martinsurrey wrote: »

And you are forgetting the 38.1% tax on dividends if you are an additional rate tax payer.

so you get a divi of 83% from the corporate, taxed at 38.1% gives you a net 51.38% of profit, BELOW the 55% as an additional rate tax payer. so the only real benefit is the offset of interest cost, but a shown above, you'd be looking at rates north of 5% in a highly geared property company so the ability to offset would be vastly less than the extra interest.

and if you are talking about REIT you don't understand the taxation of them, they don't pay corp tax, they pay dividends that are treated as rental income in the hands of the owner.

REITs are not normal companies they have a different structure that pay something called PIDs.

The company pays no tax the PIDs are supposed to be treated as rental income by the receiver.

So in theory if the company owned outright and had no costs and rental income of £1million it would pay nothing on that £1 million and distribute it as PIDs and the recovers would pay income tax on it at their normal rates.

However in an ISA or Pension there is no tax on this PIDs so the actual taxation is a full zero. The company pays nil tax and the individual pays nil tax inside the ISA and or Pension. Actually there is a withholding tax of 20% but that is recovered if inside the ISA/Pension.

So it really is 0% tax both on once and capital basins vs 45% income tax and 28% capital gains. Not to mention the HUGE advantage of buying shares for 0.5% stamp city rather than London property for 5% stamp duty. An investment of £400k geared up is going to cost the individual £60k in stamp (2 x £500k BTLs) while a £400k purchase of shares would cost £2k in stamp so that is a massive difference. Likewise on sale you are looking at over £10k cost as an individual while the shares only cost £10 to sell.

Finally as I've said earlier if as an individual I can borrow at 1.74% fixed for 2 years and at 65% LTV I'm confident a company could borrow less at 60% LTV and lower overheads in getting a mortgage for thousands of properties rather than a bank having to do work for thousands of individual landlord applications. The poster quited the yield incorrectly for British land he needs to look up yield to maturity

martinsurrey

GreatApe wrote: »

The poster quited the yield incorrectly for British land he needs to look up yield to maturity

hmmm I quoted both the coupon and the yield to maturity.

British Land (FTSE 100 with £6b market cap) corporate bonds with a 10 year maturity with a 5.357% coupon are trading at 116 (4.618% yield). You think you can get an almost 75% discount?

5.357% is the coupon and 4.618% is the yield to maturity...

GreatApe

martinsurrey wrote: »

So you'd be issuing £3b of paper every 2 years! I would LOVE to see the going concern statement where the average security of your funding is 1 year, no way would your auditors sign them off!

The reason your BTL loan is cheaper is because its backed by you, the bank has extra security, and you pay fees every few years.

Corporate funding is not as cheap.

Fine go to a bank directly if you think the corporate paper market is not cheaper but I don't see how adding a middle man is going to be cheaper. What is the yield to maturity for British land for 2-3 year paper?

Also you don't have to do 2 year paper it could well be a hybrid like 2 years at 1.74% followed by 10 years at 5% (or some figure over LIBOR) but of course with the option to pay off at any point after 2 years so that if you could issue another 2 years at 1.74% you would do that.

At 60% LTV and gross yield of 5.5% you can quite easily survive debt at 5.5% interest although I don't see us going much over 2.5% this cycle.

In short how can a million small landlords be more efficient time/tax/interest/other than a company with 100,000 properties