Is there money to be made in 2nd/3rd properties?

[sbk1972]

Hi all,

I've recently paid the CGT on my wife's old house that we recently sold. We rented the property for 6 years, she owned it for a total of 10 years, and seeing what we had to pay for CGT ... is there real money to be made in 2rd / 3rd properties nowadays ?

We didn't really make much during the rental of the property due to ongoing maintenance, mortgage costs, insurances, costs. What ever was made she was hit with tax, letting agent costs, etc. On selling the property the fact that she lived there for a while meant she received private rental relief which reduced the CGT.

We plan to invest this money and the idea is to buy another property to rent although a lot closer to where we now live. However, I just don't see how big money can be made in this current world. Firstly a 2rd mortgage, which will be a B2L type, will be required for the property, it will need painting / cleaning up which I can off set via costs during renting, rental costs, non more mortgage relief, and what ever is left is taxed. Seems small beer considering the high risk of tennants doing a runner, or refusing to pay / going and the process of taking them to court.. Eventually when it comes to sell I will be hit for full CGT, this time with no PRR.

Am I wrong ? Am I now looking at this incorrectly ? The only way I see making money on houses is to buy one, live in it, do it up, sell it and move up the ladder that way. Perhaps buy one in my kids name ?

These dudes that have 5/10 flats, or 2 additional houses, how di you guys make money ?

[Muzzer79]

The big short-term money ship in domestic property sailed quite a while ago.

The world and his wife thinks they're Sarah Beeny now, so only small gains.

Those with property now probably

a) Bought some time ago, when prices were lower.

b) Use the property as a long term investment vehicle, with gains from rent/increase in value outweighing interest rates and other forms of investment.

Still money in commercial property development, but that's becoming harder and the buy in is much higher.

IMO

[blueg33]

We have just bought a place to use as a furnished holiday let.

Rent is high, but so are costs and vpoid risk. It will just wash its face. For us its a long term play hoping thet the value will increase. It has the benefit of no CGT on sale and no Council Tax during operation

[sbk1972]

A neighbour a few doors up from me is a property developer / builder. He mentioned to me a while ago that he's long come out of the residential world and only now focuses on commercial. Tennants sign up for 10 years, have to manage their own maintenance and as its their own shop / business they will tend it keep it in good condition. He deals mainly with commercial units, trading estate locations etc and wouldnt consider shops on the high street anymore.

[sbk1972]

blueg33 said:

We have just bought a place to use as a furnished holiday let.

Rent is high, but so are costs and vpoid risk. It will just wash its face. For us its a long term play hoping thet the value will increase. It has the benefit of no CGT on sale and no Council Tax during operation

Hi Blue, forgive my ignorance but what is vpoid stand for ? Do holiday lets have no CGT / council tax ?

[blueg33]

sbk1972 said:

blueg33 said:

We have just bought a place to use as a furnished holiday let.

Rent is high, but so are costs and vpoid risk. It will just wash its face. For us its a long term play hoping thet the value will increase. It has the benefit of no CGT on sale and no Council Tax during operation

Hi Blue, forgive my ignorance but what is vpoid stand for ? Do holiday lets have no CGT / council tax ?

Its a typo (my typing is rubbish) I meant void

Furnished holiday lets do not attract CGT if they have been available for enough weeks of the year. Council tax is replaced by business rates and the rateable value of most cottages is well below the threshold so 100% relief is available.

[VR99]

Muzzer79 said:

The big short-term money ship in domestic property sailed quite a while ago.

The world and his wife thinks they're Sarah Beeny now, so only small gains.

Those with property now probably

a) Bought some time ago, when prices were lower.

b) Use the property as a long term investment vehicle, with gains from rent/increase in value outweighing interest rates and other forms of investment.

Still money in commercial property development, but that's becoming harder and the buy in is much higher.

