With recent government policy changes and adjustments to PRA, business planning for landlords has never been more important. New guidelines enforce tighter underwriting criteria and Section 24 changes have left some landlords wondering if they can still make money. However, this is about much more than just compliance. If you want to run a tax-efficient professional property business that delivers the best returns, a good business plan is vital. It will help you to minimise risk and maximise profit.
Malcolm Rose, Business Mentor and Co-Owner at Less Tax For Landlords, joined us for our latest webinar and showed why running your property portfolio as a business opens the door to a more favourable tax regime. Read his advice and answers below and don’t forget to check out the landlord perks at the bottom of the article.
A pathway to success
The role of your business plan will be to set a good framework and mindset. It forms the core of what you plan to achieve and why you want to achieve those goals. It’s a great enabler for success and often unlocks rewards you didn’t initially think you could achieve.
Malcolm uses a simple approach tried and tested within his own businesses as well as with his clients – a six step process to guarantee success across both your business and professional life. It is called the DPA MAP and it runs like this:
- Define: Where do you want to go, and importantly, where you are now. It’s impossible to plan a route from A to B without first knowing where A and B actually are.
- Prepare: Ask yourself how you are going to travel this journey. What will you need to achieve your end goal?
- Act: Every Journey starts with a single step. It’s amazing how many people fail to even get off the starting line.
Once you get going we move onto the MAP part of the process.
- Measure: After you have taken some action, you must measure the result of what happens. Are you closer or further away from your goal? Are you taking the most efficient route to the prize? If so, then carry on, but if not – you need to…
- Adjust: Get back on track, and ultimately…
- Persist: If you follow these steps and, as long as the goal is something you feel strongly about, you will achieve them in the end. You need to keep going. Measure, Adjust, Persist. It will be worth it in the end.
Let’s look at those steps from a Property Investor’s perspective:
First things first: define why you are doing this. Why do you want to get into property? For some, it’s an extra revenue stream. But for what purpose? For others it’s a chance to secure full financial freedom, reduce the hours they work and ultimately retire on their ‘property pension’, passing on as much wealth as possible to those they love. Decide what you want to achieve and look at what you need to do to make those goals a reality.
Ask the tough questions. Success often comes down to the quality of the questions we ask ourselves.
Imagine you have a rope held taut between two people six feet off the ground. Getting over that is pretty easy; you could probably climb onto a stool and jump over.
Now move to a 30ft high rope. Again, this can be relatively straightforward. Get the ladder out of your garage and climb over.
But what about a 100 foot rope? How are you going to get over that?
The thing is – the answer you come up with for the 100ft rope question will always work for the other two. Chances are, the same cannot be said for your other answers. The moral of the story is – that when it comes to planning, it always pays to think big. This allows you to open your mind to more possibilities, and open up routes to success that you may not have even considered with your previously limited thinking.
This will help you prepare for all eventualities. For example, if you’ve set your plan on the basis of being in an area of high growth, that growth may not always be there. What happens if it tails away? Can you still achieve your goals?
Once you have defined your goals you need to look at all the ways to go from today’s reality to your desired result. This can be quite constructive and can sometimes reveal that your goals themselves might be a problem.
So, if the only way you can get to your dream is to rob a bank or put all your money on red 6 times in a row at the casino, you may need to think about what you’re prepared to do in order to achieve your goals.
Choose something which fits into your own personal appetite for risk and reward and is practical alongside many of the compliance-led initiatives. The good news is that, with a sharp focus, education and a bit of help of companies such as Howsy and Less Tax For Landlords, there’s every chance an enhanced profit can be made without a trip to the casino!
Risk is, of course, a personal thing, but if these new goals are worth striving for, you challenge your own thinking. For example, how many of these statements apply to you?
- You only want properties within a half hour’s drive
- Only want a single residential buy-to-let
- Only prepared to manage the property yourself
- Wouldn’t touch an HMO with a barge pole
- Want to pay off the mortgage debt as soon as possible so you can sleep easier at night.
However many of these statements apply to you, don’t be surprised if achieving your goals requires you to look at – and perhaps abandon – some of them.
Realising your goals
At the end of the day running a property portfolio is just another investment. There are only two ways to make money – to benefit from capital growth or to generate revenue. You need to decide on the combination range you’re happy with.
One client asked Malcom to calculate the outcome of two potential strategies. One option was based on a 15% yield on no growth over ten years. The second was a lower yield of 7% when with an expected capital growth of 5% per annum.
After five years he planned to recycle those properties and buy into another area with an assumed 5% per annum growth. Even after the costs associated with sales and purchases, at the five year mark the latter came out on top. Of course, that was on the basis of an assumed growth of 5%. If it had been less the results would have been very different.
You must be clear about your assumptions. In this case, the assumptions were clear – and so it goes into the business plan.
