ASK499: Should I pay off my mortgages? PLUS: Should I re-buy in a limited company?

0:02Hi, I'm Rob. And I'm Rob. And this is Ask Rob and Rob. Hey everyone, welcome to Ask Rob and Rob, the show where you give us your questions and each week we come back at you with answers. It's a simple format, a format that's worked so well that we've been going for nearly 500 episodes. So Rob, we can't stop now, can we? Let's remind people how they can help us get another 500 episodes under our belt. Yeah, thank goodness we haven't run out of questions on 499. That would be awkward. No, but we would always welcome more. So do send them in via propertyhub.net slash ask. So simple, just go there.

0:35You can leave a written question for the Sunday Times or our favourite option, you can leave us a recording dead easy and get your voice on the show. And that is what Claire has done. Hi Rob and Rob, it's Claire here. I'm an avid listener and follower of all the generous knowledge that you have been sharing through podcasts, articles and books. Consequently, we are seven years along with our journey and have a portfolio of four properties. Thanks to inflation, we have now 50-50 loan to value on our portfolio. My question is, what would you advise me to do with a sooner than expected inheritance?

1:16the inheritance would totally clear our mortgages would you advise me to pay them off initially we had thought that our properties would double in value and we would be able to sell to in order to pay off to but because of this sudden bereavement and consequential inheritance I'm not sure of the best way to move forward can I also ask about how could we best protect our portfolio to ensure a maximum income for our family, our children and ourselves. Our properties were bought in our names and not through limited company and it would be important for us to protect them from excessive taxes both now and on the event of our death.

2:06So far I haven't heard much discussion about estate planning and hoped you could point me in the right direction. thank you so much indeed for all of your life-saving advice and I mean that wholeheartedly thanks to what you have advised us I was able to retire from a turbulent teaching career and start living our dream we're forever in your debt thank you so much Claire Claire thank you for your question this is a really meaty one I think Rob and I could probably talk about this for an hour but let's see if I can quickly in a couple of minutes pick out the couple of main points that you make there and give you not an answer but a way to start thinking about this.

2:51So being able to pay off your mortgages is a great position to be in and of course if you did that it would improve your cash flow so you wouldn't have mortgage payments to make anymore and that is a great thing and as the properties are in your own name and assuming that you're a higher rate taxpayer then the tax treatment on your mortgages isn't going to be particularly great so there would be a win in that respect of paying them off. However, as you're probably sick of hearing us say by now, if you've been listening to the podcast for any length of time, leverage is almost the point of property investing.

3:22It's the only mainstream asset class that you can safely apply leverage to in the form of mortgages. And that is its big benefit. Because like you said, as your plan goes, they will go up on value over time, your mortgage balance will naturally shrink as a proportion of the value, allowing you to say, sell one property to pay off the rest. And that remains a completely valued option. So the numerical way to look at this is, what would you do with the money if you didn't pay off your mortgages? And what do you anticipate that the rate of return would be on whatever you do with that money? Assuming the answer isn't going lots of holidays, assuming you invest the money, then what would the rate of return be on that?

3:59And how would that compare to the rate of return on paying off your mortgages? Which you know, because you know what the interest rate is. So you know what the answer would be there, and then you do whichever comes out ahead. In reality, of course, no one makes decisions based solely on the numbers. So a lot of it's going to come down to, well, what makes you feel comfortable? If you just flat out feel better being mortgage-free and you don't have this ambition to push on and acquire more and more and more, then that's not a bad thing to do. Even if it's not financially optimal, if it gives you peace of mind, then that is fine.

4:29And of course, it doesn't have to be binary. I think we tend to fall into this binary thinking of, do I do this or that? Well, it could be both you could use some of the money for some type of investment and some of it to pay down your debt a little bit but it really does depend on where you are and what you're pushing for some people giving us some of money will go great i've got a plan to get to 10 properties this will allow me to get there faster others will be happy where they are and just want to be debt free neither is right or wrong but this does also tie into the second part of your question which is about how you protect your portfolio and about estate planning and i think it may be worth getting clear on that part first because that might determine to some extent what you do with the money or at least how you structure what you do with the money because as you've said the properties are in your own names if they were in a limited company that would give you more flexibility when it comes to estate planning that doesn't mean there aren't any options when you've got property in your own name there are but also there is the possibility of moving them into a company structure now as we've said on the podcast multiple times if you do just sell the properties from yourself to your company the tax consequences in terms of capital gains stamp duty are not good but given that you've got four there is the possibility that you can move them into a company over time completely legitimately via a partnership and that's something that we talked about with a tax expert on our youtube channel recently so we'll link to that video in the show notes recommend you'll go and give that a watch that should be the start not the end of your research on this use that as a jumping off point to understand what's possible and then go and take some tax advice it will cost you a bit of money but it will be well well worth it because it will you so much more in the end.

