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What are my options now my portfolio is worth a million?

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  • 28/07/2003
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I have a client who has developed a buy-to-let portfolio worth just over £1m and he now wants to take the next step. What are the options available to him and should he concentrate on developing his existing portfolio?

Investors have many options at their disposal and the decision on whether to make further investments to develop an existing portfolio will be largely dependent on how much time the client has along with their investment appetite and location. However, with a slower housing market and house prices beginning to soften, now could be a good time to consider growing the portfolio to take advantage of any future rise in rental prices as demand continues to grow.

In recent times new-build has been considered a profitable option for investors, with a number of potential investment opportunities on offer from developers, particularly if they need to raise cash to fund the building work or the next phase of the development. In these circumstances, investors may be well placed to acquire a property, or multiple properties, at a discounted price. One way of leveraging available investment capital is to put a reserve on a property and exchange but not complete immediately, as it could be several months before the building is finished. Only be then do they need to arrange a mortgage, or sell it on.

The client’s current level of investment is already at the limit for many lenders. However, there are a few specialist lenders that will allow investors to expand their total portfolio well beyond £1 million. The client could also look to raise capital against their existing properties to assist in portfolio growth.

Spreading the portfolio across several lenders will also increase investment opportunities. Similarly, the client’s domestic partner could take out the loan to fund a property, again helping to spread the risk. Past performance is no guarantee of future profit ‘ or a quick profit ‘ so, as with any investment, buying to let should be viewed as a medium to long-term proposition and investors should take a realistic view of the inherent risks.

To provide a detailed answer the broker would need to know how many properties are in the portfolio, what type they are, the amount of equity in the portfolio and how the properties are owned. However, this client does have a number of options.

They may want to remortgage the existing portfolio (or part of it) to finance further expansion. If he is remortgaging several properties at once to a single lender, a broker may be able to negotiate reduced valuation and arrangement fees, and get the money released from the chosen lender in stages. If the client has had these properties for some time it is likely that more competitive buy-to-let mortgages will now be available.

The client should try and ensure that his portfolio is balanced both by tenant and property type and also geographical location. If the portfolio is primarily one type of property and in one area, the next step would be to diversify. For example, if the portfolio consists mainly of flats for professionals, look at houses for families, student lets or even a change of tack into the commercial market. The client does not want to be too exposed to any one geographical area as local property prices can fluctuate widely.

It would be wise for the client to take advice from an accountant to find out if there is a more efficient way of owning the properties. They may want to move from sole trader to partnership or even to a limited company. This can have tax advantages, both on rental income and capital gains. Building up a portfolio is one thing, but then being able to access the equity without paying too much capital gains tax is another. A staged plan of selling those properties that have done well, then using this income to buy a couple more might be a wise move. As with any investment, knowing when to get in is important, but often more money can be made by knowing when to get out.

Now the client has built up a sizeable portfolio they should look at the situation carefully and assess all of their future options.

For future borrowing, the choice of lenders may now become restricted as some lenders will not lend once you have multiple properties whereas others will refuse further loans as the client has reached a value of £1m. A number of lenders will stop lending once the portfolio value reaches a certain level.

The client should consider the tax implications and ensure an IFA and/or and accountant are involved. An example of this planning could be that a higher rate tax payer could have the portfolio in their name meaning the net rental income is all taxed in their name, but their spouse could have no taxable income so further purchases could be made in the spouses name.

A number of lenders will now consider portfolios being switched into a limited company for purposes of property management. This is an area where an accountant could advise them specifically on the benefits and the pitfalls. However the lenders that will currently consider this option are restricted in numbers so careful consideration should be given in looking at possible tax savings against paying a possibly higher rate of interest on the loan.

The client should also take the opportunity of reviewing their existing borrowing to ensure the rates are keen, as over recent years the buy-to-let rates have become a lot closer to residential purchase rates, and remortgage incentives are now available through some lenders in this market.

Finally, the client should consider future interest rate movements because interest rates are at a 40 year low point, and now may be the time to lock some of their borrowing into fixed-rate deals.


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