Income from investment
Discussion
A friend wants to do less, but have some income for retirement. Current investments amount to about £150k in a mixture of shares and cash. There is no strategy, aside from picking shares which he 'likes'. Sadly these likes have not always done that well...
My suggestion was to buy 3 BTL properties, each with a 75K mortgage. For that you would pay about £350/month for the mortgage and receive 550-600 in rent per property. Expenses and costs might come to a further £150/month/property using a mix of friends and contacts for any work, leaving you with £200-£400 at the end. I assume tax has to be paid on this, but how much? That way he could pay down the mortgage when he is working, then in 5 or 10 years when he stops, drop down to an interest only and have some cash in hand.
Is it also worth considering setting up a fund/company to manage the properties, effectively paying yourself a wage from the books? Is that more tax efficient than having them in your own name or not? Also, come time to pass things on if a son is also a director then the company continues, without having to pay 40% tax on the investments.
Finally, if the mortgage was in an individuals name, and the individual was say 55, would they lend over more than a 15 year term, and if not, does it make a difference if the investment is in a companies name?
My suggestion was to buy 3 BTL properties, each with a 75K mortgage. For that you would pay about £350/month for the mortgage and receive 550-600 in rent per property. Expenses and costs might come to a further £150/month/property using a mix of friends and contacts for any work, leaving you with £200-£400 at the end. I assume tax has to be paid on this, but how much? That way he could pay down the mortgage when he is working, then in 5 or 10 years when he stops, drop down to an interest only and have some cash in hand.
Is it also worth considering setting up a fund/company to manage the properties, effectively paying yourself a wage from the books? Is that more tax efficient than having them in your own name or not? Also, come time to pass things on if a son is also a director then the company continues, without having to pay 40% tax on the investments.
Finally, if the mortgage was in an individuals name, and the individual was say 55, would they lend over more than a 15 year term, and if not, does it make a difference if the investment is in a companies name?
Saleen836 said:
3 properties with £75k mortgage on each from £150k?
I would say that in most places where you can buy a decent house to rent out for around £75k the rent is comparable to the cost of house prices so your rent prices look a little on the high side.
If he has a £75k mortgage the prop will be worth £100k. A £600 rent on a £100k prop is easily achievable.I would say that in most places where you can buy a decent house to rent out for around £75k the rent is comparable to the cost of house prices so your rent prices look a little on the high side.
With £150k he could get 5x £100k props, leaving £25k for acquisition costs and repairs, which should net him approx £1500 mth.
I'm no expert at this but those numbers don't seem to add up. Yes you can get £75k at a starting rate of £350ish but that goes up to £450-£500 at the end of a fixed rate period of a couple of years and there is an arrangement fee of £1.5 to £2k in the ones I see. That's not taking into account that we are perhaps coming towards the end of a period of very low interest rates.
Then just looking at rents, £500-£550 is what I'm seeing for houses that cost £100k, so on those numbers you are making nothing, probably starting to lose money.
Of course another issue with BTL is that you lose money every day you aren't getting rent, so you need money to get through the times when that is happening. You also have additional costs of doing it.
So it's easy to say £600 a month, less £350 mortgage, that's £250 a month and I'm laughing but then find it doesn't work out that way unless you really know at you are doing.
But as for the questions. The income, such as there is, can be offset by costs (again you need to know what you are doing) and the surplus is then taxed at your marginal rate, so it depends on what other income you have as the the rate you pay. Having it in a company or personal is another for an accountant but from an inheritance tax perspective the value in the estate will be the value of the properties or the value of the company that owns the properties. Having the son as a director makes no difference, if the estate is over £325k then IHT will be paid (unless left to a wife). The only way round that is to give the son properties or shares seven or more years before dying.
Then just looking at rents, £500-£550 is what I'm seeing for houses that cost £100k, so on those numbers you are making nothing, probably starting to lose money.
Of course another issue with BTL is that you lose money every day you aren't getting rent, so you need money to get through the times when that is happening. You also have additional costs of doing it.
So it's easy to say £600 a month, less £350 mortgage, that's £250 a month and I'm laughing but then find it doesn't work out that way unless you really know at you are doing.
But as for the questions. The income, such as there is, can be offset by costs (again you need to know what you are doing) and the surplus is then taxed at your marginal rate, so it depends on what other income you have as the the rate you pay. Having it in a company or personal is another for an accountant but from an inheritance tax perspective the value in the estate will be the value of the properties or the value of the company that owns the properties. Having the son as a director makes no difference, if the estate is over £325k then IHT will be paid (unless left to a wife). The only way round that is to give the son properties or shares seven or more years before dying.
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