FCA Regulation Changes & Property: What You Need to Know
FCA Regulation Changes & Property: What You Need to Know
We thought it would be important to highlight recent regulations changes made by the FCA to protect investors looking to get involved in property.
The FCA issued new guidance for investors and property professionals alike in November 2019 following a large seller of ‘mini-bonds’ in the property industry going into administration (London Capital and Finance), which caused investors to lose millions.
The number of individuals investing in property-related companies for so-called guaranteed returns is on the rise, with many falling foul to the risks involved in this market.
For this reason, from 1st January until 31st December 2020, the FCA has placed restrictions on individuals looking to invest in speculative illiquid securities. Speculative illiquid securities include unlisted bonds and preference shares where the issuer uses the funds raised to lend to a third party; invest in other companies, or purchase or develop property.
Therefore any company you may consider working with for property-related financial returns will need to ensure they comply with the new FCA regulations.
The FCA outline some of the areas where investors may potentially need to be wary:
- The promise of high annual returns, often presented as ‘fixed’, often starting at 6- 8% – well above rates offered by traditional cash-savings products
- Exposure to high-risk, speculative assets that are difficult for an investor to value or verify
- Complex legal structure to a product, or between a promoter and issuer
- High upfront or embedded costs and charges
- Often misleading financial promotions that:
- Focus on attractive headline returns
- Imply capital protection or other features (diversification, asset-backed) as reducing risk, which may not be effective protections in practice
- Do not disclose costs and charges to the investor or embed them in the arranging or structuring of the product, with fees of 20% or more of funds raised in some cases
- Advertise that the investment is eligible to be held in a tax-incentivised ‘wrapper’ (e.g., an IF ISA or SIPP) when it does not meet the qualifying criteria
- Use the role of HMRC in overseeing tax wrappers (e.g., IF ISAs or SIPPs) to imply oversight or endorsement by the government
If you have any concerns about investing in property for ‘fixed’ returns on your investment, or working in partnership with a property professional in a joint venture type profit share, please consult FCA guidance (see the link at the end of this article).
Individuals who wish to invest in property-related businesses may still be able to so in certain circumstances. The FCA will still allow property-related businesses to promote their products or services to a niche retail market for whom they are likely to be suitable but remove the ability to ‘mass market’ specific products to the public.
To comply with FCA regulations, any property-related business may work with investors so long as they fall into one of two categories:
- Classed as a high net worth individual (simply put: either a salary of £100,000 per annum or more or £250,000 in assets – excluding family home or pension)
- Classed as a sophisticated investor
If you would like to find out more about risks involved in property-related investments and whether you are suitable to invest in property-related businesses, please click the links below to be taken to the FCA regulations.
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HMOs: What Does the Future Hold?
HMOs: What Does the Future Hold?
Many of you will be thinking HMOs, what’s interesting about student accommodation? Today’s blog will take a look at why HMOs are becoming more popular in the market place, and why property investors maybe adding them to their portfolios.
For those of you who may not know, HMO stands for House of Multiple Occupancy (or Occupation) and is a term used to describe when three or more unrelated individuals live together in a home with shared facilities such as kitchen, living space and sometimes bathrooms. They’re most commonly used for students, and often get bad reputations for being lower quality accommodation and troublesome for neighbours due to student antics. Each local Council will have policies relating to the regulation of HMOs within neighbourhoods, and for your property to be used as an HMO, you will need to apply for a license from your local Council and ensure particular safety standards are met. Because of the specific requirements needed to set up an HMO, the setup cost can be far higher than a traditional single let.
So, why would you want to set up an HMO?
Typically properties that are let out to multiple occupants tend to attract a higher rent than if the property was let out to a couple or a family (a single let). Here’s an example: a property may rent out for say £800 per month as a three-bedroom family home, but you might be able to charge say £500 per room (one tenant per room) totalling £1,500 per month. As you can see, you almost double the rent you collect each month.
