Whether you are a prolific investor or an accidental landlord, it is essential to understand the financials and protect your property profits. This includes monitoring your key costs on an ongoing basis.
Here are 5 financial reviews you should carry out annually:
1.Invest as an individual or via a limited company?
Currently, if you let a property you own yourself, you can only claim relief on your finance costs at the basic rate of 20%, even if you are a 40% or 45% tax payer. On the upside, if you invest via a limited company, you pay a lower rate of tax and there are other benefits. You can draw earnings from profits as opposed to income, and mortgage interest can be deducted as part of costs as a limited company but not as a private individual. For some, there are favourable rates when you come to sell, as limited companies pay 19% corporation tax rather than the 28% capital gains tax you could pay as an individual.
However, there are downsides to consider. If you transfer existing properties to a company, you may have to pay stamp duty and capital gains costs because they are deemed as being ‘sold’. There aren’t as many mortgages to choose from, and interest rates on mortgages are higher in the name of limited companies vs private individuals. You are likely to have more complex accounting, so could incur additional costs of around £1,000 in professional fees.
How to structure the ownership of property investments is an extremely individual decision, as the potential benefits depend on your personal circumstances. Irrespective of whether you buy as an individual or a limited company, you still need to pay stamp duty surcharge. To work out which is best for you, speak to our financial experts about your property plans and they can help guide you on the best way to invest.
2.Do you own a property with cash or a mortgage?
Many landlords prefer to invest with cash. It often means you can ‘bag a bargain’ when buying a property to let, you can secure more rental income without a mortgage to pay and the property is yours, whatever happens to interest rates. However, cash investors need to ensure a property’s value rises by at least the rate of inflation each year in order to be ‘worth’ the same. So, if inflation rises at an average of 3% each year, the capital value of your property needs to rise by a minimum of 3% just for your investment value to ‘stand still’ and this may not always happen.
When owning a property over the long term, it is worth considering taking out a mortgage, even a small one, as this can help generate better returns on the cash you invest.
To find out whether you should be holding property with cash or whether you might be able to secure greater returns through investing via a mortgage, speak to our local mortgage experts. They have arranged 1,000s of mortgages and have a wide range of over 12,000 products from 90+ lenders.
3.Current rates for re-mortgaging, equity release and development finance
If you already have a mortgage for the property you let, it’s important to review your deal every 6-12 months, as new products are launched on a regular basis. If the value of your property has increased (UK average house prices increased by 4.7% over the year to September 2020), it could help you secure a mortgage with a better loan to value which may have a lower rate. Or you might want to take out equity to buy another property or just to treat yourself and the family after a difficult 12 months. You may have bigger plans to renovate or develop property - whatever your finance needs, we can help.
4.Will your insurance cover you when you need it?
Just as mortgage products are reviewed regularly, so are insurance products. In the first lockdown in 2020, rent protection insurance went through a difficult period, when some products couldn’t be offered due to temporary changes to the eviction process. If you haven’t reviewed your insurance since before the pandemic, then it’s worth checking you have the right insurance at the right price. We provide tailored landlord insurance via our Premier Service, which means we will not only pay the related legal costs incurred on your behalf, but we will also manage any claims for you. Cover includes: non-payment of rent, damage if tenants have left the property in disrepair and legal costs if the tenant is taking action against you for any reason.
5.Can you reduce your ongoing lettings costs?
Whether you are having to upgrade your electrics before April 1st 2021 to meet the new guidelines or you provide a regular cleaning service for your tenants, it’s always worth checking you are paying a fair rate for the costs of letting and maintaining your property.
It’s important to achieve a balance and not to change suppliers or contractors simply because they are cheaper. The key thing to consider is whether you are getting value for money. Sometimes services are cheaper because they genuinely don’t offer everything you need - for example, does the electrician know and keep up to date with the latest regulations for letting a property?
Also if you have multiple properties across different letting agents, could you switch to one agent and get a better deal? Letting all your properties with Portico can provide you with added value as you have the option to utilise our other services like emergency repairs, as well as landlord insurance and Premier Service (which ensures your legal costs are covered should you or your tenants initiate legal proceedings).
If you need help reviewing your property financials, pop into your local Portico branch.