When property investing goes right

By specialist property accountant Stephen Fay ACA

Property investing is a business that can be very financially rewarding – and often in my experience many property people dare not to ‘dream’ about how things might be if things do go to plan and those ‘back of the mind’ risks don’t actually materialise.

This article gives a ‘no-names’ brief summary of five of our clients who are making a real success of their property investing – and, unlike some of the stories you may hear on forums or at meetings, I can assure that these are absolutely true stories!

1. Landlord with 6 properties making £40k per annum net profit

Client #1 owns 6 modest multi-let properties, and generates yields of around 10%. He self-manages, and keeps his properties in good condition. By re-investing a decent chunk of profits back into the portfolio, his properties are always in demand. He treats tenants with respect, and benefits from tenant goodwill such that he rarely has voids. He is mortgaged, but maintains 70% LTV and is actively repaying one property off. He is a ‘vanilla landlord’ – treating his properties and tenants well, while keeping an eye on costs, and having chosen his properties very carefully.

LESSON: ‘Bread and Butter’ property rental can be very profitable, if suitable properties are bought at keen prices, financed sensibly, renovated cost-effectively, let at good yields, and maintained over the longer term. BTL is not dead!

2. The builder who doesn’t build!

Client #2 is a builder who buys unmortgaegable properties for cash, and then fixes the problem that is making the property unmortgageable. Typically this is a subsidence or large crack issue, and may require strategic underpinning or ‘bolting’. However what is interesting is that he only fixes the main problem, and while there may be money to be made from additional refurb works, he maintains that most of the profit is in fixing the main ‘scary’ issue that puts off buyers. He doesn’t get his hands dirty – instead, he has a two tradesmen who fix the issue under his guidance. He then gives the keys back to the same agent who sold it to him and makes £10k per small property after costs – 4-5 per year for very little effort and he makes a decent wage with little risk – far better than the average builder, and no tenants to manage!

LESSON: Who needs 10 strategies when one will do? The secret to consistent profits is to master one, and repeat it consistently. Property is not a complicated business – find a strategy that that you like, try it, master it, repeat it!

3. The portfolio landlord turned property educator

Client #3 is a portfolio landlord of with around 70 properties, who for various reasons has found himself in a loss-making position. Not one to give in, he now works for a property education company on a self-employed basis, bringing a wealth of property experience to his trainees. He commands a premium rate for his time, and has made an extremely healthy year #1 profit. In fact he is the only client I have seen who has not only reached the VAT threshold in year #1, but is also on the cusp of having to de-register for the VAT Flat Rate Scheme (turnover >£230k) in a single year. As well as that, he has developed and is executing a new strategy to stabilise and turn around his own portfolio fortunes. He has faced significant issues head-on and challenged himself to build a second business as well as safeguarding his portfolio for the future.

LESSON: Every business-owner faces problems at some stage – don’t panic, take some time to think about possible solutions, and take action. Sometimes the solution is multi-pronged, and doesn’t provide immediate relief – so, be patient, and ‘work your plan’.

4. The ‘design-developer’ making more from his developing that his vocational day-job

Client #4 is in a vocational profession which he trained for many years to qualify in – it pays well, but not spectacularly. But, his real flair is for finding suitable flats in London in need of a lease extension and with a ‘design angle’. The lease side involves buying flats typically in the £500k+ bracket but with

LESSON: There are plenty of BTL magnolia boxes out there – but creating something unique, and special, can enable a premium price to be charged. Few investors have this combination of design expertise and finance-raising skills to operate in this lucrative property niche.

5. The commercial property capital allowances junkie

Client #5 is very unusual – he has very little involvement in property, on a day-to-day basis, as he earns around £300k per annum in his job. However, he has a pathological aversion to paying income tax! Therefore, his property strategy is less about buildings and tenants, and more about spreadsheets and tax losses. His main strategy – per our advice – is to target commercial properties on which substantial capital allowances claims can be made. He has cultivated links with commercial agents in London, who know what type of property he wants, and in what price bracket. However he isn’t trying to buy BMV – instead he is looking for properties with likely large unclaimed capital allowances (pre-purchase advice sought from a capital allowances surveyor). These allowances are then offset against his day-job income to produce a substantial tax refund (£50k) plus. There is obviously a need to consider the underlying business case for buying the asset, but there is also an appreciation of the tax benefits of commercial property.

LESSON: Not all property profits are made from tenants and buildings. There are ‘paper profits’ to be made by buying commercial property – capital allowances can be a goldmine in terms of tax benefits – and many Blue Chip companies want to rent good quality commercial premises so that they don’t have to tie up their own cash in a property. They key is, as ever, choosing the right property.