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First Time Property Investor: what you need to know

Are you a first time property investor? Perhaps you’ve inherited some money, or you want to put the equity in your home to better use. Or maybe your savings are devaluing thanks to very low interest rates?

There may be many reasons to start a property investment portfolio. But there are some fundamentals to consider, different investment types to look into, and the right structure for your business.

Taking the First Steps into property investment

Firstly, and most importantly you must treat your property investment portfolio like a business. That’s because it is.

Like all businesses there are some fundamentals to consider:

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Write a business plan and carefully consider your goals and objectives
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Consider your business structure so that you maximise your profits and minimise your exposure to business taxes
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Consider your income and expenditure. Draw up sales and profit and loss forecasts, and stress test them so that you can see how bad times will affect your income
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Include a cash flow forecast and stress test so that you know how your business will perform in various scenarios
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Seek professional advice from a specialist accountant, property investment professional, business adviser and solicitor

Investment options for a first time property investor

There’s more to property investment than just buy to let. Whilst this is the most popular type of opportunity, there are options in the buy to let market. And becoming a landlord isn’t the only way to successfully invest in the property market.
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Buy to Let

The most popular type of property investment, buy to let is an investment where you purchase a property and let it to your tenant. There are some particular requirements in terms of safety, your responsibilities to your tenants, access to the property, and tenancy agreements. And you must have a specialist buy to let mortgage in place if you need to finance the property. Using a standard residential mortgage is not permitted except in very particular circumstances.

Buy to let properties typically fit into these categories:

  • New developments
  • Refurbished properties
  • Older properties
  • HMOs
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HMO

Houses of multiple occupancy are an excellent options for student rents, or areas where property prices and rental rates are outside the ability of tenants to afford. individuals will rent a room and have access to the shared spaces like kitchen, bathrooms and living spaces. That means that the rental yield can be higher than letting a property to a single tenant, and if one person moves on the landlord has to re-let one room which means only a partial loss of rental income. Of course with multiple tenants in one property, there is a greater admin burden, and some additional requirements in terms of privacy, fire safety, and so on.
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Older Properties

Housing stock that comes onto the market is often spotted by property investment consultants and experienced property investors as good investment opportunities for buy to let. Typically they will be smaller properties in areas with high housing demand which can yield a good rate of rental return. They are likely to need a small amount of work to improve them. They will often be for sale at below market value so a good investment for buy to let landlords.
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Refurbished Properties

These are also older properties that will have been bought by a property developer at below market value and refurbished. This could mean replacing kitchens, decorating throughout, replacing bathrooms, and anything else that needs improvement. Once complete the developer will place a tenant in the property for three months before putting it on the market. The property and relationship with the tenant will be fully managed. This is an ideal investment for the first time property investor who may wish to take on a property that’s “oven ready”.
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New Developments

The construction industry and house building remain buoyant, and many developers will seek to sell properties for rent. They will often work with property investors to sell their new developments to investors. As new development properties are ready to let, fully decorated and fitted so they have this advantage over older properties. A good property investment consultant will always be seeking out properties of this type for their clients. Whilst there are opportunities all over the UK, the North and Midlands are regions with the greatest opportunities.
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Commercial Buy to Let

This is a version of buy to let where rather than letting a residential property the landlord lets a business property. That could be retail, office space, warehousing or manufacturing for example. There are particular requirements in terms of finance, and lenders consider this to be a higher risk.

Our sister company Liddle Perrett has published a blog sharing their tips to securing the best buy to let mortgage deal.

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Read more about the best places to invest, our analysis of the property investment market and more in our blogs.
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Buy to Flip

This is not a buy to let opportunity, but rather where an investor buys a property, usually at below market value that requires refurbishment. The investor will make the necessary improvements to the property and sell it on for a profit. This is a more labour intensive means of property investment. It requires a number of skills like project management, sound financial management, and an eye for home renovation. This type of investment is where Capital Gains Tax can have an impact if the investor is not careful, so taking advice from a specialist accountant is advisable.
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Property Loan Notes

For the first time property investor, this option doesn’t require investing directly in a property that requires management at all. A property loan note is a means for developers to borrow money to finance their projects alongside finance from banks. The investor invests a sum of money in return for a fixed interest rate, for a set term. At the end of the term, the interest is paid and the original capital investment is returned. Terms typically run from 1-5 years, and interest rates could be anywhere from 10%-15%. Whilst they are not risk-free, property loan notes are considered to be first charge debts so in the event that a developer goes bankrupt, it is highly likely that the investment capital can be recovered. The interest earned will be subject to tax because it’s considered to be income.