IMO

This sums it up quite well. Every tom, dick and their dog are claiming they are millionaires and 'living the FIRE dream' from their 'passive' income streams generated by properties but of course tend to conveniently leave out the important details.

I know of a few people making decent dosh from a 2nd property but..their parents got them on the ladder early in the 2000's or they became accidental landlords when upsizing and the key bit... mortgages are fully paid off.. given the increases in property/asset value since 'back in the day' then they have done v well. If you were to buy now I'm not so sure it's as lucrative and taxation makes it less attractive now?
I think if you are an experienced landlord and know what you are doing fair enough but for me personally as an example I would expect to get v burnt if trying to do BTL in the current climate.

Edited by VR99 on Tuesday 2nd March 12:14

[MechMovement]

Think of it as a business and there is money to be made.
If you are wanting a more passive income stream then be prepared to give away ~10% of your rent to a managing agent for hopefully less hassle.

You could try and be more actively involved, spend smaller amounts on external companies to credit reference check etc.... in the hope of saving the agents fee but in turn may/will incur some additional hassle from the tenants.

I do believe exposure to residential property as an asset class is worthy but you HAVE to run realistic numbers through your accountant/yourself and go in with your eyes wide open.

Points mentioned above about bought some time ago when prices were lower etc... i believe these will be the same lines you will hear in another 5/10 years if you were to ask this same question.

Depending on age do also think about the impact your BTL income can have when you begin to draw from your pension etc...

[Eric Mc]

blueg33 said:

Its a typo (my typing is rubbish) I meant void

Furnished holiday lets do not attract CGT if they have been available for enough weeks of the year. Council tax is replaced by business rates and the rateable value of most cottages is well below the threshold so 100% relief is available.

Holiday Lets ARE chargeable to Capital Gains Tax - but because they are looked on as a form of business, they are eligible for the CGT reliefs that can be obtained when a business is disposed of.

[NickCQ]

sbk1972 said:

We rented the property for 6 years, she owned it for a total of 10 years, and seeing what we had to pay for CGT ... is there real money to be made in 2rd / 3rd properties nowadays?

I think you are looking at it the wrong way. You had the property as an investment for 6 years and (presumably) a second home / weekend place for the other 4? If you came out of all of that with a profit (which you must have done on the capital given you paid CGT), then you've saved yourself a decent chunk versus staying in a hotel all of those weekends!

[Groat]

If you're moaning about paying CGT you must have profited from the sale by more than the allowance - potentially double the allowance given you're married.

Moaning's reserved for losses.

[blueg33]

Eric Mc said:

blueg33 said:

Its a typo (my typing is rubbish) I meant void

Furnished holiday lets do not attract CGT if they have been available for enough weeks of the year. Council tax is replaced by business rates and the rateable value of most cottages is well below the threshold so 100% relief is available.

Holiday Lets ARE chargeable to Capital Gains Tax - but because they are looked on as a form of business, they are eligible for the CGT reliefs that can be obtained when a business is disposed of.

Exactly. I just didn't put it that way. There are conditions to be met

The property must be located either in the UK or in the European Economic Area (EEA) and must be furnished to a sufficient standard for normal occupation.

The property must also be let on a commercial basis, i.e. with a view to making a profit.

In addition, there are three ‘occupancy’ conditions imposed by HMRC:

1. The availability condition – the property must be available for letting as FHL accommodation for at least 210 days in the year;

2. The letting condition – the property must be let on a commercial basis for at least 105 days in the year; and

3. The pattern of occupation condition – the property must not be let for periods of 31 continuous days or more for more than 155 days in the year.

Then there is some flex to allow for multiple properties and crappy years

[blueg33]

For many private equity and institutional funds buying assets to rent is working very well. There is still a boom in build to rent etc

The sector I am interested in is buying a small site in a Uni town and building say 12-20 apartments aimed at students. Sort of "halls light" with private ownership rather than the big developers like Unity

[S17Thumper]

blueg33 said:

Eric Mc said:

blueg33 said:

Its a typo (my typing is rubbish) I meant void

Furnished holiday lets do not attract CGT if they have been available for enough weeks of the year. Council tax is replaced by business rates and the rateable value of most cottages is well below the threshold so 100% relief is available.

