How to invest in property: Is it worth it and how to plan properly.

This is the first in our series of 8 videos on Buy to Let properties. These videos were recorded following a presentation we gave in conjunction with DJ Alexander & Hampden Bank on 22 June 2017.

In the first video we look at someone investing in a property for the first time, mention the recent tax changes affecting landlords both in terms of tax relief on mortgage interest and the tax payable on acquisition.

Full text transcript below:-

David Court: You’re a person buying a property for investment. We’ve got some cash, where do we spend it? What do we want to do with it?

Rob Trotter: It’s a surprisingly regular question, in fact an increasingly regular question, that we’re asked. I would say, almost on a daily basis we have individuals coming to us, and with all due respect to them, they quite often don’t have a clue what they’re going do with their money, they just know they want to invest in property. They want to buy some flats, so they come to us seeking advice. The first question I would always ask them is: What is your main ambition here? Do you need property that’s going to go up in value and offer you high prospects for capital growth over the long term, or do you need a steady income and a monthly return from the rent? It’s very difficult to find a property that will offer you both, it’s the holy grail in property investment. Establishing that will very quickly determine what kind of property they’re looking to purchase. Obviously identifying how much they have to spend is very important, and then deciding do they buy one larger property, or two smaller properties. We’ll discuss whether or not they’ve had a conversation about lending.
But, what i would normally do to any investor is, before they start I’ll put the brakes on. I’ll say, “Have you spoken to somebody about tax implication? A bit of guidance on tax? Have you spoken to somebody about lending? Do that first, so you know what your strategy is, what you’re trying to achieve, what you’ve got to spend. Then, come back to me and then we’ll start actually tailoring it and decide which properties are going to perform best for you.” So, I would frequently refer them on to David at Johnson Smillie.

David Court: That is a sensible isn’t it?

David Miller: Absolutely, it’s the ideal scenario because we would far rather speak to clients and help to advise them whether to move into the market, whether to buy the property in their own names or in joint names with their spouse, or to buy it through a company. It’s far, far better to take advice in advance rather than to come to an accountant after the event and say, “I’ve done this. What do you think?” And you hold your hands up in horror and say, “Why’d you not come to speak to me six months ago? We’d have handled it differently.” So, taking advice in advance is the way forward in my opinion. Then, when you speak to the client, I think it’s very important to form a plan with the client. Get the client to sit down, write a plan, decide what they want to do, how do they want to do it, how they’re going to manage that property throughout its lifetime. Also, most importantly of all, plan an exit route.

David Court: Do you find that’s what people are doing more often now?

Murdo McHardy: I think the main thing people need to think about before they look to buy a property for investment purposes is how much of a deposit they’ve got and how do they finance the rest of it? If they need to raise finance to help them buy the property. We’ve seen some quite big changes in the market this year, so historically over the last number of years, people have been able to get a buy-to-let mortgage if they had a basic level of income themselves and the rental on the property more or less had a bit of margin above covering the mortgage payments. There’s been a lot more build into that assessment process now, and in January of this year new guidelines came out, which makes it, not more difficult, but it means that the rental coverage has to be more of a buffer between that and the mortgage payments. The upshot of that really is that people maybe can’t borrow quite as much. The rental yield is really important in terms of how much they can borrow, and a bigger deposit may be required, and that can determine whether people buy one property or two properties.
So, these sorts of things, because we’ve seen so much change over the last nine months or so, are really, really critical that people understand that and know how much they can borrow in advance before they embark on the journey of the strategy, and deciding that who to speak to.

David Miller: There has been so many changes in tax legislation, primarily with how tax relief on interest or a mortgage to buy a buy-to-let property is relieved. People need to be very, very mindful of their tax situation, so you need to look at that very, very carefully because by 2020/21 when the new rules come completely into force, tax relief will not be as generous on mortgage interest. Going back to my point earlier about the exit route and what Murdo mentioned , and Rob as well, about buying two properties rather than one. The cost of buying a property now has changed, it has become more expensive in Scotland. The rates of what used to be Stamp Duty, now Land and Building Transaction Tax and the Additional Dwelling Supplement, you’ll pay double the amount of tax to buy a £500,000 property compared to two properties at £250,000.

Rob Trotter: And then on that, it’s very important to make sure that what you’re buying there’s going be a tenant that’s going want to rent it. There’s no point in buying something because it looks nice, and it’s in a nice part of town if nobody’s going to occupy it. Actually on that vein, two more modestly priced properties will tap into much bigger markets. The more affordable the rental accommodation is the more demand there will be for it.

David Miller: Also helps the exit route when you’re trying to mitigate your eventual capital gains tax, easier to sell two small properties over a period of time rather than having a lot of gain in one particular property.

David Court: It’s a preferable option that they’re coming to you and saying, “We’d like to buy a property, what would we get in rent?” Rather than, “I just bought that flat.”

Rob Trotter: It’s increasingly that people come in advance. Most investors are recognising that if they don’t know what they’re doing they really need to take advice. But, it’s quite common that someone will come to me with an idea in their head, and you’ll very soon realise that you’re going off into completely the wrong direction with this. I think understanding who is it you want to rent to, who is your target tenant, and most importantly are those many of those about? So, choosing a good location in the city, choosing the right city to start with, and making sure there’s a good growing economy there, and there’s a growing population, and there’s plenty of employment, that’s crucial, then choose a property that will appeal to that type of demographic. I think if you do that right, you take your advice in advance, then you’re positioning yourself very well for a profitable venture.

David Miller: Some landlords are what I call accidental landlords. Maybe a couple come together who each have a property and and decide to rent one out, so the decision has already been made they’re going to rent out a particular property. But if someone’s going in to enter the market for the first time, they’ll want speak to somebody like Rob who could advise them where to buy, what size of property to buy, what type of market to tap into.

David Court: So, the key to this is you would get the best from your investments is take advice.

Rob Trotter: Before you start. Yes.

David Miller: Absolutely.

David Court: Okay.