Investing in bricks and mortar has always been a popular method of investing money.
Property investment is about buying a premises with a full, repairing and insuring lease that means that the Property Investor receives a strong yield in terms of rental income without deductions.
Often the income is less secure in residential property investment, typically not longer than 12 months and therefore in addition to securing the income stream a property Investor buying residential property will be more concerned in the underlying asset value and capital appreciation.
Historically residential property investment was undertaken in personal names for flexibility and because the finance costs were cheaper. Individuals would use Declarations of Trust to share the tax burden. This still takes place but Attwells’ Declarations of Trust Team are now more focused at protecting the cash contribution and equity.
Who is a Property Investor?
Most people who start out in property investment have a successful career doing something else and are looking to diversify or create a passive income so they are less reliant upon their job. Many of Attwells property investors started out small and have gone on to become full time property investors or have become property developers.
If you are buying property as a property investor then this is business and your approach needs to be very different from buying your dream home. You are buying to make money.
A property investor buys a property for the purpose of renting it out and collecting an income or selling it and making a profit. These are two very different strategies.
Buying to Sell
If your strategy is “buy to sell” then buying at the cheapest price, understanding how you can add value to the property, the costs of doing so and capital growth are important to understand. Investors who “buy to sell” are often skilled in the building trade and/or have a good understanding of the planning system.
At the moment conversions of offices to flats in town centres under permitted development is very popular and may well continue for the future if there is an over-supply of office accommodation. The mindset of a property investor who buys to sell is more similar to that of a property developer.
Capital growth is the amount that your property increases by in value over time. This can also be called capital appreciation.
Purchase Price - £100,000
Current Value - £150,000
Capital Growth = £50,000
Any capital growth on an investment property is subject to either capital gains tax if you own the property in personal names or corporation tax if you own the property in a company. A good basic understanding of taxation is important as a property investor.
Increases in property prices are affected by supply and demand, jobs, transport and planning policy. When thinking about where to invest if your strategy is around capital growth make sure you do your research.
Buying to Let
A property investor mindset should be focused upon rental yield and capital growth is a secondary consideration. This is buying to let (i.e. you are buying a property to let it out).
What is Rental Yield?
Rental yield is the return in the form of rent that you receive each year on the property you are thinking about buying.
To calculate it you would take the annual rent and divide it by the price of the property and then multiply by 100.
Annual Rent - £5,000
Purchase Price - £100,000
= 5% yield
Many property investors will go on to calculate net yield which is when you add to the purchase price other costs such as mortgage payments, work that needs doing and insurance.
Property prices and rents differ across the UK and as a result yields can be very different.
Don’t forget that any rent is subject to taxation either personally in the form of income tax or in a company in the form of corporation tax. A good basic understanding of taxation is important as a property investor.
Understanding the yield enables you to compare different properties and to compare property investment with other investment opportunities available to you.
Commercial or Residential Property?
Often new property investors start with residential property investment as it is easier to relate to and understand. Commercial property investment is far more focused upon the income stream and a very strong rental yield. There may not be capital growth.
For residential property investment the income is less secure, typically not longer than 12 months and therefore in addition to securing the income stream a property Investor buying residential property will be more concerned in the underlying asset value and capital growth.
Commercial property investment is about buying a premises with a full, repairing and insuring lease that means that you will receive a clean income stream without deductions. Make sure your Solicitors are experts at identifying that the income stream is secure, increasing it if possible and ensuring it is not subject to irrecoverable sums.
Historically residential property investment was undertaken in personal names for flexibility and because the finance costs were cheaper. Individuals would use Declarations of Ownership to share the tax burden in addition to identifying their ownership or initial cash contributions.
In the last few years changes in particular to the income tax treatment of mortgage interest and the Stamp Duty Land Tax (SDLT) rates has meant that residential buy-to-let has become significantly less popular and property investors now in most cases buy in companies.
We are also seeing investors working closely with their accountants and solicitors to transfer their properties from personal names into a company structure. Care needs taking around SDLT in these cases as the starting position is that market value would be payable upon the transfer.
