A former business colleague got in touch this week through Linked In and we had a catch-up chat. He asked me ‘so what do you think about all this landlord bashing and what are your thoughts about property investing going forward?’. Today’s show is an elaboration of my response, equally prompted by another headline: ‘50% of landlords could quit sector due to tax changes.’
What are the main incentives and disincentives that are driving these sentiments and indeed some of my own personal investing behaviour? Let’s find out!
Article on 50% landlords changing their investment position referred to in the podcast
Tax and Fiscal Treatment of Landlords in Ireland
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Today’s must do’s
Think about the long-term and why you want to invest in property, then take a look at the incentives and disincentives that exist. Take your decisions as to your next steps wisely after considering what you wish to achieve with the various ways of getting there…there is more than one way to skin a cat!
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Transcription of the show
Hello and welcome to another episode of The Property Voice podcast. My name is Richard Brown and it’s a pleasure to have you join me on the show again today.
Thanks to all of you that have been in touch recently in way or another after my recent absence from the podcast…I have felt your warmth that’s for sure. Also, a big thank you to all of you that took up the Birthday special offer to grab a copy of my book Property Investor Toolkit and in the process, send it towards the top of the charts once again!
This week, a former business colleague got in touch through Linked In and so we had a catch-up chat. He asked me ‘so what do you think about all this landlord bashing and what are your thoughts about property investing going forward?’. Today’s show is an elaboration of my response, equally prompted by a recent news headline: ‘50% of landlords could quit sector due to tax changes.’
What are the main incentives and disincentives that are driving these sentiments and indeed some of my own personal investing behaviour? Let’s find out!
As I mentioned, a former colleague contacted and asked for a call. It’s always good to catch up with former colleagues and business contacts, especially when you have not spoken for a while but where we did have a good working relationship. You never know what’s on people’s mind in advance, but my former colleague made his sentiments quite clear after an initial exchange of pleasantries.
He asked me ‘so what do you think about all this landlord bashing and what are your thoughts about property investing going forward?’. He then went on to share with some of his own sentiments and how what is happening is affecting his property investment plans, mainly with buy-to-let.
I also shared some of my current property activities and to some extent how these have been driven by recent changes in the tax and regulatory landscape.
The main things that I am involved with in property right now are these:
- More emphasis on development
- More emphasis overseas markets for investment & trading
- Less emphasis on new UK single property standard buy-to-lets
- More emphasis on alternative commercial structures & property strategies that negate some of the recent tax changes
But why is this and how is Government policy directing my personal property plans?
There is a phrase used in Economics that ‘incentives work’. Economic incentives are offered to encourage people to make certain choices or behave in a certain way. They usually involve money but can also be non-financial. I guess, by definition, that a disincentive is the opposite of this…more like a penalty if you prefer.
In terms of general Government policy, here are some of the big incentives or disincentives or penalties that have been introduced of late:
- 3% The Stamp Duty premium for second / investment property ownership – this makes buying new investment properties more expensive when compared to previous purchases and when compared to current non-investment buyers.
- The caps and reclassification on mortgage interest tax deduction for individual buy-to-let investors, which makes BTL less profitable for higher rate taxpayers & can push some basic rate taxpayers into a higher tax bracket.
- A hotchpotch of statements, polices and incentives aimed at encouraging new house building.
These 3 changes alone highlight the general behaviour that the Government seeks to encourage: less rental investment properties held by individuals and more corporate and institutional investment into rental property and new homes provision.
The incentives and disincentives take the shape of policy statements, changes to planning guidelines, access to funding and grants and tax treatment in the most part. They are deliberately designed to shape our actions and behaviour and in a lot of cases it is working.
Many existing landlords who own buy-to-let property are considering selling some or all of their portfolio, switching into alternative types of investment, be that within property and elsewhere, or are looking for the alternative structures and loopholes to try and avoid the pain instead!
Some potential new landlord / investors are having a rethink about BTL or are simply sitting on the fence for now.