Another advantage of using a property as an HMO over a single-let is minimising risk. The risk to your income comes from void periods. With a standard single let property when a tenant moves out, you risk of the property sitting empty and therefore not bringing in any income. On the flip side, when you own a property with multiple occupants, even if one tenant moves out and you struggle to replace them, you’ll still receive rent from the remaining tenants. Risk also comes into play with non-payment of rent. If you rent your property to one tenant (whether it’s to an individual, a family or a couple) and they stop paying rent for whatever reason, you lose the full rental amount. On the flip side, if one of your HMO tenants stops paying rent, you only lose a smaller portion of your total rent. Both reducing void periods and risk of non-payment ultimately reduce the risk to your income as a landlord.
HMO’s are an attractive way for landlords to make profits from their properties, but is now a good time to look at setting up new HMOs?
The answer to this is yes. We’ve all read about the shortage of housing in the UK, and HMOs can help relieve a small amount of this burden. HMOs effectively maximise the living space in rental properties, therefore helping with some of the need for more housing, particularly in cities. HMOs are becoming more popular with demographics other than students, such as young professionals or individuals on lower incomes. In many cities, renting an apartment alone or as a flatshare with one other person is still way beyond what the average young professional can afford. With the average age of first-time buyers creeping up in the UK, HMOs can be an affordable place for professionals to live while saving for a deposit for their first home.
If you decide to consider setting up an HMO for professionals, the best place to start is looking at competition in your local area. HMOs that cater to young professionals are usually of an excellent standard, often with higher spec kitchens and luxurious bathrooms (or possibly even all en-suite rooms). There’s definitely a market for this sort of living, so it’s perhaps a great time to look into HMOs in your local area. Please ensure you check with your local Council for restrictions and regulations in your specific neighbourhood before you get going.
There are some negatives to owning properties as HMOs. I won’t go into the full details, but some of the issues can include: higher turnover of occupants, larger management fees if you use a letting agent to manage the property, more wear and tear on the property, bigger initial set up costs and cost to furnish (and renew/replace furniture) the property. Obtaining a license for an HMO from your local Council also comes at a price.
Interested in Investing in Property?
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Maximise Profits from your Property Portfolio
Maximise Profits from your Property Portfolio
With many news articles like ‘the buy-to-let market is dead’ hitting the headlines over the past few years, we think it’s important to discuss ways to maximise the profitability of your property portfolio. Changes to legislation, such as Section 24, have hit landlords hard. But all is not lost. If you’re one of many landlords that have held on to your portfolio, this article is for you.
Renovate
Could your properties do with an update? Most rental properties could do with a lick of paint or even updated kitchens or bathrooms. Spending a little on bringing your property up to a good standard can go along way to boosting the rental income you’ll receive every month.
Have a look at property portals like RightMove or Zoopla for other properties in the same area as your rental property to ensure your property is in similar condition (or ideally better than) the competition.
Change the use
Would your property make you higher returns if it was used for an alternative purpose than buy-to-let? For example Serviced Accommodation (also referred to as Airbnb.
Serviced Accommodation has become ever more popular with property owners due to the higher returns achieved. Something to bear in mind with this strategy is consulting your lender to ensure your mortgage product is still suitable for serviced accommodation, and finding a good Airbnb management company to manage your property is highly recommended.
If your property has three bedrooms or more, would you consider changing the use to an
HMO (House of Multiple Occupancy)? HMOs are popular for students and are becoming popular for young professionals. Quite often, property owners can make significantly higher returns when using their property as an HMO rather than a single-let property. Consult your local planning department for guidance on restrictions and necessary safety alterations.
Review your lending
It seems very obvious, but check out your mortgage product (if you have one) and ensure you’re on a low-interest rate. You’d be amazed at the number of landlords who leave their properties on the same mortgage for years on end when switching could save them hundreds of pounds every year. Interest rates are at an all-time low, and with some mortgage providers offering a ten-year fixed-rate mortgage, now could be the time to switch lenders. Give your mortgage lender a call to see what’s available, and if there are no savings to be made with them, look into switching lenders.
Increase your rent
When did you last increase your rent? Many landlords shy away from raising the rent on their properties, particularly if they’ve had tenants in their property for some time. I’m not recommending charging in and doubling your tenants’ rent, but it may be worth reviewing other similar properties nearby to get a feel for a fair rental price. If the rent your charging is behind other similar properties, it’s time to increase your rent. On average, the amount you charge for rent should go up by roughly 3-5% per year to account for inflation and increased costs. This will help increase the profitability of your portfolio.
