Are you looking to invest in your financial future? Whether that’s long-term funding for your retirement or your children’s university funds or to ensure you and your family are well looked after for years to come, building a property portfolio can be a great way to secure your financial future.
Creating a well-thought-out investment strategy and working with industry professionals can be your ticket to building a successful property investment company.
If you want to dip your toe in the property investment pool, then here are some of the steps to building a successful property investment portfolio:
- View properties
- Speak to us for financial and accounting advice
- Decide on your business structure
- Research average rental yield
- Purchase property
At Archimedia Accounts, we understand the desire to use property investment as a way to diversify your income and secure your finances. We are professional certified accountants, and we have been helping clients for over 30 years, guiding them to financial stability.
Alongside our extensive experience, we have our own impressive property portfolio spanning both residential and commercial properties. We want to help you do the same!
In this blog, we explore why building a property portfolio can be your ticket to financial success and how you can do it in the best way possible for a sustainable income. Keep reading for more information, or contact us today for a friendly chat about your situation.
What is a property portfolio?
A property portfolio is a collection of properties owned by an individual, a group, or a company to generate income and secure their finances. It typically includes multiple properties, such as residential homes and commercial buildings, which can be rented out to individuals or businesses for long or short periods of time.
For instance, serviced accommodation (or holiday lets) can be let out for just a few days, whereas for a commercial property, a tenant may have a 10-year lease agreement. Buy-to-lets, on the other hand, would usually have a 6-month or 12-month shorthold tenancy agreement that is renewed if required.
If you are looking to increase your standard of living, then a well-managed property portfolio can do just that. It has the potential to provide a predictable income stream and capital growth over the long term, ultimately increasing your profits and ensuring a healthy financial future.
How do property portfolios work with business structures?
Property investors can purchase investment properties in their own name or through a limited company. However, each investor and their family situation can be entirely different.
For a more tax-efficient way to purchase property, it has become more popular to do so through a limited company. This is because tax laws have made it less favourable to own property in your own name.
Essentially, there is more tax to save the more property you have.
In a limited company, you pay Corporation Tax, which is lower than what you’d pay as a higher-rate taxpayer investing in your own name. So, you can make greater tax savings by buying property through a limited company.
Plus, if you don’t take the profits out of the limited company, then you wouldn’t pay income tax on them either. You can just reinvest this money, for example, to buy more properties.
Can you add a property portfolio to your business?
You can transfer your property portfolio to your business, but it might not be the most tax-efficient way of doing things.
It is often best to structure your property business so that it is separate, for example, from a trading business. Funds from the trading business can still be used for investing by transferring them to the property business. It could be best to ring-fence the property business by having a holding company structure.
This would then enable the trading business to distribute dividends to the holding company tax-free, and the holding company can lend the funds to the property business, allowing the property business to start investing. This ensures the property is protected from a liquidator in case the trading company goes into liquidation.
Should you set up a new business entity or add your property portfolio to your current business?
Ultimately, the decision to set up a new company structure or use your existing company when building a property portfolio is down to you and your unique circumstances. However, there are some significant tax-saving benefits and security when having your businesses as separate entities.
Setting up as a limited company for rental property
If you are looking to make more significant tax savings when building a property portfolio, then setting up a specific property investment company can be a smarter investment strategy. This can be done as a group structure, as mentioned above (e.g. holding company), or a separate entity altogether.
Sometimes lenders insist you have a separate property investment company with a specific SIC code. A SIC code is a 5-digit number that classifies a company’s principal business activity. All companies must provide at least one SIC code when registering with Companies House.
Transferring rental property to your limited company
Transferring rental property to a limited company effectively means selling the property to the limited company at market value. This can have Stamp Duty Land Tax (SDLT) and Capital Gains Tax (CGT) implications.
When you transfer the property to a limited company, the company then becomes the legal owner of the property, and shareholders own shares in the company. You no longer have to pay income tax on the profits, but the company will pay Corporation Tax.
You can pay yourself and your family members a salary from the company, and you can also pay yourself dividends if there are sufficient profits to do so. However, salary and dividends will both be subject to income tax.
Talk to Archimedia about other ways of extracting funds from a limited company in the most tax-efficient way possible.
Steps to building a property portfolio as part of your business
When looking to build a property portfolio, it may be overwhelming with all of the information out there. That is why Archimedia Accounts has created a step-by-step guide for what you should consider as new property investors.
1) Scope the property market
Are you looking to buy commercial or residential properties? Maybe a mix of both? It’s important to know what you’re looking for when investing, especially if this is your first property, as it could be the most significant.
To see if holiday-lets are tax efficient, check out our guide here.
