Voids, Property Tax and Development Risk: Financial Hurdles For Today’s Property Investors

We all know that property investing carries a level of risk, but the same financial hurdles that investors and developers face come up time and time again. This articles gives you a run-down of the most common challenges and explains how to avoid falling into any of these financial traps.

The cost of void periods

When a residential property reaches the end of a tenancy period, a landlord can typically expect the property to sit empty for 1-3 months while new tenants are found. This is called a void period, and can be very costly for landlords.

A void period isn’t simply about a property being empty, it’s about the fact that charges and fees on that property will still apply whilst it’s unoccupied. Costs such as mortgage payments, council tax, utilities, and insurance, will all still apply.

To keep void periods to a minimum, it’s essential to view your property as a home for your tenants and not just as an investment for you. Put yourself in their shoes, what features would entice you to rent your property? Are the furnishings out of date? Is the garden overgrown?

If your property is in a location with good rental demand and transport links, there’s no reason it should sit empty for long if it’s in good condition and the rental price is competitive.

Tax on your buy-to-let income

Keeping on top of the latest property tax rules for landlords can be both confusing and daunting. The first thing to understand are the individual income tax rates and bands for 2021-22.

The personal allowance threshold is currently £12,570 – this is the amount you are allowed to earn before you have to start paying income tax.

The amount you earn above £12,570, will be taxed at 20 per cent on buy-to-let income between £12,571 and £50,270, and 40 per cent on income above £50,271 (an increase on last year). Earnings above £150,000 remain at 45 per cent.

Section 24

Section 24 is a much-discussed change in UK tax law that came into full force for landlords in April 2020. The legislation means that landlords can no longer deduct mortgage interest from their income, and must pay tax on all the rental income they receive.

Mortgage interest costs can be claimed back, but only up to the basic rate of income tax (20%). Whilst this new law seems to have more significant impact on landlords with larger portfolios, there are ways to off-set and manage its impacts.

Landlords can look to review (and reduce) operating costs, consider re-mortgaging with more competitive deals, divide profits or transfer ownership of properties to partners or family members, become a limited company (as Section 24 does not apply to them), hold the properties in a SSAS or SIPP pension, set up a Beneficial Interest Company Trust (which allows you to maintain personal ownership of the property but transfers your portfolio into a company structure), or increase rents.

With so many options, its always recommend to speak to a specialist in this area when it comes to an overall tax strategy for your property business.

Property Development costs

Another financial hurdle that you will face as a property developer, is project management and the cash flow associated with it. No matter what planning takes place at the start of a development project, it’s inevitable that some delays will occur, or you will come across unforeseen problems.

Time and cost overruns can both have a significant impact on your cashflow. Make sure your contract with any building contractor is detailed and avoids any assumptions on what’s included – right down to the exact fixtures and fittings.

A scheduling plan is also essential so that when a delay looks likely, you can quickly and easily move back the next phase of works, ensuring that the project continues to run smoothly after your delay is resolved.

Your builder going bust is also a potential threat you should consider. Where would this leave you and your project? No matter how well you think you know the builder, running detailed due diligence is essential before signing any contract.

When it comes to forecasting the costs and income with any property investment, be honest, detailed and accurate with your numbers. Working with numbers that have no merit or research behind them is the fastest way to hitting financial problems.

Conclusion

Whilst the financial hurdles described above can have a financial serious impact on a property investment business, you are able to minimise the effects of most of them with careful planning at the outset, keeping up to speed on the latest property rules and laws, and having the best specialist team around you.