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The Property Voice Podcast - Series 2: Portfolio Development Part 2
We continue to look at property cycles and in particular our own portfolio development cycle with part 2 of our ‘4Es Model of Property Portfolio Development. Last week we looked at the Enter & Expand stages and this week we consider the Establish & Exit phases. Then, out of the blue this week, the Chancellor released another bombshell aimed at the buy-to-let market in his autumn statement – what does it all mean and what can we do about it we ask? We pause for reflection on this prompted by a listener question in Your Voice to weigh up the implications of this.
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Resources mentioned
Scanner Pro App & Echo Sign App
Today's must do's
Where are you in your portfolio development cycle? Consider what are the characteristics prevalent in this stage are and what is likely to be coming up ahead to plan for?
How can you adapt or innovate to avoid being caught out by the Chancellor’s latest round of tax hikes on BTL investors?
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Transcription of the show
Hello and welcome to another edition of The Property Voice Podcast, my name is Richard Brown and as always it is a pleasure to have you join me again on the show today.
Well, what can I say about the last week in property…yet another raid on the smaller buy-to-let property investor has been dished out by the Chancellor in his autumn statement. We shall get to this in more detail the Your Voice section later on.
In the meantime, our main topic continues the theme of portfolio development by continuing the 4Es of Property Portfolio Development model that I shared last week. Whilst it may be tempting to think that these two topics are unrelated, in fact they are very much related and linked to one another as we shall see.
Property Chatter
If you can focus on anything else aside from writing to Number 11 Downing Street, then let us briefly recap what we shared last time out as our 4E Model of Property Portfolio Development.
The 4Es again are:
- Enter
- Expand
- Establish
- Exit
As we shared last time, as property investors, we move from one phase to the next as our portfolio unfolds and develops with us over time. I guess it could be tempting to say that following last week’s surprise announcements that the exit phase may come sooner for some than others! I have certainly heard of a few investors that are considering selling up, or at least downscaling. But before we jump ahead and do that, let’s at least take stock and consider our options first.
OK, so last week we delved into the Enter and Expand phases of portfolio development and we considered some of the characteristics and focus prevalent in each stage. This week, let’s look a little closer at the remaining phases of Establish and Exit then shall we.
The Establish Phase
During this Establish phase of our portfolio development, we are likely to have a portfolio that we are largely content with. Whilst we may still wish to grow and continue our acquisition of properties, we may be focused on what I like to call a ‘rinse and repeat model’ or of you prefer the ‘cookie cutter approach’. We have probably worked out a preferred strategy and method of progressing and so it is a case of doing the same thing repeatedly.
Instead then, our focus may shift away from strategy selection but into scalability, debt management and diversification of risk.
Starting with scalability, we may be concerned with systems, procedures and portfolio management generally. How do manage a larger number of units without compromising on our profitability say? This could lead us to look at different technological systems, such as lettings applications. Or, we could reconsider whether our approach to lettings and management is still appropriate – this might mean hiring a portfolio manager, or even taking our portfolio back in-house if we had previously outsourced with letting agents, or it could mean a hybrid where we use a low-cost agency, for tenant finding say and then manage the back office paperwork and first level repairs and maintenance response through our own part-time or full-time property manager.
At this stage, there is often a gap between a portfolio sufficient in size to justify full or even part-time staff to manage it and the increasing cost and / or disparate management of outsourced solution via a variety of agents. Taking the leap to hire people to assist in the management could lead to a short-term dip in profits. For this reason, many investors either stop adding to the portfolio significantly and then self-manage to retain more profit, or alternatively keep adding more properties and / or look to collaborate with other investors to create the required economies of scale to justify more people in the business.
It is often not surprising then to see some investors starting their own lettings agency for their own portfolio and also for a few more properties to make the numbers work out. This however could mean being more occupied in the property business as well.
Another characteristic at this stage is often risk management in the form of diversification. This can happen naturally as resources allow us to consider investing either in a slightly different location to spread the geographic concentration risk for example. Alternatively, it could lead us to consider different property investment types such as flats instead of houses, or higher yielding properties to counterbalance potentially higher capital growth properties. These are just examples of the types of decision that many more established investors could look to take to protect their position. It is about weathering the storms really.