5:59So what I would do, Claire, is do that research, then take some tax advice, and then with that knowledge, think about what you want to do with the money, looking at it through the lens of both what's financially the best thing to do and what makes you feel more comfortable, and see what feels right at the end of that. So I hope that helps, and good luck. Next up, we have a question in from Danny. Hello, Rob and Rob. It's Danny here. Thank you, firstly, for the content you put out on the podcast on YouTube. It's very helpful, so big thanks for that. I was hoping you could give me some guidance today in the sense that I have two properties in my own personal name and debating whether to keep them or sell them.

6:36So property one was once my primary residence. It's a one-bed masonette in a place called Haraldwood in Womford. I bought it in 2008 for$149 ,000 and it's now worth approximately$270 ,000. I have no money left in as I refinanced to buy my second buy-to-let in 2016 also in my personal name and then refinanced again to pull out equity to go towards our main residential home it's in a strong location close to the station so good for commuters and is always rented out solidly property two is a studio flat in Brentwood again in good reach of the train station and is a solid rental for workers getting into London I bought this for 160 ,000 and it's now worth approximately 200 ,000.

7:27Property one brings in about 370 pound a month. Property two brings in about 160 pound a month. I suppose it's important to note that I have my own business and I keep myself in the lower 20 % tax bracket. So the thing ultimately I'm looking for a little bit guidance on is whether you think I should keep them based on their performance so far or whether I should sell up and invest in a limited company. Now on that front I have just had an offer accepted on another property in Essex and I now know for education partly for you guys as well that I'm best investing through a limited company so I've now got a limited company set up and that third buy to let will be in the limited company.

8:14So what I would like a little bit of help around is if you think it's worth keeping those properties in my personal name and obviously sucking up the facts that I pay a bit more tax and get a bit less interest rate relief etc etc or whether you think I should perhaps look into selling them and buying elsewhere as a bit of a side note the tenants have been very long-term tenants in these properties not give me much headache and they're strong rental units so my heart tells me to keep them in my personal name but my head and my financially savvy side of me says perhaps look into selling them and putting the money to work better somewhere else within the limited company but thanks once again your opinions and guidance on this will be much appreciated thank you danny thank you for your question it's an interesting one and i can understand why you've posed this question because you're right we do talk about how in the majority not all cases but in the majority of cases the best way forward is investing through a limited company now that's not tax advice speak to a tax advisor if you're listening to this there may be a reason why you shouldn't go down that path but for a lot of people it's the main route okay so with that said should you sell your properties in your own name and now go and buy another miss a company instead?

9:36The answer is probably not and that's because of transaction costs. Property is a long-term game for a few reasons. One because the benefits you'll really see over time but two the transaction costs are really expensive and buying and selling properties is something that you really want to avoid when you can and you've done that already. You've refinanced rather than selling to extract money out those properties and then that gave you the chance to go and invest and put money into your own home which is great. The only caveat I give here is if you have problem properties so these properties give you constant headaches the tenant profile of those properties means that it's always issues or a property has a lot of maintenance issues so your profits are consistently wiped out if you find that you've got one of those properties in your portfolio then maybe you could consider selling it because while you do still have those transaction costs there are costs of running that property because it keeps giving you headaches.

10:36Now hopefully you've got two properties that are fairly normal that occasionally things go wrong because of this property things do go wrong but it's not enough to force you to sell and then reinvest through a limited company. But sometimes you have them and the bigger your portfolio gets the more likely you'll see it is that you have properties which are just a pain in the bum. I know I've certainly got one or two in my portfolio for different reasons it just happens even with the best of research these things happen some people deal with it better than others but if you do have one of those properties then run the numbers look at the pain that you're going through and say okay can I remove this pain with these transaction costs go and invest in a stronger area potentially because there are probably stronger areas than where you've invested right now and see the upside and that's a decision to be made but as I say Danny that is probably the exception rather than the rule most people listening to this if you are in a similar situation to Danny the answer for most of you will be to hold but there are situations like a problem property where you can consider the option of doing something else good luck well there you go claire and danny have their answers and you could as well if you send your question in so do that at propertyhub.net ask we will be back with episode 500 next week whoop and of course we'll also have the property podcast and before then of course on thursday we'll have the property podcast so we'll see you then bye-bye Bye-bye.