Take a look at what’s out there and start getting an idea of property prices. We believe you should never pay too much for a property, and don’t be afraid to offer below the market value. Warren Buffett says investing is not like baseball; you don’t get three strikes, and you’re out. Take your time. There’s no rush. Only invest when you’re hitting a sweet spot, i.e. you’re making money when you buy the building.
Seek advice, network with like-minded people and join investor networks. Having a property investment community can be a huge help when looking to build a property portfolio. Or contact our experienced team. We’ve been there, too, so we have a wealth of information on investment properties.
2) Seek financial and accounting advice
The right financial advice will help you plan your income and wealth needs, looking at your immediate goals as well as your longer-term goals.
You have to balance seeking long-term wealth with taking on debt, rental vacancies, and any unexpected costs that might arise, such as boilers breaking or roofs caving in. Leaving money aside as a cushion is essential when buying multiple properties in case anything unexpected occurs.
You cannot risk running out of cash in the short term for long-term gains, and you don’t need to take unnecessary risks. It’s better to invest in a property that doesn’t have the best long-term gain potential (although it should still have decent capital growth) but is a steady short-term investment and can pay its bills.
At Archimedia Accounts, we are experts in tax planning and accounting for businesses of all sizes. We’ll help you manage the income and expenses from your rental business and structure it in the most tax-efficient way. With the help of our accounting experts, you’ll be able to determine potential rental profits, understand your mortgage payments and, ultimately, know what is needed to secure you and your family’s financial future.
3) Set up a new limited company or use your current one
At this point, you’ll need to decide whether you set up your property portfolio business as a new limited company or start your investment property venture under your current one. As mentioned earlier, it can be beneficial to start investing in properties through a new company structure, especially if the lender requires you to do so.
However, everyone’s situation is unique, and what may suit one person may not suit the next.
4) Develop a rental income forecast
Since the property market is constantly changing, it is a good idea to know how much return on investment you could make from purchasing a rental property. You’ll also need to find out how much you can afford before jumping in and placing a bid.
The best way to do this is to create a forecast of the rental income you could receive and predict the costs involved in the purchase, such as agent fees and maintenance. Developing a rental forecast will help you realistically ascertain the goals you aim to achieve from your investment property.
5) Purchase property
It is essential to purchase the right property in the right location with the scope for rental increases and capital growth. If there is substantial Government or private investment in an area, it would likely be a good place to buy.
When it comes to the numbers, your mortgage advisor (Archimedia has good contacts that we can introduce you to) will help you with the right mortgage product and the level of mortgage you can secure. They will calculate this based on your deposit needed and the potential rental income the property will generate by surveying the market.
If there is reasonable cash flow at the end of the month, after the mortgage, estate agent, and set amount for potential maintenance, then this would be a good indicator of whether you should invest.
You can then negotiate and make an offer on your desired property. A solicitor will also be able to guide you through the process.
6) Build a long-term property business strategy
People who achieve great success start with a good plan. Starting out with one property to begin with and growing your property portfolio from there is a much more sustainable investment strategy.
To build long-term success, you’ll need to assess where you are now, where you want to get to, and the actions you have to take to bridge the gap. Be clear about your money and what you need to allocate to your property investing – but don’t forget to consider your personal budget, too!
You should be realistic in terms of the time that you have to put into property investing and the knowledge you have and are willing to develop, including investing in training.
You need to be clear about whether it is income you need or capital gain and which is more important now and in the future.
Property business strategies:
- Buying, then adding value and refinancing
- Buying properties at a discount and then refinancing
- Turning properties into HMOs to get a higher return
- Converting commercial property to residential or some commercial and some residential elements for high returns on investment
- Flipping properties for a profit
How can Archimedia’s property accountants help you?
At Archimedia Accounts, we are property tax specialists. Our Directors, Barbara and Chris, also own a large, successful property portfolio spanning 30 years and covering a multitude of residential and commercial properties.
Combining our personal property investing experience with over 30 years of experience in tax planning and accounting, we have the specialist skills and expertise required to help you achieve your property investing goals.
So, whether you are looking to make long-term investments or benefit from immediate rental income, contact our property accounting experts for a friendly chat today.
We believe that building a property portfolio as part of your business and future wealth strategy is an excellent idea. We understand that while big dreams can be exciting, they can also feel daunting.
So, to make this journey more manageable for you, we have broken it down into a few simple steps:
- Assess where you are now and set clear goals
- Decide how to reach your goals and fund your investment properties
- Research the property market and talk to like-minded people
- Choose your ideal first property
- Create a long-term strategy and develop a plan to manage your property portfolio