In terms of mindset here, it is all about staying calm & resilient as the market shifts, maintaining a long-term, balanced judgment and staying current with our knowledge to avoid becoming stale, or getting caught out.
To maintain sustainability, it is all about protecting what we have already and so this often means deleveraging, balancing out the portfolio and having plenty of cash reserves around.
Growth will likely be controlled and moderate; steady-as-she goes I guess you could say. However, with a building cash reserve and greater experience, opportunistic acquisitions could arise to capitalise upon.
What could potentially jeopardise things here is a temptation to throw caution to the wind and over-trade, or conversely to become a sitting duck as the water level subsides, potentially leaving us exposed if we are too concentrated or narrowly focused perhaps.
So that’s the Establish phase, now let’s take a look at the Exit phase.
The Exit Phase
The final phase of our 4E Model is the Exit phase. I am talking about the portfolio here, rather than any individual properties.
For many people, there is no exit, aside from our own departure from this planet. That though is still an exit and will lead to a liquidation or transfer event of the portfolio for sure.
There are alternatives to this however, such as merely living off the fruits of the portfolio, for example by selling off individual properties over an extended time period, living off the rental income or further equity release through extending the debt.
It could also mean handing down properties in the family in a controlled and planned way, selling the portfolio, or potentially setting up some kind of lasting legacy wealth fund or trust for the benefit of our chosen beneficiaries or our chosen good causes. These are at least the main options.
It may seem odd then that some of these options mean retaining assets and others disposing of them, or that some may imply reduced debt levels, whilst others may look to extend borrowing. The fact is, that it will very much depend on individual circumstances as to which approach is considered best.
Ideally, we would have thought about all this when we started out, or soon after. However, I rather suspect that many won’t have thought about things too early and so exit planning if often more likely to take place increasingly toward the end of the portfolio development journey than at the beginning for the majority.
However, perhaps with the exception of investors with net assets below the inheritance tax threshold with a will in place, it would be wise to seek advice sooner rather than later if possible. Seeking out professional advice from a specialist wealth advisor or estate planner is therefore well worth considering before getting too close to the Exit phase, as it could be too late to significantly alter the landscape and direction once too far down the track.
The dominant thoughts at the Exit phase are likely to be legacy, philanthropy, enjoying the fruits and how best to keep our tax bill down!
In terms of sustainability, we would likely be most concerned with timing and phasing issues, asset management & wealth protection and potentially using our privileged position for the benefit of others.
That about covers these last two phases of the Property Portfolio Development Cycle.
That covers all 4 phases of the Property Portfolio Development Cycle or the 4Es, namely: Enter, Expand, Establish & Exit. I did want to wrap up with considering how our personal situation can shift over time, but given the Autumn Statement announcements, I have decided to make a little more room for this topic this week and return to complete our portfolio cycle review discussion next week instead.
So, if you have been waiting to hear what I make of the goings on from the Chancellor, then you need wait no longer as it is next up under Your Voice.
Your Voice
This week’s Your Voice is stimulated by a listener by the name of Paul, who contacted me with the following question:
“Given the Chancellors earlier raid on BTL with the mortgage interest relief changes and now the stamp duty surcharge, should I just sell up my modest portfolio and give up on property investment altogether?”
That was Paul’s original question and through an exchange of dialogue I understood that he invests jointly with his wife, is a high-rate taxpayer and has a couple of higher value but lower yielding properties in the south-east. He is not a multi-millionaire, nor is he overly greedy, nor a ‘rogue landlord’ by all accounts. He has spent several decades diligently saving from his earnings along with a modest inheritance to invest in these properties. I guess you could say he is well off but not super rich and wealthy then…we did not discuss his political persuasion.
So, what on earth did Glorious George do to Paul and the rest of us this week then? A 3% surcharge on stamp duty starting at properties costing over £40,000 is what.
In financial terms this would mean the following for BTL investors and second homeowners compared to residential owner-occupiers from April of next year:
| Property Value | SDLT Homeowner | SDLT Investor |
| £80,000 | £o | £2,400 |
| £180,000 | £1,100 | £6,500 |
| £280,000 | £4,000 | £12,400 |
| £480,000 | £9,000 | £20,400 |
Ouch!