If you are an existing landlord / investor in buy-to-let and, in particular, use mortgages and are or would become a high or highest rate taxpayer due to the changes, then no doubt you will be fairly well tuned in to all of this. You may be put off by the additional stamp duty premium and possibly coughing over your cornflakes when you fully understand how much BTL profit could be eroded if you are an individual investor in BTL.
Personally, I am potentially impacted by some of these two tax changes. I have seen new single unit properties, be they for trading profit or long-term BTL, take a dent in terms of their profitability.
I am to some extent protected from some of the changes to my existing portfolio & trading options for as a result of some tax insulation that I have built over time, so I am in no hurry to incorporate or enter into a range of complex trust arrangements…not just yet at least! But that may change down the line.
However, I am not that keen on exacerbating the problem in the short-term, so I am to some extent sitting it out as far as new single-let BTL rental properties is concerned. I do, however, see some parallels between what is happening in the UK right now and what has happened in Ireland over the past few years or so.
Rather like the UK, Ireland introduced a range of policies and penalties aimed at deterring rental investment among private landlords and favouring homeownership instead. Without going into all of the detail…it failed miserably. The reason why it failed was that there was a rather large false assumption that the Government had made that drove their policy. The assumption was that everyone both wants to and can own their own home.
It’s simply not true though, 100% home ownership is just not possible. Firstly, many people prefer the characteristics & flexibility of renting over the high bar and responsibility of homeownership…secondly, some just don’t have a choice to be perfectly frank!
Lower entry costs, mobility, no ongoing repair and maintenance issues on the one hand, along with lack of ability to prove mortgage payment affordability or lending viability, poor credit and a low ability to save creating a gap in terms of financeable mortgagees on the other, help to disprove that false assumption…certainly above a certain level of homeownership anyway.
Homeownership peaked at around 72% in the UK and currently stands at around 64%. Of course, many commentators are up in arms about the decline in homeownership rates as a result. However, it is safe to say, that even at 72% homeownership, which does seem as though it might be a natural limit, implies that other forms of home occupation are absolutely required. These forms of home ownership are primarily social housing and the private rented sector, which are roughly equal in size.
However, the rate of social housing provision has been in steady decline for a couple of decades now, due to lack of council housing and funding for housing associations. So, the slack has been taken up by the private rented sector, both for those that can’t or don’t want to buy generally but also to plug the gap left as a result of the social housing declines too. Many of these housing providers were of course individual landlords. The vast majority of private landlords have just 1 to 3 rental properties, so they are not property moguls.
So…it’s not such a good idea to punish the private landlord then when they are in fact providing a necessary service that forms an important part of the housing market as a whole is it? If you don’t believe me, then just take a look at what Ireland is now having to do. It is having to reverse it previous decisions and policy aimed at reducing the attractiveness of private investment into housing that followed a similar track to that of the UK now and is in fact now actively incentivising it instead! It’s gone full circle.
The reason is quite simple – it takes huge sums of money to build and provide homes for people and neither the Government, the social housing sector or indeed some of the larger financial institutions getting into the private rental sector have pockets deep enough and a capacity wide enough to meet the demand we have for new homes in the UK in all its required tenures i.e. ownership, social and private rented.
These homes will need to be available to buy and also to rent as I have explained already…all three housing tenures will still be required, not just ownership. I mean think about it…how does the benefits claimant buy a house…they won’t qualify a mortgage? What about students…they will move on after a couple of years so want flexibility? What about young people…they are chasing their careers or a partner and so need to be mobile and flexible too? These are just some of the realities that mean we absolutely NEED rental properties in the order of 30% or so of the housing sector to provide for these types of household. I do agree that a level of home ownership is desirable for society in general, it does provide a natural place to hold money, which can be used as a pension, health care provision or leg up to the next generation as well. It can over the long-term help to reduce housing costs to people provided they stop climbing the ladder, settle down into a house and pay off the mortgage off.
In other words, I think the policies will go full circle…eventually!
