Issues such as the removal of mortgage interest rate tax relief and the practice of stress-testing property portfolios by lenders are increasingly making the lives of landlords more difficult and many have already started to dump their stock. But, if you know your market you can still succeed in property.
Property Expert Series: Rory O’Mara from Closed Bridging Finance
- Introducing Rory O’Mara from Closed Bridging Finance
- What is Bridging Finance?
- What is Development Finance?
- Debt Finance Vs. Equity Finance – Which is Better for Property?
- What Kind of Property Can Be Bought With a Bridging Loan?
- How Much does a Bridging Loan Cost?
- How to Use Bridging Finance to Grow a Property Portfolio Quickly
- What Problems do Property Investors Face in 2018?
- Which Property Strategies Offer the Best Long-Term Potential?
- How Can a High Net Worth Individual Invest in Short-Term Finance?
- What is an SPV and Why are They Used by Property Developers?
Amy: What problems do you think property investors could be facing in 2018, Rory?
The Property Cyle
Rory: So, there are one or two key things here. We talked very briefly about the 18-year cycle. So, if we are 14 years up and 4 years down, we are at the top of that so we might just see a bit of a slowdown in the market for some people.
That slowdown isn’t great, generally. The drop has historically been about 1.5 to 2%. So, it’s just a temporary blip and you can’t always identify it.
So, that’s one risk.
Council Tax
Rory You need to know your market. So, for example, if you were buying in London, would now be the right time to buy in London? There may be better opportunities in the North East or the North West or maybe the Midlands.
And then you start to break down into… So, let’s just look at HMOs (houses of multiple occupancy). Generally, you’ll have regular Council Tax but we have heard from some investors, where the VOA, the Valuation Office Agency, are imposing Council Tax on a Band A basis per room.
Now, that can have a massive impact, if you had to pay £100 per room, as opposed to £200 or £300 and how would you deal with that?
And so some of the workarounds would be, well, technically, if you banded separately the tenant can get a 20% to 25% Single Person Discount. They are liable. But because it’s not a universal banding they’d move to another landlord’s property.
So, I see that as being quite a big risk for HMOs.
Amy: I agree and if you keep abreast of the news and conversations on the property forums, you can see this is happening more and more. People are coming forward and saying, ‘This has happened to me, now, in this area. This has happened to me’.
And I think that this is a real danger, this can spread and it probably will do because they can make a lot more money out of it.
Rory: I think so. I did read this, I’ve not validated it but I have read that when you turn a 5 or 6-bed HMO into 5 separate bandings or 6 separate bandings, the local authority gets credits for building new homes.
Now, I don’t know if that’s true. We need to do more research. But that would explain why this is happening.
Also, I think there is a greater risk if you are buying commercial property, converting commercial property into residential because the VOA have to come and re-band, as part of the process. And that may be an opportunity. So, that’s something to be aware of.
Tax
Rory: The other big issue is our dear friend George Osborne, thanks for nothing, really, George.
He imposed this crazy tax on landlords, where you’re basically taxed on turnover. There’s no other business that I know of, anywhere else in the world, where you’re taxed on turnover.
So, what does that mean as a risk?
I think there are some savvy landlords now, who are seriously thinking of offloading some stock.
And I think as we go through this process over the next four years, halfway through, I think, we’ll start to see some landlords… If they’re not making money and are quite highly geared and are not able to claim mortgage interest rate relief because they are higher rate taxpayers, that could have an impact.
Stress Testing
Rory: The last risk that I see would be, again, the rules that came in this year, related to portfolio landlords.
So, if you own 4 or more properties, the lenders will have to stress-test your entire portfolio, before they lend you more money.
That’s a much tougher job for the broker and it might mean that you, as an investor, you go and buy, let’s say, your 5th property… You think you can get a 70 to 75% loan-to-value but actually, you’ll be dictated by the lender based on the stress-testing on your portfolio with other lenders.
They will tell you what you can get. So, what does that mean? You may have to put more money into the deal.
And I only focus on one number and that is the return on cash. So, I don’t look at yield I just look at… If I get X-amount of money in the project. So, let’s just make some numbers up.
If I have left £100k in a project, can I get a 10% return on my money per annum? Why? If I’m going to get a consistent 10% return, it’s quite tough but if I can get it then it’s a good deal.
If it is significantly less than that, do I want to take the risk? I’m ignoring capital growth because you never bank on that.
So, those are the key risks as I see them, next year.
Amy: Thank you.