However, in addition to the SDLT surcharge for BTL investors and second home owners, there is talk of there being an exemption for companies and similar instructions owning significant amounts of property, muted to be in excess of 15 properties, although this has yet to be confirmed. That doesn’t sound like a fair application of tax law to me…rich, corporate or well-established property investors will be exempt from this surcharge…surely that can’t be right? But sadly it is right, or at least proposed to be right at this stage.
There was also a change in the timing of the payment of Capital Gains tax for investors, but it would be hard to argue this is not fair at least. From next April, any CGT due from investors will need to be paid within 30 days of completion…at least we would have had the cash proceeds by then to pay it.
The thing is, if we add the main change from the Autumn Statement – the 3% SDLT surcharge for investors to the interest relief changes from the Summer Emergency Budget, then it not only paints a pretty bleak picture but a grossly unfair one as well.
As I mentioned, larger corporates can avoid the SDLT surcharge and equally, corporate investors can also avoid the penalties resulting in the interest relief restrictions that came out in July (now in formally law by the way). In other words, smaller individual investors are placed at a significant disadvantage when compared to owner occupiers and also larger corporate investors. If that sounds a little like wealth redistribution from the middle classes to both the rich and relative poor, you could be right in thinking that!
To be perfectly honest with you, given the investment community’s relative apathy following the July Budget, as evidenced by a mere 40,815 signatures to the Government petition put into perspective by the fact we have over 1.4 million landlords in the UK…is it any wonder that the Chancellor thinks landlord shooting is open season?
So, what can we do about this if anything?
First of all, sign the last petition if you have not done so already and ask your other landlord investor friends to do the same – remember the mortgage interest changes are effectively a retrospective tax hike, so particular nasty. If we get to 100k signatures we get it debated in Parliament at least.
Second, re-evaluate your investment strategy and minimum levels of return – developers often have a fixed profit margin and then try to flex all elements of the project costs, including the purchase price, to ensure their profitability remains. We should adopt a similar strategy and reflect this in our offer prices.
Third, consider higher yield properties and lower cost locations and potentially lift rents gradually to compensate for the cost increase where this is permissible.
Fourth, look at the incentives being made available to developers and larger investors and establish if it is worth joining a bigger club or alternative structure instead e.g. a REIT or property syndicate
Finally, seek to build up your cash reserves, both as a hedge against a price dip and also as a potential war chest to capitalise on opportunities that may arise in the coming months and years.
The conclusion is to adapt, innovate and be flexible in our approach – that is the professional approach, to adapt to the terrain.
As for our listener Paul, what should he do next? Well, he could sell part of the portfolio to both reduce his debt levels and build his cash reserves. He could also adapt and look at higher yielding or larger numbers of lower value properties instead. Should he panic? Probably not. But should he be prepared? Probably yes.
I wish I had better news to share this week but I don’t. However, all is not lost, we will always face challenges as professional property investors and it is up to us to plan, prepare and adapt to the ever-changing landscape.
As I mentioned at the top of the show, it is all a part of the natural market cycles and this can have a bearing on our personal property portfolio cycle as well. Just as the seasons change, so too do the seasons in property and we need to adapt our approach accordingly to remain sustainable during the harsher winter periods.
Right, enough of this for one week…what can we share with you in the Shout Out then?
Shout Out
This week’s Shout Out is for an app called Scanner Pro. It is a scanner app for your iPhone of iPad (sorry not Android). It turns the camera into a scanner and automatically smooths off those rough edges of a photo image for you. It also allows multiple page PDFs and can upload to cloud storage systems such as Dropbox and Google Drive. Combine it with an electronic signature app like Echo Sign and you have a powerful combination that is a step towards having a paperless office…providing you can get the recipient to accept electronic signatures that is.
Two in one apps this week then, so if the Scanner Pro doesn’t do it for you, then perhaps the Echo Sign app will instead…
That’s another week from The Property Voice podcast over and done with. The end of the year is looming fast but we march onward regardless. Keep calm and carry on!
By all means, drop me an email personally to podcast@thepropertyvoice.net if today’s theme has stirred you up. Meanwhile, the show notes will be over at the website www.thepropertyvoice.net
Thank you very much for listening again this week and until next time on The Property Voice Podcast…it’s ciao-ciao