Since the twin onslaughts of George Osborne’s Section 24 tax raid and the wholly unfounded negative hype surrounding Brexit, the talk has all been about woe is me, and that being a landlord marks you out as being belonging to an endangered species.
At the same time, there’s been a panicked rush to offset the removal/capping of mortgage interest relief by chucking everything into a limited company; another predominantly negative reaction.
So, if you believe all of that, then it’s clearly impossible for you to make money as a landlord – it’s what’s known as a self-fulfilling prophecy.
Thankfully, the naysayers have got it wrong – as if anything, now is one of the best times ever to make money as a landlord.
Firstly, property is one of the few truly asset-backed investments out there whose value is closely linked to supply and demand, as opposed to equities whose value is mostly sentiment-based.
For instance, according to the Office for National Statistics (ONS), the UK population grew to 65.1 million in 2015, an increase of over half a million since 2014.
Moreover, it continues to grow and is projected to continue to increase to nearly a quarter of the population by 2045; and my gut feeling is that demand for private rented accommodation will at least remain at current levels, if for no other reason than people living longer means that there are less properties on the market for our kids to buy. There are also the long-term demand hotspots along HS2 and London’s Crossrail, amongst others.
Same goes for Brexit, the world won’t stop wanting to come here, and if anything the reverse is likely to happen as UK Plc is a pretty good to place to live, work, and make money. That’s why so many people (my ancestors amongst them) risked everything to get here.
Secondly, owning and running investment property is absolutely no different to owing and running any other business asset. Note the operative word being ‘Business’, the definition of which is being a person's regular occupation, profession, trade or commercial activity. In other words, property is simply a raw material to which you add value (which is in this case providing decent rental accommodation of whatever flavour) and, if you get the sums and market intelligence right, make a profit in the process.
In which regard, the numbers are everything. Getting the balance right between yield and capital growth is not easy – London yields are awful, but the potential for capital growth is really good; albeit don’t over borrow as capital values are outside of your control, such as what happens to them during a loss of market confidence or perceived political risk such as Brexit.
As they say at the roulette tables “Faites vos jeux”, or in good old Anglo-Saxon “Place your bets”. In contrast, however, rental yields in the North East can be as high as 15%, but the chances are that you’ll never make much on the underlying asset value.
Probably the biggest part of running any business is to have clearly defined, manageable, measurable, and realistic goals. In other words, how much, of what, by when, by whom and, most essentially, why? So if you want to succeed, you really do need to work out what it is you want and be able to put a number and timeframe to it.
Thirdly, don’t let the tax tail wag the planning dog. Remember, having to pay tax is one of the most reliable indicators of being in good financial health – you only pay tax if you’ve actually earned something.
Likewise, if you all you worry about is paying less tax, then you’re looking at what once was (a bit like the way most accountants are really only interested in last year); whereas you should be behaving like an entrepreneur, i.e. knowing where you are now, where you want to be (next year), and working out how to get there as quickly as possible by reducing risk, having maximum choice, and minimising cost(tax is just another business cost),in an effort to maximise return.
One thing is for certain though, using a standalone limited company just to offset the predations of S24 will cost you far more than you bargained for, be pretty restrictive when it comes to raising money, and tie you knots into the bargain that are almost impossible to undo.
Bear in mind, that whilst mortgage interest is 100% deductible in a company, and its profits only taxed at 19% (corporation tax is falling to 17% over the next three years and perhaps even further as Brexit washes through), every penny you take out after that will be subject to more tax, and yet again when you die.
Likewise, the reason why the Exchequer just loves limited companies, is that they are totally visible and a doddle to tax; something that’s always popular with voters come election time. After all, the next oldest insult after tax collector is landlord!
In summary then. Yes, is it still possible to make money as a landlord, but only if you look at property as a business and behave like one, of which the largest part (and generally the hardest) is to accept that you don’t know what you don’t know, and be prepared to pay for that which a professional adviser does. In other words, don't be afraid to seek and pay for advice – it’s the only way that you’ll achieve anything like your potential, let alone your goals!
Keep calm and carry on, as they say.
Tony Gimple is one of the owners of Less Tax For Landlords.