The Complete Guide to Property Investment

by Rob Dix

  Any relevant costs you incur for seven years prior to your property business starting – which could be tax advice, travel, business cards or anything else you can think of. Unfortunately, however, you can’t make any claims relating to aborted transactions – so if you got a survey done on a property that subsequently fell through, that’s not allowable.

  Any mileage you use in the course of property activities, which can be claimed at standard HMRC business rates.

  The costs of education, as long as it’s classed as improving an existing skill rather than acquiring a new one. There’s no clear guide as to where the dividing line between acquisition and improvement is, but you could argue that once you’ve read this book and gone on a cheap or free course, you’ve acquired the skill of property investment – so if you subsequently go on a £500 course, that could be claimed.

  Sustenance costs while running your business, within reason – so keep your receipts for the odd sandwich and coffee while you’re out viewing properties.

  Postage costs, such as sending documents to solicitors.

  Telephone costs.

  If you run your business from home, you can claim an allowance for using your home as an office.

  And more. As with everything in tax, there are grey areas aplenty here – which is why it’s worth paying an accountant once you get to a certain point. If you’re just starting out, no number of receipts for stamps and sandwiches will save you as much as an accountant charges, but when you get to a certain level it can give you the confidence to claim expenses that you weren’t sure about or possibly weren’t even aware of.

  Losses and tax planning

  The wonderful thing about tax (now there’s a phrase I never thought I’d type) is that losses can be carried forward for as long as your business exists, until they’re “wiped out” by equivalent profits.

  To give an example, say you buy a property in Year 1 and in the process you pay your broker’s fees and buy some white goods for the kitchen, then go on a full-day course (all classified as revenue expenses) – for a total spend of £3,000 before any rent comes in. That loss of £3,000 is carried forward to Year 2, during which you make a profit of £2,000. That means you still have an overall loss of £1,000 to carry forward to Year 3, which is the point at which you’re first on track to become profitable and have tax to pay.

  It’s important to realise that profits and losses are calculated across your portfolio as a whole – so in any given year if you incur a whole load of costs on one particular property (as long as they’re classified as “revenue” in nature), these costs will reduce or eliminate the profit you would otherwise have made on the rest of your portfolio. However, you can’t offset property losses against other sources of income – your property portfolio is effectively a separate “business” in itself, even if you own the properties in your own name.

  (This is another reason why it doesn’t make sense to look at the projected returns from a property and say “Oh but that doesn’t take tax into account”, and it’s why I didn’t include tax in my explanations of strategies in Part 1. The tax that’s payable is determined by the portfolio as a whole, so you can’t factor it into a discussion of one particular property.)

  Once you appreciate these facts (that the profits/losses that determine tax liability are calculated across the whole portfolio, and losses can be carried forward), you start to see that while you’re in the acquisition phase, it’s possible to structure your affairs to pay less tax than you might think.

  Let’s see how. Say you buy a property that’s fundamentally sound but somewhat dated internally, and it comes with a tenant already in situ. Six months later, the tenant gives notice and you take the opportunity to refurbish the property before you move the next tenant in – costing £7,000.

  As we saw in the last section, if you’d conducted this refurbishment before letting the property out for the first time, it would have been categorised as “capital” in nature – whether that refurbishment had constituted “improvement” or not. But once the property has already been let by you for a period of time, anything that isn’t an improvement can be classified as a “revenue” expense.

  Let’s say the refurbishment consisted of replacing single-glazed windows with double glazing (not considered an improvement, because putting in single glazing nowadays isn’t an option), replacing a grotty old bathroom suite (an improvement aesthetically but not functionally, which is critical) and giving the whole place new carpets and a lick of paint. Those changes might allow you to increase the rent, and might even increase the value of the property if you ever wanted to refinance or sell it on – but nevertheless, they’re “revenue” in nature.

  That £7,000 spend might eliminate the profit from the rest of your portfolio, or even give you a loss to carry forward. So if you’re in acquisition mode and buying one such property per year, you may not have tax to worry about for quite a while.

  To take it a step further, let’s say that a couple of years later you sell the property for £10,000 more than you paid for it as a result of the refurbishment. This £10,000 profit will count as a capital gain – and if you bought the property in your own name, this will fall within your annual allowance so there’ll be no tax to pay.

  It’s easier to follow if we put in some made-up numbers:

  Year 1: £500 rental profit (£200 tax to pay, assuming a 40% rate of income tax)

  Year 2: £1,000 rental profit, £7,000 refurbishment cost (no tax to pay, £6,000 loss carried forward)

  Year 3: £1,000 rental profit (still £5,000 loss to carry forward)

  Year 4: £1,000 rental profit (still £4,000 loss to carry forward)

  Year 5: Property sold for £10,000 more than the purchase price (capital gain within allowance, still £4,000 loss to carry forward)

  Forgetting the capital/revenue distinction and putting it in “real life” terms, you’ve walked away £3,000 better off after paying for the refurbishment (you made £10,000 and the refurbishment cost you £7,000), paid no tax on your rental income for four years and still ended up with a loss to offset your tax in future years.

