Not only is it the start of a new year, but a new Decade. And in a few years’ time, we will look back at 2020 and realise that it was probably one of the best investing opportunities of this Decade. The question is, what is the best property investing strategy for 2020?
In this first article for 2020, I want to explain why this month (January) in particular is so important and why it will create a huge opportunity for you if you are ready for it. Unfortunately, many people will miss out on this opportunity. And I don’t want that to be the case for you. So please make sure you read this article carefully to really understand the opportunity in front of you.
The impact of Section 24
By the end of this month, everyone who is a landlord will need to have submitted their personal tax return for the 2018-19 tax year. This means any tax due from the rental income on their property will have been paid. This is the second year that people will see and feel the effect of Section 24, which came into play in April 2017. As I am sure you know, the Government decided that they wanted to change the way that property investors are taxed.
The changes impact landlords who own property in their own name. And most long-term landlords do. Also, this impacts landlords who are higher-rate taxpayers. And most people in property are. As a result, most landlords will be paying more tax on their rental income.
If your property is owned in an Ltd Company, instead of your own name, then you will not be affected by Section 24, and if you are a lower rate taxpayer, then there is no impact, although some property investors will slip from a lower rate taxpayer to a higher rate taxpayer, because of the way that rental profit is now calculated.
So what does this mean for you, and why is it the opportunity of the Decade?
What Section 24 means to you
Every month my organisation run 50+ local property investors network meetings all over the UK, and so I am in a unique position to have my ear to the ground in 50 locations around the UK to hear exactly what is going on with investors at a grassroots level. I can tell you for an absolute fact, that in 2019 we had far more long term landlord coming to our pin meetings than ever before because they are looking to sell some or all of their portfolio, and retire early due to the impact that Section 24 will have on them and their income.
In any market, you will also have new investors entering the market and some people retiring and exiting the market, but right now there are more landlords than ever thinking about selling up earlier than they have initially planned because they don’t want ever-decreasing return on their property portfolio.
January 2019 was the first time, many landlords realised the true impact of Section 24, when they saw the amount of tax they pay go up, and their accountant will have informed them that it is only going to get worse as the true effect of Section 24 is phased in over a 4-year period. January 2020 will be the second year that people see the effect of Section 24 starting to bite more into profits.
This will be the catalyst for even more landlords to seek a solution to this problem and for some of those 1.75m landlords in the UK, I truly believe that early retirement may be the preferred choice for many of them, especially as they have seen tremendous capital growth over the last 10 years.
Are you looking to expand your portfolio in 2020 and beyond?
Whilst Section 24 is obviously very bad news for many landlords, there is always a silver lining if you look close enough. For those property investors who want to expand their portfolio and acquire more property, 2020 will be a fantastic opportunity for a number of reasons.
First of all, we will see properties become available for purchase in previously locked down Article 4 areas. In these Article 4 areas, permitted development rights have been removed, so you have to get planning permission to convert a normal house into an HMO (with 3 or more unrelated tenants). However, if you do apply for planning in an Article 4 area, it will be automatically rejected because the local council does not want more HMOs. You can, of course, appeal and you might get planning permission if it meets all of the criteria, but it is very difficult.
However, if you buy an existing HMO in an Article 4 Area, you don’t need to get planning permission. Instead, you can just apply for a certificate of lawfulness as long as the property was used and an HMO before Article 4 was introduced in that area and has been continuously used as an HMO. Prior to the introduction of Section 24, in Article 4 Areas, landlords were quite happy keeping their property, knowing that there would not be too much new completion. But now some of these landlords are now considering selling which means that you can get access into these effectively locked down areas.
Why is 2020 a great time to buy more property?
The main reason why 2020 will be such a great time to acquire more property is because of the way in which you will be able to add to your cash flow and property portfolio. You see these landlords who decide to retire earlier than planned, have another problem. The main problem is that if they sell all of their properties in one go, they will have to pay a lot of Capital Gains Tax (CGT) on the profit from the sale.
The best solution for anyone wanting to sell a number of properties is to phase the sale over a number of years so that they can claim their personal CGT allowance and so reduce the amount of tax they will pay. But this creates another problem. The landlord will have to hang around until they sell their last property.
Purchase Lease Options (PLOs)
The good news for you is that there a solution available. One that allows these landlords to sell all of their properties over a number of years. But also, one that enables them to minimise tax. And one that means they do not have to hang around until the last property is sold.
They can do this with the help of an investor like you, who can use Purchase Lease Options (PLOs) to take over the properties and manage them for the owners, with a schedule to buy them over a number of years. This means you get cash flow and potential equity growth on property that you don’t own, whilst providing a fantastic solution to these retiring landlords. You don’t need to have large deposits, or even be able to get mortgages to do this.
The only problem here is the PLOs are a massively misunderstood strategy. Most people who think they know about PLOs, don’t really know enough. And we can say this because otherwise, they would have done a lot more of them by now! One of the main problems here is that PLOs only work in certain circumstances, namely when the seller does not need the money now and they have what we call favourable mortgage conditions. Luckily for you, Landlords normally meet both of these criteria, which is why the strategy works so well for them.
Just in case you don’t know let me give you the basics about PLOs. This is where you enter into a specific legally binding agreement with a property owner. Through this, you agree that you have the right (but not the obligation) to purchase their property for a fixed price (The Option Price) agreed upfront. This needs to happen within a certain time period (The Option Period). And in the meantime, you pay them a monthly payment (Monthly Option Fee). This entitles you to use the property. There is also a consideration (Upfront Option fee) required to make this a legally binding agreement. This upfront fee can be anything from as little as £1. But it could be several thousand pounds in some circumstances.
During the Option Period, you look after the property as if it were your own. That means you also take care of all of the maintenance. For example, you might have the right to buy a property for the current market value of £200k anytime within the next 5 years. In the meantime, you pay the owner a guaranteed £600 per month. You take care of all the bills, repairs, and maintenance. You could then rent this property out in a way to generate a much higher income. This could be through an HMO or Serviced Accommodation, for example. That way, you could make a profit on the difference between the rent you pay to the owner and the rent you achieve, minus all the bills. This is cash flow for a property that you don’t own.
The benefits of PLOs
The main benefit for you as the investor is that you don’t need to put down the typical 25% deposit. As you probably know, this is what you would need if you actually purchased the property. You don’t need to get a mortgage on the property, because you don’t actually own it.
You can benefit from positive cash flow during the option period and potential capital growth of the property. If the value of the property rises from say £200k now to £250k in five years time, you have the right and the choice to purchase it at the agreed option price of £200k.
Attend our local property investors network (pin) meeting
How do you find these landlords? Well, you can always attend your local property investors network (pin) meeting. Make sure you ask for a referral of landlords who may want to retire. Or you can write direct to landlords using your local council list of licensed HMO owners.
I do hope you can see the incredible opportunity you have right now. And that you will decide to help these retiring landlords finding a win-win solution.
Invest with knowledge, invest with skill
Author of Property magic
Founder of property investors network
Further learning resources
Simon Zutshi will be holding some complementary live 90-minute online Master Classes all about PLOs. These will take place during the first two weeks of January. Click here to register