By Simon Misiewicz
I have decided to write a blog series that captures my experience of dealing with over 1,000 property investor clients over the past 10 years.
My discussions with clients along the way have enriched my knowledge and understanding of what makes a successful property investor.
I am going to cover the following subjects with you:
- Part 1 of 9: Why mortgages are the thing of the past
- Part 2 of 9: The end of buying properties in your own name and why limited companies are the only way forward
- Part 3 of 9: Lose it all, the risk of holding residential property investments
- Part 4 of 9: You are immortal and do not need to worry about legacy planning, really?
- Part 5 of 9: The problem with your Joint Venture partners screwing you over
- Part 6 of 9: Why the heck are you doing all this anyway
- Part 7 of 9: Why you will be poor at retirement
- Part 8 of 9: Why not just buy another poorly-performing asset
- Part 9 of 9: Why commercial properties are the new black
Why do people always get a mortgage when buying residential property investments?
A lot of people reading this article will probably have suggestions such as:
- Property prices increase and use of mortgages for leverage
- Minimise tax as mortgage interest is a cost
- Speed of getting onto the property ladder
Our team of property tax experts are on hand to best advise our clients on how to structure their property investments.
I used to say that property prices doubled over a 10-year period. However, if we look at the graph shown on the Office National Statistics (ONS) website below, you can see that property prices have not even increased in value, never mind doubled.
Mortgages and capital repayment
Are mortgages actually useful to leverage money to gain capital growth?
After all, you do pay a lot of money in arrangement and broker fees – and then the ongoing monthly interest. Most people have an interest-only mortgage, so it is likely to suggest that the mortgages will be outstanding after the 25-year term, if they are lucky to achieve this length.
How are these mortgages paid off?
People used to think that some of their properties could be sold off to pay off the mortgages However, this is unlikely if house prices do not increase, and will therefore leave a lot of landlords in financial hardship as they will not have the money to pay them off.
As a result, they may be forced to sell properties even if they generate a good monthly income and they may not get the amount of money they expected upon the property sale – especially in a forced sale or recession.
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Section 24 and mortgage interest relief
For years, property investors have benefitted from the fact that they can offset mortgage interest costs against their income. This helped us leverage capital value whilst minimising our taxable income. That was all fine and dandy, until the budget changes and Brexit.
I focused very heavily on the tax impact of Section 24 and mortgage interest relief cap in this article.
Basically, HMRC now say that mortgage interest costs are actually income. You will get 20% tax relief on the mortgage interest costs, not ideal if you pay 45% tax. So, if you are a high rate tax payer or indeed forced to be a high rate tax payer because of these changes, then it could be a disaster if you are highly-geared.
Indeed, a high rate tax payer currently paying 40% in tax will have their tax liability increased on their property portfolio from an average of 65% to an extreme of 135%.
I do not need to point out the obvious, but there are future implications where a lot of property investors across the UK will pay not only all of their property profits to HMRC but will need to fund the additional tax liability from the employment income.
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I have completed financial and wealth planning sessions with over 100 clients. This is the type of service that does not just look at the tax return for the preceding year; it focuses on the future aspirations of the property investor, and the family structure to meet their lifestyle needs.
The greatest concern I see from property investors is that they do not know when enough is enough.
Stephen Covey said that “people climb to the top of the ladder, only to find out that it is set against the wrong wall”. How many people do you know are like that? Could it be you too?
I have also seen that people have purposefully lived other people’s lives. How many property investors say they need £10K per month, even though they earn a 1/4 of that and they will never spend that type of money anyway.
I think it is time that property investors understand what they want and need. Once this is established, it is about buying the right investments that provide tax-efficient income to meet the desired lifestyle.
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Mortgages and death
Sadly, a friend of mine died a few years ago, leaving his wife and two young children to find their way in life. He had been the “bread winner”. The issue was that the property investments were just in his name.
The banks wanted their money within 12 months of his death and asked her to send her mortgage application forms to get the mortgages moved to her. Sadly, she had no real experience of property investing and she had no income to shout about. The banks in question forced the properties to be sold.
Did she get the money she wanted from the properties? No, in fact she lost money on some of the properties, which added more stress to the situation.
Can you imagine losing your loved one?
Every morning you wake up next to one another and have those precious moments where you hold each other in silence, relaxing in one another’s arms, sipping a cup of coffee before you start the busy day. You loved spending an evening with a glass of wine discussing the day whilst watching a comedy on the TV.
The next minute they are no longer with you. As you can imagine this to be a very upsetting time. How about you are in this position and because your spouse has not sorted things out like mortgages that you now have to deal with banks that seem to be working against you.
You fear the worst, as the properties may need to be sold, but you have no personal experience of dealing with estate agents or being in the business of negotiating house prices. It can be a frightening time that is easily avoided if mortgages were in joint names from the beginning.
Better still, if only properties were purchased with no mortgages at all. You would not have the stress of paying them off in the event of death of your spouse (or indeed parent). Many investors use mortgages to have three or four properties rather than just the one because they can put down a smaller deposit.
You could have just one property that yielded the same amount of money as owning several properties with a mortgage. As such you would have far less tenants to deal with never mind the constant issues with boilers, electrical issues, broken cabinets, plumbing leaks etc.
Having mortgages also prevents you from transferring properties to your children because the mortgage terms prevent it. This could mean that property investors will end up paying a lot more IHT than they needed to. This will be examined in detail a later part of this serialisation.
I do understand that property investors look at the Return On Investment (ROI) as detailed in a previous article. However, sometimes I feel that it is much better to ignore ratios and simply to look at the absolute amount of money that you receive from your investments.
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