A less common vehicle for property ownership is to purchase a commercial property using a self invested personal pension (SIPP). A SIPP cannot be used to buy residential property and access to the income is subject to the usual pension rules so expert advice is required here.
Tax is a key in property investment. Consideration needs to be given to Capital Gains Tax, Income Tax, Stamp Duty Land Tax; Corporation Tax and VAT. Accountancy advice needs to be taken to understand your personal circumstances to advise you as to whether you should be buying as an individual or company and what is and is not tax deductible.
As you get older it will be important to consider your property investment portfolio in the context of inheritance tax too. Every property investor should have a Will in order to ensure that this investment is protected after your death.
If you are buying your first property investment then it is likely that you will need a buy to let mortgage.
Loan to values on investment properties are less generous than they are on a personal property purchase and normally interest rates are higher too. Loan to value is the percentage of the property value that is being borrowed from a mortgage company.
With buy to let mortgages lenders will usually not lend more than 80% of the loan to value.
The mortgage criteria for property investment is very different from a personal purchase. A lender will want to understand your income and outgoings, credit history and value the property you are purchasing but of particular importance is the potential rental income from the property. Lenders will want to know you can cover not only the mortgage payment but say a further cushion of 25% on top.
If you are buying in a company name then you will need a commercial mortgage in the name of your company and in addition to the security over the property you will be likely to be required to personally guarantee the mortgage too. Make sure that your Solicitor understands personal guarantees; debentures; charges over rent accounts and the need for independent legal advice.
How do I find a good property deal?
The starting point is that you need to know whether a property is good value or not. You therefore need to have a detailed understanding of your geographical market. Starting out it makes sense to invest locally because it is probably a market that you know well. If this is not possible because of yield or price then make sure you do some detailed research on your investment area.
Once you have decided where to invest it is a good idea to meet local estate agents as you will be an attractive buyer to a seller as you are chain-free and therefore the purchase is more likely to happen.
Newbuilds are often at a premium but a developer is a motivated seller and therefore if he has stock that is unsold then he may be prepared to offer you a good price.
Buying at a good price means that the setting of an auction where the market determines the price can be a good source of commercial and residential property for Investors. Make sure Solicitors are ready to review auction packs at short notice and identify the pitfalls. Nick Attwell has done a couple of videos on buying at auction and you may find these useful:
Remember when looking for property not to fall into the trap of asking yourself whether you would like to live there. Work out the rental yield and identify the prospects for capital growth.
You will need to decide whether you manage you own property or not. A factor to this will be the proximity that the property is to your home and again this is a reason to initially start out local.
If you are happy to deal with the maintenance and rent collection then you may still find it useful to pay an agent to find you a suitable tenant, undertake the initial legal checks for you and arrange for the tenant to sign the tenancy agreement, register the deposit and then you will take over.
If you want to be more “hands off”, or the property is more distant from you or you have a larger portfolio then it may make sense for you to hand over the management to an agent. Check the agent is properly regulated and check their terms and conditions carefully.
In particular take great care to make sure that the deposit paid by the tenant is properly protected in a tenancy deposit scheme and you have supplied this information to the tenant.
Experienced property investors may also identify “difficult” properties which can be lower in price because of legal issues that may need to be resolved. A flat may be unmortgeable because of the short lease term. A property investor can purchase with cash and then add value by agreeing a lease extension and then having achieved capital growth sell at a higher price. Lease extension legal expertise and valuer contacts can help here.
Sometimes a property may be subject to a secure tenant who has lived there for many years. Expert landlord and tenant legal advice is required about how possession can be recovered.
On other occasions disputes with a neighbour or land that is not registered may mean that a property investor can seize upon a more unusual opportunity to make a profit.
Investors may own a number of properties in a Block but their investment may be being impacted by poor management of the Block. Alternatively, Investors may have identified opportunities to develop the Block further if they own the freehold or at least to prevent the investment being eroded through the requirement to pay ground rent or lease extension premiums. Here the law around collective enfranchisement or the right to manage can help to increase the property value.
