Moubin Faizullah Khan is founder & chief executive of GetGround, a firm which specialises in helping landlords establish multiple limited companies to invest in property.
Achieving maximum return with minimum hassle is any investor’s dream scenario. Only the very luckiest can claim to have hit such a goal, and even then it won’t be that often.
But when it comes to buy-to-let property investments, we are, at least, closing in on reducing some of the stress and alleviating some of the pain.
Specifically, when investing in buy-to-let property through company structures, the ability to mitigate the investment risk involved is greater than through alternative personal ownership options.
The financial advantages of company buy-to-let are increasingly well understood: mortgage interest tax deductibility and the option to extract profits by way of dividends, owner loans, capital or pensions can’t be ignored.
Another significant reason why investing through limited companies makes the best possible business sense revolves around the legal protections, flexibility and risk mitigation that incorporated entities enjoy and their personal owner counterparts do not.
These protections work both ways – protecting you and your family from buy-to-let investments that may go south, and so too protecting your investment portfolio from other risks in your life.
Each company established for the purpose of buy-to-let investing is in effect a special purpose vehicle (SPV) that’s specifically designed for efficiency and protection in three key ways:
1. A company is a separate legal entity to the individual that forms it, meaning its liabilities are ring fenced. If a buy-to-let investment underperforms, the company will be impacted but you, as an individual, are not. Why make the financial security of your family dependent on the success of your business pursuits?
2. A company is structured in a way that promotes successful buy-to-let investing. Share value is kept low. Most of the funds required for the property deposit are made by way of owner loans thereby better protecting the owner’s capital and allowing the owner to take repayments when needed. And, of course, capital repayments are not subject to tax. The correct standard industry classification codes (“SIC codes”) are used to describe the company’s activities and to meet the needs of any prospective mortgage lenders.
3. A company allows for a flexible ownership structure where multiple individuals can come together to purchase a property, spread risk and be protected by the legal documents that come with a corporate structure such as articles of association and shareholder agreements. Adjusting ownership is also much easier, with share trades being executed within a day when required and without the costly Stamp Duty Land Tax payments that come with changes in property owned under personal name.
The benefits don’t stop there. By holding one property per company, an investor amplifies the benefits even further through standardisation.
In particular, investors have a lot of flexibility around how they manage their portfolio over the long time period during which property is typically held. For example, an investor could decide which properties in their portfolio to gift to each of their children, which to keep for a pension income, and which to sell or refinance. This is difficult to do at a property level if all properties are held in a single company structure.
Furthermore, each company has its own balance sheet and bank account, making visible the individual cash flow situation at any single point for each property in an investor’s portfolio. That includes timestamped evidence of rental income and outgoings such as utility bills, mortgage payments and expenses.
It’s no wonder mortgage lenders are increasingly in favour of it. Company buy-to-let properties are far easier to analyse to assess their suitability for finance. The one-property-per-company model in particular allows mortgage lenders to better assess risk and take security.
In this way, systematising the performance analysis of properties held through companies becomes simpler. When individual assets are held in individual company structures, all managed in the same place or platform, data about the performance of each company (and therefore the property within it) can be tallied, assessed, matched and compared. Investors can at last quickly identify – through fact not guesswork – the best and worst performers in a portfolio, and crucially, understand the reasons for their peak or poor performance.
In turn, this quality data available equips investors with better decision making power. When assets are managed uniformly and assessing them is standardised, investors can start to make changes to their portfolios in anticipation of issues, not in response. Or, indeed, they can make informed investment decisions to fit their changing life circumstances – upsizing or downsizing their portfolios depending on need.
Landlords are becoming younger: GetGround serves as many landlords in their early 20s as late 50s. As the average age of a landlord reduces, it’s likely we’ll see more landlords own and rent out property over longer periods of time, spanning different phases of their lives. During that long time, the requirements they put on their portfolio will change as they encounter and handle moments of financial stress and success that require or enable them to make significant changes to their investment positions.
Company buy-to-let used to be the favoured route to owning property you didn’t live in yourself, but over the last few decades personal ownership took precedence over companies where the latter became perceived to be more complicated or challenging to manage.
Now, as understanding of the simple, clean investment experience that can be achieved when investing through companies improves, we’re seeing greater innovation to cut out the apparent expense and bureaucracy of company buy-to-let that did, for years, heavily outweigh the benefits.
There aren’t a huge number of things that the whole of the buy-to-let market agrees on, but when the ecosystem is pulling in the same direction, you have to know that something is right. Today more than 60% of BTL investments are being made through companies. That’s up from 15% five years ago. It’s time now to help that remaining 40% see the benefits and risk mitigation, and make the necessary change.