Holiday Lets ARE chargeable to Capital Gains Tax - but because they are looked on as a form of business, they are eligible for the CGT reliefs that can be obtained when a business is disposed of.

Exactly. I just didn't put it that way. There are conditions to be met

The property must be located either in the UK or in the European Economic Area (EEA) and must be furnished to a sufficient standard for normal occupation.

The property must also be let on a commercial basis, i.e. with a view to making a profit.

In addition, there are three ‘occupancy’ conditions imposed by HMRC:

1. The availability condition – the property must be available for letting as FHL accommodation for at least 210 days in the year;

2. The letting condition – the property must be let on a commercial basis for at least 105 days in the year; and

3. The pattern of occupation condition – the property must not be let for periods of 31 continuous days or more for more than 155 days in the year.

Then there is some flex to allow for multiple properties and crappy years

Very helpful Blue - cheers

[NickCQ]

blueg33 said:

For many private equity and institutional funds buying assets to rent is working very well. There is still a boom in build to rent etc
The sector I am interested in is buying a small site in a Uni town and building say 12-20 apartments aimed at students. Sort of "halls light" with private ownership rather than the big developers like Unity

The way the economics seem to work on these is that you build to a 6-7% yield on cost and make your money by flipping at a 4% cap rate as soon as it is stabilised. As a long term build-and-hold play I don't think the returns are that exciting.

[Eric Mc]

That sort of investment talk really excites me - if only I knew what it meant.

[blueg33]

NickCQ said:

blueg33 said:

For many private equity and institutional funds buying assets to rent is working very well. There is still a boom in build to rent etc
The sector I am interested in is buying a small site in a Uni town and building say 12-20 apartments aimed at students. Sort of "halls light" with private ownership rather than the big developers like Unity

The way the economics seem to work on these is that you build to a 6-7% yield on cost and make your money by flipping at a 4% cap rate as soon as it is stabilised. As a long term build-and-hold play I don't think the returns are that exciting.

Current net initial yield is under 3% with a local authority covenant and CPI indexation with cap and collar, 3-4% for large housing associations and management companies, 4-5% for weaker covenants and 7%+ for the flakey stuff

I am mostly doing deals around 3%

Many are forward funded with a different interest rate through the construction period. generally we are talking long term income strips of 30 years plus with asset amortised to zero by the end of the term

[worsy]

And all before Sunak decides to raise CGT rates in line with Income Tax rates......possibly.

[NickCQ]

blueg33 said:

Current net initial yield is under 3% with a local authority covenant and CPI indexation with cap and collar, 3-4% for large housing associations and management companies, 4-5% for weaker covenants and 7%+ for the flakey stuff

I am mostly doing deals around 3%

I don't need to tell you how to suck eggs then . I think the point remains though that the only place for a PE cost of capital in all of that is at the front end to capture the compression to the 4% equiv. Holding beyond that is not accretive unless you have a thesis on further cap rate compression or rental growth.

[blueg33]

NickCQ said:

blueg33 said:

Current net initial yield is under 3% with a local authority covenant and CPI indexation with cap and collar, 3-4% for large housing associations and management companies, 4-5% for weaker covenants and 7%+ for the flakey stuff

I am mostly doing deals around 3%

I don't need to tell you how to suck eggs then . I think the point remains though that the only place for a PE cost of capital in all of that is at the front end to capture the compression to the 4% equiv. Holding beyond that is not accretive unless you have a thesis on further cap rate compression or rental growth.

I agree, there is virtually no room for compression, the reliance is on CPI and pension fund return levels. As you say for PE hat tends not to work so they aggregate and gear a portfolio