  There are important subtleties in here. For a start, you’d need to make sure that your expenses were genuinely revenue in nature – and if the refurbishment included an element of capital improvement too, you should try to get any tradespeople to separate out their invoices to keep it neat. For example, if the same company added a loft conversion (improvement, hence capital) and repainted all the existing internal walls (reinstatement, hence revenue) you should ask them to issue a separate invoice for each job. Secondly, enough time needs to elapse for you not to be “gaming the system”: there are no hard and fast rules, but if you bought a property, let it out for a month, refurbished it, let it for another few months and sold it, eyebrows might be raised at HMRC. Or they might not – such is the nature of grey areas – but the eyebrow raise might happen after you’ve done the same thing for the fourth time in two years.

  In short, I’m saying that by understanding the basics of how property profits are taxed, you can optimise your activities to keep your tax bill down – especially while you’re in the acquisition phase. You can see how, timed correctly, you could avoid making a paper profit for years – perhaps until your income from other sources (such as employment) has dropped off and put you into a lower tax bracket, for example.

  But I’ll say it one last time: this is not a tax book. I want to give you enough knowledge to get you thinking about what’s possible, but please, make sure this is the start of your education process rather than the end. Take professional advice rather than rely on what you read in this book or online, and make sure you’re not knowingly or unknowingly breaking any rules or storing up unintended consequences.

  It may be tempting to stretch the rules and sail close to the wind, but it’s not worth the stress. While an investigation is unlikely to happen, I prefer to make sure I could sit across the table from an HMRC representative and confidently expl
ain my tax arrangements without any concern.

  Chapter 14

  Selling

  Whether you’ve held a property for a couple of weeks or a couple of decades, the day may come when it’s time to bid it a tearful goodbye, delete it from your portfolio spreadsheet, and start planning for what you’re going to do with the cash you raise from the sale.

  Much of what you need to know about selling a property has already been covered: all the considerations are the same as when you’re buying, but you’re on the other side of the transaction. There are some elements we haven’t yet discussed though, so in this chapter we’ll look at how to sell (for top dollar) a property you’re flipping, how to decide whether to sell a buy-to-let property, and how to survive the legal process in either case.

  Achieving the best price when buying to sell

  It’s wildly obvious to say that you only make your money on a flip once you sell, but it’s something that amateur investors often seem to forget: instead, they get all excited about buying it and finding ways to express their creativity while doing it up. The most successful property traders, meanwhile, are thinking about the sale from the very beginning – while they’re still deciding what to buy – and they see everything else as just steps they have to go through before they can put it on the market.

  From the moment you start looking at areas and properties, you need to be thinking about the sale at the end. We covered this earlier, but if you buy in an area where there isn’t much owner-occupier demand, you’ve already put yourself at a giant disadvantage. Conversely, if you buy somewhere with considerable demand and not much supply, any mistakes you make will affect you less severely.

  When you’re planning your refurbishment, every pound you spend should be targeted at improvements that will induce a potential buyer to pay more at the end. For this reason, I’d recommend getting an estate agent around to see the project and offer advice as early as possible, because they see a lot of houses and hear the comments that hundreds of potential buyers make. Should you knock through a wall to make an open-plan living area? Should you put in an en suite or an extra downstairs bathroom? I don’t know, you don’t know, but an estate agent will.

  Whatever your refurb budget, I strongly recommend setting aside some money for professional photos. It makes no sense to me when people sink six figures into a project and then baulk at spending £100 on a decent set of photos – preferring instead to let the agent’s dodgy iPhone snaps represent all the hard work they’ve put in. Selling the property involves getting people through the door, which relies on them spotting the property on the portals or in the estate agent’s window, which in turn relies on your property standing out from all the other listings so that they’ll pick up the phone and book a viewing. There’s no doubt that professional photos make a property stand out: just browse Rightmove yourself (always a fun distraction) and notice that it’s the ones with clear, bright pictures that get your click.

  Another highly worthwhile thing to consider (but admittedly more pricey than photos) is staging the property with furniture. You might be able to look at the blank canvas and visualise what it will look like when beautifully furnished, but not everyone can. Your aim is to find the buyer who walks through the door, pictures themselves living there, and will be willing to pay any price because they can’t bear to lose it. And if that buyer needs to see it nicely staged to make that happen, you’ll have lost the sale if you were too cheap/lazy to put in the effort.

  You can either buy furniture and move it from house to house (if you’re planning on undertaking multiple projects), or rent it on a month-by-month basis. Either way, it’s going to cost you more than you want it to – but if it tempts one extra buyer into a bidding war that adds £10,000 to the final selling price, that’s one heck of a return on investment. This is one area where effort is rewarded: the most successful property trader I know has a lock-up garage full of cushions and homely little touches, which get moved from house to house. It’s a lot of work, but everything up to this point has been a lot of work so it seems a shame to stop now.

