Parents want to retire; should they sell or retain property
Discussion
I have an interesting problem, which I am hoping others may have experienced and/or might be able to share their thoughts on.
I will try to set out the basis of the business, including the financials, together with my parent’s priorities. I should say at the beginning, before any decisions are made, any plan would be implemented with professional advice. I’m just casting it out there in case others have had to deal with a similar scenario which might help give a fresh perspective.
The problem relates to my parent’s property business. They have built up an interesting property portfolio over the years. They are both now reaching an age where they feel it is becoming too much, and they are thinking about selling at least some or all of the properties, to pay down the mortgages, and create a less time consuming and less stressful business in their later years.
They don’t want to retire completely as they enjoy making deals and ‘trying to turn 50p into a £1”.
There is an alternative strategy which is, instead of selling, they bring someone in to manage the business, possibly myself or my sister. My parents accept a lower return but also lower stress, and the assets are retained to create an income for their retirement and also in time for their children (me) and also their grandchildren.
There are two aspects to their business;
Letting Business with 50 properties, mainly low cost flats with an average value of £100,000, so portfolio worth around £5m total. These properties are mainly low cost flats let to factory workers, council tenants etc.
All of the properties are clustered close together (e.g. within 10 miles radius.)
Dealing with this part of the rental market is time consuming and can be difficult to manage. There are always issues chasing non payment, occasional damage to property, fixing issues in the property, managing voids, gaining new tenants, re-decorating when a tenant leaves etc etc.
Anyone with experience on running a larg/ish lettings business will know what I mean. My parents are very experienced in dealing with this type of letting, but it is draining and not a particularly enjoyable aspect of the business.
The letting business brings in around £300,000 per year on average in letting income. The mortgages on a interest only basis cost £120,000 (total mortgage amount is £2.9m split over a lot of different mortgage lenders).
There are other property maintenance costs and other staff and admin costs which makes the current letting business income around £140,000 per annum.
If the letting properties were sold, after paying off the mortgages, and net of tax (tax is quite high because of the way they were purchased), there would be circa £1m+ available in cash which my parents could either keep in the bank or invest.
Their other business interest is their farm/small holding which has around 40 acres of land. Over time they have built high quality 5* holiday accommodation. The value of assets including the main residence and land is around £3.5m. There is no mortgage on the holiday business.
The holiday business brings in around £140,000 gross, and after deducting costs would probably yield around £90,000 per annum. This isn’t much return when you consider the scale of the assets being utilised.
However, my parents are happy at this stage to run the holiday business themselves. It generally involves meeting nice guests, and they like keeping busy.
They do not have a pension, other than the assets mentioned above.
Scenario 1
My parents pay for good professional advice. Their current thinking is sell the letting business either as individually properties or in groups to investors in as tax efficient way as possible.
They would net £1m+ from the sale of the lettings business after tax. This could be invested to give an income of perhaps £35,000 per annum without eating too much into the principle sum. They are wary about investing in things they don't understand and would be liable to do little with the money initially.
They would then continue to run their holiday business for the next few years and enjoy the income it makes.
Scenario 2
They hand over the letting business to myself or my sister . We would need to give an income to my parents which was similar or better than that which they would obtain if they invested the sum directly, for example £60,000-£70,000 per annum.
However, my sister and I live around 120 miles away. We both run our own successful businesses and so we don’t have lots of free time.
In terms of a legacy for my parents, they like the idea that in 30 years time, the 50 lettings properties were still active and producing an income and helping the grandchildren as well.
In this scenario they would also continue to run their holiday business for the next few years and enjoy the income it makes.
I’ve discussed with them handing over the property to a member of staff or agency to manage. From their experience, they say this wouldn’t work as the staff can’t resolve the difficult issues, or could make the wrong decision. They either want to hand it onto a family member or sell.
If I took it on, and was paying my parents an income, do you think I could find or employ a person to manage the letting business?
With what I would need to pay to my parents and the current income, there would be £50k of income to pay a very good agent.
I could perhaps consolidate the mortgages into a single mortgage which would make the administration easier.
What would you do in this situation?
All comments and ideas welcome.
I will try to set out the basis of the business, including the financials, together with my parent’s priorities. I should say at the beginning, before any decisions are made, any plan would be implemented with professional advice. I’m just casting it out there in case others have had to deal with a similar scenario which might help give a fresh perspective.
The problem relates to my parent’s property business. They have built up an interesting property portfolio over the years. They are both now reaching an age where they feel it is becoming too much, and they are thinking about selling at least some or all of the properties, to pay down the mortgages, and create a less time consuming and less stressful business in their later years.
They don’t want to retire completely as they enjoy making deals and ‘trying to turn 50p into a £1”.