Building your business plan
When building your business plan, you will need to decide on your legal structure. It’s a great chance to look deeper at where you are and take a review of your property portfolio. This is a great thing to do in any case. Ask if the numbers are giving you what they want or are they in line with your new objectives? If that doesn’t get you where you need to go you might want to restructure your portfolio.
So, what goes into a business plan?
Here are some of the key things to think about:
- Financial Targets: Set out your financial targets. These are the goals you’re looking to achieve.
- Experience: To help with your PRA guidelines you should document your own experience and the people around you.
- Type of properties, and locations. Explain why you feel this is the best option for you.
- Discuss the location: Location is important. Some areas, for example, might have higher growth; in others it might be more difficult to avoid void periods. Ask yourself if the local market allows you to generate enough profit? Is that property really a good deal, or is it cheap for a reason?
- Business structure: Your lenders will take into account the type and amount of taxes you are likely to attract. And whether you are posting trading income or investment profits.
- Who does what: List who is responsible for what. In many cases this might be you, but consider this: experts often advise entrepreneurs to spend time working on their business rather than in it. It’s easy to get distracted with working ‘in’ the business when what you should be doing is stepping back and concentrating on the bigger picture. Get help from other people. It may cost a little more but it may help you achieve your target.
- Who is your support team? Who is helping you achieve your goals? This could be the letting agents, maintenance teams, advisors and consultants – anyone who is there to help you achieve your goals.
Remember. Investors will be looking at your whole portfolio, but if you’ve done your work and planned properly this shouldn’t be something to be worried about. Indeed, it can unlock more investment.
When starting a business, it’s a good idea to think about your exit strategy and this applies here too.
Though if your exit strategy is driven by a desire to avoid tax, that might be a problem. And remember if your exit strategy is to sell up, that selling your property could be like killing the goose that lays the golden egg. Do you really want to get rid of a property which could provide gains for years to come?
Here are the answers to a few questions answered by Malcolm during the webinar.
1.Should I buy properties in my own name or in a limited company?
Many people ask if it is best to buy in your own name or limited company.
Whilst there isn’t a one size fits all answer to this, it does make a lot of sense to understand the ultimate end goal and just how large you want to grow your portfolio.
For most people, it is generally better to still own properties bought to hold and rent, in your own name, and properties you are looking to flip in a limited company SPV.
In some cases, this may mean seeing an increased tax bill due to Section 24 if you are a higher rate tax payer and have mortgages. However, once your portfolio reaches a certain size, you can restructure in a very cost-effective way, and reap serious short and long term benefits by doing so.
Again, knowing where you are heading is absolutely key.
2.When buying a property to let are finance costs such as remortgaging set against capital gains or income tax?
Finance costs are set against income tax. The only thing you can claim against CGT will be any expenditure to improve the value of the property. Everything else is running costs.
3.As we supply all furnishings in an HMO are they off-settable?
In general, the answer to this question is yes. However, every situation is different and the devil can be in the detail.
4.When buying with a mortgage and a hold-forever strategy, is it better to buy via a limited company?
It will always depend on your situation, but almost certainly not. With a limited company you will be paying income tax on your profit, and also when you draw the money out of the business, either via PAYE or Dividends.
5.When drawing up a business plan, what roles should you include?
It’s worth reflecting this question back and asking yourself what it is you actually do? There may be many things you do such as due diligence in finding a location and handling tenants. Work out all the tasks you do and note who carries them out. Bring similar tasks together under one role – a mini job description if you like.
Ultimately you may find you have 5, 6 or even more roles. And right now you may be doing all of these yourself, that’s OK. Some of these roles – such as strategy – should probably remain with you. However, to achieve your goals and eventual exit, you may need to replace a number, if not all of these roles with someone else eventually.
6.Capital allowances in HMOs
A lot of people aren’t aware of them. If you have purchased HMOs or commercial properties where there is a shared area you can get a tax credit on the percentage of the purchase price deemed to be related to the provision of fixed assets in those shared areas. However, this can only be applied once. So, if anyone has had a tax credit on this before, you will not be able to get it.
Perks for landlords
Congratulations on reading this far down! As a reward, here are 2 months of property management on us! Move your property portfolio to Howsy and for the price of £350 outside of London (anywhere in England) or £450 inside of London, we will manage the full lifecycle of your property for a whole year.
You can move as many existing managed properties to us as you like, or we can help with the whole finding of tenants and management. You still cancel at any time and you will be refunded the difference.
To claim the offer, register on this link or call us on 0330 999 1234 and quote ‘Less Tax 4 Landlords’
Less Tax For Landlords is offering a free initial tax assessment so you can understand whether you need to restructure your property portfolio. Claim it here.
To access the portfolio review table shown by Malcolm during the webinar, click here. See more landlord taxation resources here.