  Once everything is beautifully staged, the next step in making the sale is to price it correctly. Buyers may be emotion-driven, but they’re not daft: an overpriced property will receive fewer viewings, and the viewings that do happen will be less likely to convert into offers because they were expecting something truly spectacular for the price.

  My personal preference is to price very slightly below what other similar properties are going for. If an un-staged property with amateur photos has an asking price of £160,000, my beautifully presented property at £155,000 is going to stand out a mile. I’ll get more viewings – and that will lead to quick offers, competition, and fear of missing out. Worst case, I’ll get a quick sale – which will allow me to bank the profit and move on to the next project. Best case, the large number of viewings will spark a bidding war and it’ll end up selling for far more than the asking price.

  Of course, you can only price it right if you gave yourself enough room in your figures: if you buy at too high a price and spend too much, you could easily end up needing to sell at an astronomical figure just to break even. That’s why it’s so important to think about the sale before you even buy.

  If you’ve ticked all the boxes – bought in the right area, got the spec right, presented it attractively and priced it well – then you should find the offers coming in thick and fast. Accepting the offer isn’t, sadly, the end of the story – there are still hurdles to overcome during the legal process. The issues you’ll face are the same for flips as they are for buy-to-lets, so we’ll consider both together later in this chapter.

  Why sell a BTL?

  Well, why would you? After all, properties always go up in value in the long run. Once you start talking to people about property investment, you’ll soon get sick of hearing about how they’d be a millionaire by now if they hadn’t sold that Notting Hill flat in the 1980s. Add to that the capital gains tax bill when you sell, plus the lost income that the property was generating for you, and selling doesn’t look like a particularly attractive option.

  The logic is sound, and investors generally prefer to expand their portfolios by refinancing to access equity (which we’ll cover in more detail in Part 3) rather than selling. In reality though, there are several situations in which you might want to sell a property.

  Firstly, and simply enough, not every property you buy is going to be an absolute slam-dunk of a success – especially at the start of your investment career. You might have invested in a house that you thought would be a superstar, but it’s actually a B-league player at best (or is even losing you money); it makes more sense to offload it and use the funds to buy better next time. There will be points in time that are particularly favourable to shifting under-performing properties (which we’ll look at far more in Part 3), and it can be wise to seize those opportunities.

  Or maybe you’ve given your strategy some thought and realised you hold properties that aren’t aligned with your goals (for example, you might own high-yielding properties when what you’re really after is capital growth). That being the case, you might decide to sell what you’ve got and buy something else.

  Or you might detect that a property has already done what you wanted and no longer serves a purpose for you. Perhaps you bought it when the local market was depressed and it’s risen in value nicely since you bought it, but it doesn’t yield brilliantly and seems to have given you all the growth you’re going to get. Again, you might decide to sell and look for opportunities elsewhere.

  In every case, the argument for selling emerges when you recognise that the opportunity cost of holding the property is too high: if you were to sell, your money could be put to better use elsewhere.

  That’s not to say that you must sell in these situations – you might be very happy with the returns you’re getting, even if it’s possible you could get higher returns elsewhere. What matters is to judge each situation on its merits, r
elated to your strategy – not to just accept the “never sell” mantra at face value.

  Should you sell with the tenant in situ?

  If you do decide to sell a buy-to-let property, you’ll have a dilemma to contend with: do you sell it with vacant possession, or with tenants in situ?

  In the past, vacant possession has been the way to go, and it may still be. By selling the property tenanted, you’re excluding the biggest part of the market – people who are buying a property to live in – and appealing only to investors, who (especially if they’ve read this book) aren’t going to be inclined to give you your full asking price because they’ve just “got a feeling that this is the one”. You also won’t be able to present the property as well as you could do if it were empty, and you might even struggle to get access for viewings if the tenants choose to be difficult about it.

  All that said, a big drawback of selling a vacant property is that you’ll be losing out on income while it sits empty. It could easily take a few months to accept an offer, followed by another couple of months for the legal gears to grind along. And during this time without rental income coming in, you’ve got mortgage payments to meet, higher insurance payments (because it’s empty), and council tax to pay (unless your local authority offers an exemption for empty properties).

  For those reasons, you might prefer to sell the property with tenants in place. This is becoming increasingly popular, because the proportion of investors (rather than owner-occupiers) in the market has increased in recent years. For investment buyers, a tenanted property is a bonus: they’ll have income from day one, and won’t have to spend money on marketing or refurbishing.

  So which option should you choose? It depends on the property itself, as well as the local market. If local estate agents tell you that the majority of people who’ve bought similar properties recently have been investors, marketing it as “tenanted” could be the answer. Conversely, if it’s a family home in a popular area, you’d be doing yourself a major disservice by excluding the owner-occupier market – the financial hit you’ll take from it being empty while it’s up for sale should be more than compensated for by the higher price you’ll eventually receive.