With the New Year fast approaching, it's time to start thinking ahead.
As we always say, property is one of the best investments a person can make, especially in today's volatile financial climate.
For those in London or the South East, ploughing your money into yet another pricey property in or around The Big Smoke may not be the smartest move in 2017.
The consensus in the press is that placing your chips in the south is no longer going to stack up. Why? Well, the reason is Section 24 which states that from 2020, you will no longer be able to deduct mortgage interest payments as a business cost before working out taxable profit; instead, relief will be applied at 20% once you’ve arrived at your profit. This new law will be phased in from April 2017 which, as we all know, is not far away.
This new bill means that you need at least a 4.1% yield on your property for it to break even which, in reality, puts a significant squeeze on lets down south where there are poor yield percentages. It’s time for a change.
The Solution to Section 24
There are three distinct ways around the crush of Section 24. Let's take a look at them:
Raise rents: Let's face it: having nowhere to rent at all is infinitely worse than having to pay more and, regrettably, the government is forcing landlords’ hands to raise rents. Without investment landlords, the government would be obliged to house tens of millions of people so it is not in their interest to dissuade investors. If oil prices go up, petrol goes up; this is no different.
Refurbish: Refurbishing could drive down taxable profits while increasing capital values. As a landlord, you can deduct the costs of works which restore a property’s condition - elements including painting, replacing windows, or even updating a bathroom or kitchen - from your rental income. It's also possible to carry forward losses over several years until they are wiped out by profits, or to offset them against profits on other properties. Essentially, your tax liability is calculated across your whole portfolio.
Head North from London: We're talking about North Staffordshire in particular. Why? We see minimum yields of about 6% rising well into double digits. The investment entry level is very low; you can get a four-bed detached house from about £180,000 in Newcastle under Lyme, for example. Newcastle is deemed an affluent area with private schools, a high ranking university nearby, lots of green space, and many other attractive residential qualities. Rents for these kinds of properties start at about £1000 PCM which delivers a yield of around 7%. It's worth bearing in mind that this is an area yet to see the kind of regeneration that has been enjoyed down south which means when things really start moving, you could benefit from enormous capital and rental growth - and that my friends, is the most solid solution to Section 24.
Family homes in safe areas are the best bet when it comes to investment, as families tend to stay put to ensure their children’s schooling isn't disrupted. These sorts of lets are more likely to achieve long-term tenancies; particularly when these types of properties tend to attract the likes of doctors and solicitors who have more sturdy jobs.
2017 is set to be a topsy-turvy yet incredibly exciting year. If you're an investment landlord, perhaps it's time to hang up those London boots in pursuit of the greener pastures of North Staffordshire and secure yourself a long and prosperous financial future.
**Credit: Sunday Times for statistics and core industry insights.**