There is an alternative strategy which is, instead of selling, they bring someone in to manage the business, possibly myself or my sister. My parents accept a lower return but also lower stress, and the assets are retained to create an income for their retirement and also in time for their children (me) and also their grandchildren.
There are two aspects to their business;
Letting Business with 50 properties, mainly low cost flats with an average value of £100,000, so portfolio worth around £5m total. These properties are mainly low cost flats let to factory workers, council tenants etc.
All of the properties are clustered close together (e.g. within 10 miles radius.)
Dealing with this part of the rental market is time consuming and can be difficult to manage. There are always issues chasing non payment, occasional damage to property, fixing issues in the property, managing voids, gaining new tenants, re-decorating when a tenant leaves etc etc.
Anyone with experience on running a larg/ish lettings business will know what I mean. My parents are very experienced in dealing with this type of letting, but it is draining and not a particularly enjoyable aspect of the business.
The letting business brings in around £300,000 per year on average in letting income. The mortgages on a interest only basis cost £120,000 (total mortgage amount is £2.9m split over a lot of different mortgage lenders).
There are other property maintenance costs and other staff and admin costs which makes the current letting business income around £140,000 per annum.
If the letting properties were sold, after paying off the mortgages, and net of tax (tax is quite high because of the way they were purchased), there would be circa £1m+ available in cash which my parents could either keep in the bank or invest.
Their other business interest is their farm/small holding which has around 40 acres of land. Over time they have built high quality 5* holiday accommodation. The value of assets including the main residence and land is around £3.5m. There is no mortgage on the holiday business.
The holiday business brings in around £140,000 gross, and after deducting costs would probably yield around £90,000 per annum. This isn’t much return when you consider the scale of the assets being utilised.
However, my parents are happy at this stage to run the holiday business themselves. It generally involves meeting nice guests, and they like keeping busy.
They do not have a pension, other than the assets mentioned above.
Scenario 1
My parents pay for good professional advice. Their current thinking is sell the letting business either as individually properties or in groups to investors in as tax efficient way as possible.
They would net £1m+ from the sale of the lettings business after tax. This could be invested to give an income of perhaps £35,000 per annum without eating too much into the principle sum. They are wary about investing in things they don't understand and would be liable to do little with the money initially.
They would then continue to run their holiday business for the next few years and enjoy the income it makes.
Scenario 2
They hand over the letting business to myself or my sister . We would need to give an income to my parents which was similar or better than that which they would obtain if they invested the sum directly, for example £60,000-£70,000 per annum.
However, my sister and I live around 120 miles away. We both run our own successful businesses and so we don’t have lots of free time.
In terms of a legacy for my parents, they like the idea that in 30 years time, the 50 lettings properties were still active and producing an income and helping the grandchildren as well.
In this scenario they would also continue to run their holiday business for the next few years and enjoy the income it makes.
I’ve discussed with them handing over the property to a member of staff or agency to manage. From their experience, they say this wouldn’t work as the staff can’t resolve the difficult issues, or could make the wrong decision. They either want to hand it onto a family member or sell.
If I took it on, and was paying my parents an income, do you think I could find or employ a person to manage the letting business?
With what I would need to pay to my parents and the current income, there would be £50k of income to pay a very good agent.
I could perhaps consolidate the mortgages into a single mortgage which would make the administration easier.
What would you do in this situation?
All comments and ideas welcome.
Edited by happytobealive on Monday 29th June 13:04
Edited by happytobealive on Monday 29th June 13:05
hi i am not in anyway an expert on money or property, just need to look at my bank balance and size of mortgage to realise that 
my comment is simply that if your parents are anywhere near the midlands I know a guy that is based Coventry way that does property management and lettings etc and I could put you in touch with him. I am fairly sure they do this sort of thing for a number of landlords.
if nothing else it may be someone your parents could get an idea from as to how it would pan out, he would at least know what the markets would be like etc.
If that's too far away, sorry, good luck with it.
if it's anywhere near essex let me know i'll have a go
my comment is simply that if your parents are anywhere near the midlands I know a guy that is based Coventry way that does property management and lettings etc and I could put you in touch with him. I am fairly sure they do this sort of thing for a number of landlords.
if nothing else it may be someone your parents could get an idea from as to how it would pan out, he would at least know what the markets would be like etc.
If that's too far away, sorry, good luck with it.
if it's anywhere near essex let me know i'll have a go
.. are the businesses umbrella'd into a holding property Ltd company, or are they all owned/mortgaged directly by your parents? What's their view on IHT and gifting? I wouldn't bother too much looking at the scenarios just yet - the 'perfect' technical solution isn't probably the one that's most relevant or most important.
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