Personally speaking, this means I am faced with a couple of options right now…
Defend my current portfolio position – which I am doing through a regular portfolio review, targeting properties that can sustain a gradual and modest rental increase, and strategic sales and refinancing, so that debt levels are manageable. However, I am not actively growing my standard single-let UK BTL portfolio right now.
Look for richer pickings – the fundamentals of the UK property remain strong. Low supply and high demand is not going away anytime soon, even with Brexit. However, there is a greater short-term emphasis on housing supply these days and that means property development and / or conversion from other uses into residential use is desirable. Schemes such as Build to Rent, loosening of planning restrictions such as permitted development rights and more funding / less regulation for housebuilders are all examples of incentives to support this. That makes development and conversion potentially more appealing, or a little easier than it was in recent times. So, I am doing more in this category too.
Diversify into more investor-friendly markets – there are some examples of more favourable property segments from an incentive point of view in the UK, such as through commercial property or more likely for existing BTL investors mixed-use property. However, right now and for me at least, it is easier to look at alternative international residential markets where the landscape is more receptive. An example is the USA, which offers higher yields for single family homes and more favourable tax treatment, especially in terms of financing. Yep, as mentioned last week, I have some US properties and am actively looking to take on more.
Mix the commercial model up a little to improve net returns – higher yielding property strategies, such as HMOs and short-term letting, offer the potential for higher income to offset the higher after tax costs. Similarly, alternative structures & commercial models, such as limited company ownership or lease, rental & owner financed property allow immediate control of a property with deferred ownership models that allow more favourable after tax profit positions to be adopted, so I am actively investigating and implementing some of these structures therefore.
The net result of all this, for me at least, is a watchful eye on what will happen with Government policy and regulation over the coming 5 years or so. I do think it will take some time for the oil tanker of Government to see the iceberg and change course before hitting it though, just as was the case with Ireland. So, from a personal point of view, I am not going to hang around and wait for that ship to come back into port anytime soon.
Instead, development, conversion, overseas markets and alternative ownership and rental investment models are attracting my attention and keeping me very busy in the right now. Standard single-property BTL in the UK will probably come back up on the radar…one day! Don’t worry, I will keep you posted as this unfolds.
But here’s my conclusion…it will be OK in the end…
If you have modest property ambitions, then stick with buy-to-let but perhaps take a close look at alternative ownership models going forward. It doesn’t need to be overly complex to offset some of the changes if you have say 1-3 rental properties.
However, if you intend to derive a reasonable retained income or asset base from your property activities, then think more like a professional investor and adopt a flexible approach to your investing. Water the plants for growth by growing rental income and removing the leakage of costs and taxation to keep the ground fertile, and so retaining higher net profits as you do. Don’t forget that you can always store your cash in property later, once you have grown the snowball large enough 😉
There is no escaping the idea in my mind that property will remain a very attractive asset class to store wealth over the long-term, even if net property incomes get squeezed along the way…so I fully intend to retain most of my existing properties, acquire new higher income ones in due course and use other property as a means in one way or another to grow the snowball along the way. I may just take a meandering path through different property strategies in getting there that’s all. I am more experienced and in a different position to many, so whilst I have multiple interests and strategies that I am working on, I appreciate that this is not always possible for new and early stage investors. However, some strategies are more favourable than others, so after a couple of standard BTLs you too might be thinking…what now…just as I have. Then, you will start to look at market trends and strategies but also at the incentives that are out there for us to take up or avoid as appropriate. Let me know if you need any help in figuring this out by emailing in.
Finally, and as a parting thought, whilst I have kind of said that invectives work and to some extent illustrated the point here with my own personal actions and behaviour, don’t let the tax tail wag the investment dog…it is a consideration for sure, but one among many others as I hinted at just now.
BTL might be wounded, but property investment and other property income-generating and asset accumulation opportunities still exist for the smart investor.
Remember that you can email me firstname.lastname@example.org if you want to talk about anything from today’s show or more generally in property investing, the show notes will be over at the website www.thepropertyvoice.net
But for now, all I want to say is thank you very much for listening once again this week and until next time on The Property Voice Podcast…it’s ciao-ciao.