Business Structure

There are a number of options:

Sole Trader

The simplest form. You and your business are considered to be the same entity, so you simply deduct your expenditure (business expenses) from your income (rents and any other income from your investments) and you pay tax through self-assessment.

Pros

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The simplest form of business type. Not subject to the Companies Act
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Very simple to administer with little in the way of additional cost. While we recommend an accountant, with this structure you can manage your accounts yourself
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You aren’t liable for Corporation Tax

Cons

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You will be exposed to the full rate of income tax at 20-40% dependant on your profits, with no way to mitigate that exposure
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You are personally fully liable for everything should anything go wrong
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If new tax rules are introduced it’s very difficult to manage your exposure

Partnerships

Similar to sole trader, except that you will be in business with one or more people. Your profit is calculated in the same way as a sole trader, except that the profit is divided between the partners.

Pros

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Not subject to the Companies Act and a simple way of involving multiple people in your business
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Not as straightforward to administer as a sole trader, but still a simple business structure
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You aren’t liable for Corporation Tax
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A Limited Liability Partnership can limit the personal liability of the partners. Law firms, doctors surgeries or accountancy practices are typically set up as LLPs

Cons

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Your profits are spread amongst your partners subject to your partnership agreement
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You are personally fully liable for everything should anything go wrong(with the exception of LLPs)
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If new tax rules are introduced it’s very difficult to manage your exposure

Limited Companies

A limited company is incorporated by Companies House and is a legal structure with a board of directors. This could be one or more directors. It is a separate legal entity subject to its own tax regime.

Pros

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A talented accountant can use the tax code to reduce your exposure to taxation
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When new taxes or regulations are added the impact can be mitigated within a limited company
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As a director, you are not personally financially liable (except in some circumstances) if things go wrong

Cons

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A company director has responsibilities to the company defined and governed by the Companies Act. Whilst these are mostly common sense responsibilities, they are there nonetheless

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Companies are subject to Corporation Tax
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There is an added layer of admin like company house returns, managing accounts and tax returns.

Top Tip:

As a first time property investor it is advisable to seek the advice of an accountant or business adviser to guide you on the best form of business structure to suit your objectives.

Taxation

As a business, you will be liable to various taxes. These are:
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Income Tax

Payable at a rate between 20% – 40% depending on your income. Paid through self-assessment, or PAYE depending on how a limited company has been set up
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Corporation Tax

Only Limited Companies are subject to this tax, payable at a rate of 19% of net profit. A return to Companies House must be made, and payment made to HMRC 9 months and 1 day after the end of the financial year
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Capital Gains Tax

Taxation on the profit you make on the sale of an asset- like a property. More relevant if you intend to buy properties, refurbish and resell rather than buy to let, but take advice on this from an accountant
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Inheritance Tax

Not relevant to the everyday running of your property investment portfolio, but should be considered if you are inheriting money and thinking of investing, and when you die and bequeath your property portfolio to someone

Our sister company Will Protect can advise you on how best to leave your business assets to your family and loved ones

Top Tip:

As a first time property investor it’s important to understand the tax liabilities that you will face, and how to manage them. Seek out seminars and webinars where you can get a solid overview, and always use a specialist accountant.

Our Top Tips for first time property investors

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Take the time to research your market, understand what you want to achieve, and how you are going to do it. Attend seminars, webinars, and workshops to learn from existing property investors.
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Seek professional advice before you take your first steps. Getting your business structure right, understanding what you need to do, and engaging the skills of the right people could mean the difference between success and failure. Speak to an accountant, business adviser, and property investment consultant to begin with. Try some business network meetings to meet some different people, or ask for recommendations.
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