Having secured an investment property a property investor will be looking to perhaps extract equity from the property in the future and to reduce or fix any interest costs by refinancing the property.
A common strategy that is adopted is that following capital growth the property is remortgaged so as to extract a deposit to purchase the next investment property. There are risks around this strategy and therefore care and financial advice should be taken in addition to ensuring that this fits with your personal investment strategy.
After purchase if the income stream stops because the tenant stops paying then a property investor needs an expert at recovering back possession as quickly as possible and suing for any rent arrears.
If it is clear that your tenant is not paying rent then you must take action quickly to protect your investment. You cannot just change the locks or threaten your tenant as you could be committing a criminal offence. You must take legal advice but you must act quickly
Most Solicitors have a residential conveyancer dealing with property investment. This means that you are not getting the expert advice that you need.
You need a Solicitor to secure your deal quickly. A Solicitor that understands rental yield and capital growth and therefore what is important to look at in relation to the legals. A Solicitor who has a good understanding of tax and can therefore speak to your accountant. A Solicitor who understands company buy to let financing. A Solicitor who understands how to extract greater value out of the more tricky situations. A Solicitor who can create new leases if necessary and refinance quickly. A Solicitor who can take legal action fast if your tenant is not paying. You need a law firm that has built a service around you.
Meet the Head of the Team
I am Nick Attwell I head up the Property Investor Team. I am a residential and commercial property investor. I have written articles and spoken at many seminars on property investment. I have helped hundreds of clients and household names to develop their property portfolios and am ready to have an initial chat with you.
Property Investor and Property Development Legal Services
Due to our property law focus Attwells are able to offer you a broad range of legal services. When you instruct Attwellsyou will be offered a property professional solicitor who will oversee all of your matters. This ensures we build close relationships with you. We are happy to arrange online meetings, site visits or make out of hour calls to suit your working day.
Property Investors Consultation and Letter of Advice
Price: £300.00 plus VAT
What is included in the price:
- Initial telephone conversation
- Brief review of documentation in advance of meeting (subject to reasonable number)
- Meeting at your local office with a lawyer who has specialist knowledge of the property sector
- Summary of advice at conclusion of meeting setting out the legal position
- Letter of advice
What is excluded from the price:
- Subsequent letter of advice
- Meeting at your business premises (can be arranged at additional cost)
- Legal advice outside of the service requested
None are anticipated
How long will it take?
The meeting itself will last around 1 hour and, subject to your availability, we would aim to hold the meeting with you, within 48 hours of your initial call or earlier if required. Same day appointments can be made.
What can we cover in the meeting?
We can provide advice to you on all areas, including but not limited to:
- All aspects of employment law / HR
- Estate Agency law e.g. Estate Agents Act 1979, property misdescriptions, consumer rights
- Terms of business
- Contractual and commission disputes
- In house Complaints handling
- Referrals to the TPO or other redress scheme
- Anti-Money Laundering Regulations
- Breach of restrictive covenants by ex-employees e.g. non-compete, non-solicitation
- Landlord & Tenant issues
- Block and estate management
- Possession proceedings
- Acquisitions and company law
- Training on money laundering and SDLT, possession claims, speeding up your conveyancing pipeline and making the agent/solicitor relationship more effective
- GDPR and data protection
- Debt recovery
- Business disputes
- Shareholder / Director disputes
- Shareholder agreements
- Self-employed contracts including IR35
When will I pay?
Attwells Solicitors will ask you for money on account in advance of the meeting so that work can get underway on your matter. In the event that the meeting is cancelled more than 24 hours in advance, a refund of money on account can be made to you.
How to instruct Attwells Solicitors?
Instructing us is simple. You can either click on the instruct button below to register your interest or you can call your local office. We have offices in Ipswich, Colchester and London. When instructing us please inform us of the office you would like to use.