Still not making the yields you feel you should be? If you review the above methods to maximise profitability from your portfolio and are still wondering why your portfolio yield is lower than expected, it could be time to sell. Sometimes it’s worth cutting your loss and selling any properties that are performing poorly. We like to think of it as removing the driftwood. If you sell properties that perform poorly, the cash pot you gain could be used to buy properties with higher yields.
Interested in Investing in Property?
We make property investing simple for people who want to benefit from high-quality property investments without investing their own time or resources. Our investors can benefit from a passive income on a fixed term, backed by a brick and mortar asset and a team of experienced property investment professionals.
Download our investor brochure by clicking the button below.
Buy, Renovate and Refinance
Buy, Renovate and Refinance
Some of you may be familiar with the concept of buy, renovate and refinance. Today’s blog is going to walk you through the concept and give you some example figures.
The idea of buying a property and renovating it isn’t a new concept. When considering refinancing following a renovation, there can be a real light bulb moment for individuals who have not come across this before.
When a property is purchased that requires a lot of work; the property purchase price tends to reflect this. In comparison to other properties in the local area, you should definitely feel like you’ve picked up the property for a great price.
Now, this is when your number-crunching becomes essential. You should have a good idea exactly how much your renovation work is going to cost, plus all other associated fees with buying a property such as legal fees and stamp duty. We also put around 10% of renovation costs aside for an additional safety net, as renovation costs often creep up. Many property investors will put down a small deposit and take out a mortgage to pay for the rest of the property, say a 25% deposit and 75% mortgage (75% loan to value).
When you initially bought the property, you’ll have spent some time looking at other properties on the same street or same area to get an estimated end market value, i.e. what the property will be worth once renovated. From here we have an idea of:
- All fees included with buying the property
- Renovation costs
- End market value once renovated
If you’ve spent time crunching the numbers before diving in and purchasing the property, you should have a good margin between all the money spent purchasing and renovating the property, and what it will be valued at once renovated. This is your profit.
Where experienced investors can use their skills and make their money work harder for them, is when they buy a property, renovate it, and refinance the property at the higher value once the renovation is complete. If a property is purchased at a very low price, for example, if the property is in extremely poor condition, or where there can be a huge uplift in value by, for example converting the loft or extending sideways/into the garden, when the property is refinanced the investor can occasionally pull out all the capital that was initially invested.
Here’s an example:
A 2 bedroom bungalow purchased for £175,000.
Fees, stamp duty and renovation add up to £75,000.
Initial 25% deposit put down – £43,750 (therefore borrowing £131,250 from the lender)
Total money invested from our pocket into the deal: deposit plus fees plus renovation costs: £43,750+£75,000 = £118,750
Once renovated, the bungalow has three bedrooms and a large living room/kitchen extension.
It is now valued at £375,000.
Property is refinanced at the higher valuation of £375,000…
So borrowing 75% of £375,000 is £281,250.
The mortgage provider will, therefore, increase your borrowings to £281,250 for the renovated property.
New mortgage – old mortgage: £281,250-£131,250 = £150,000 of additional capital borrowed from the bank.
With this additional £150,000 of borrowed money from the bank, we can pay-off our initial investment costs of £118,750, and walk away with a small profit.
This example deal hopefully highlights the power of buying properties in need of significant renovation works or properties where ‘value’ can be added (extensions, loft conversions, etc.). If the difference between purchase price plus all costs associated, and the estimated end value are high enough, if we decide to refinance a property once the renovation work is completed, we can potentially pull all of our initial costs out of the property. Now that’s what I call making your money work hard for you.
We always need to bear in mind that not all lenders will allow you to refinance a property following renovations, and while it may seem financially smart to look for these sorts of projects, they come with additional risks. Before undertaking a project of this scale, we would recommend speaking to your local estate agent, local tradespeople, and your financial advisor to ensure you are knowledgeable and financially safe to complete this sort of undertaking.
Interested in Investing in Property?
We make property investing simple for people who want to benefit from high-quality property investments without investing their own time or resources. Our investors can benefit from a passive income on a fixed term, backed by a brick and mortar asset and a team of experienced property investment professionals.
Download our investor brochure by clicking the button below.