Death of the Legacy Landlord - Opinion

0:01Hey everyone, it's Rob B here with Rob D and you are listening to The Property Podcast. Today, is it the final nail in the coffin for the legacy landlord? We discuss the deterring situation for this large group of investors, but also look to the future and see, is there another way?

0:24Welcome to The Property Podcast. In case you don't know, we run a company that buys more than 100 million pounds worth of property every year for our clients. You can find out about that at propertyhub.net slash invest. And something that we've noticed from talking to these clients and hearing from you listeners to this podcast is that the world of property investment has completely transformed. It's happened gradually over the years. We almost hadn't realized just how stark it has become. But today, that's what we're going to be exploring. And even if this is something that you think that you're well aware of, that you're completely all over, there are some stats in this episode that shocked us and will probably shock you as well.

0:56it's time for our new story of the week now and we've been digging in to all our favorite publications and this week we're bringing you a story from the mortgage finance gazette yes i know you're regular readers but just in case you've missed this story there's a really interesting report that says house building is not economically viable in half of england warns zoopla and rob the title is quite self-explanatory but what's really interesting to me is most people aren't aware of this this is something that internally we've discussed many times people in the industry discussed but it's not really recognized elsewhere and that is that even if you were given the land for free in many places you still wouldn't make a profit if you built property there and then sold it because the price of that property just isn't enough to justify the build and cover its costs it's pretty crazy and this has got worse over recent years so it says since 2022 the cost of actually delivering a new home has gone up by 17 % while sale prices have only gone up by 1%.

1:57So why has it got worse? Well obviously the cost of building materials has gone up, the cost of labour in this sector has gone up as well, but you've got higher borrowing costs, you've got more regulations and for taller buildings and city centres you've also got the building safety issues which we've talked about recently on the show which is extending timelines which has a cost and the cost of compliance and preparing submissions for that increasing costs as well so you can see how it's happened what i'm not sure rob is what you do about it because it is a major problem the government wants one and a half million houses to be built but if it's not profitable to build them it won't happen no it won't happen and it's something we've been observing for a while particularly in places like the northeast of england you know sunderland's a great example of this there's not been much built there for a long time now for this very reason and potential solutions aren't that appealing like you could subsidise builders to develop in areas you want them to build it.

2:48Builders will build wherever if they can make a profit. So maybe the government could give them money to build in those areas if it is so keen for property to be built there. I don't think that'll be very popular and I don't think it will happen, but that's one solution. And the other solution is just to wait. Because what will happen over time, if people want to carry on living in that area and the population increases, then the demand for property will naturally put prices upwards. And then it may become feasible for property to be built in those areas again not a great solution just sit and wait but it's a really interesting dynamic that's not really been reported on but to challenge one of my own solutions which is just sit and wait one of the big problems that you have is that these areas aren't necessarily growing in population because there's not enough investment there's not enough infrastructure in those areas and then you'll find people moving from places like Sunderland to Manchester we've seen that a lot we've seen a lot of people relocate into Manchester that we hire there on a regular basis so we know and Leeds as well Birmingham London so these big cities are absorbing young talent and that means these other areas their population growth isn't that strong so while the UK population is growing as a whole it isn't distributed evenly and that doesn't help these areas either so I don't know how this will ever be fixed I've attempted a two very weak solutions to the problem I don't think either of them are practically feasible but it's a dynamic that's going to be in play for a long time and it is interesting so i'm glad we've covered it barely a week goes by at the moment without hearing about all the landlords who are leaving the market in droves we all know about the tax changes we all know what's happened with interest rates and now there are even rumors of even more taxes being lumped upon landlords but what doesn't get talked about enough is that there are now two completely different games being played with two totally different sets of rules over the last 10 years a whole new breed of landlord has emerged who are thinking about things and doing things and going about it in a completely different way.

4:46But we still have what we've started calling, Rob, legacy landlords. And today we're going to talk about just how big and how significant that difference is, and if you still have legacy properties that are causing you issues, what to do about it. But surely this only impacts a small amount of people, right? People have been listening to the podcast, they use limited companies. Well, no, the legacy landlord is the dominant landlord. There are 2.8 million unincorporated landlords. That basically means landlords who have not invested via a limited company. And that is the majority of landlords. In fact, limited companies only make up 13 % of the private rented homes.

5:25So yes, you've heard Rob and I talk about limited companies for years. And yes, you've heard tax advisors say invest for a limited company. And yes, as we'll get to, that is the absolute way to go moving forward. But the reason why the sector feels so beaten down is this legacy landlord and the legacy landlords quite rightly can feel sorry for themselves and then you've got investors like Rob and I and I'm sure many people listening who have got a bit of a legacy in their portfolio because they've been investing for a long time and then they've got some stuff in limited companies as well so while the new stuff and all the investments you make from now on they're in the most efficient manner you've still got some in your portfolio that are really being targeted by the government and Rob this targeting isn't us or the sector feeling sorry for themselves they really have been targeted targeted is probably a nice word they've been hammered and they've not just been hammered in years gone by it looks like the hammering could continue as well yeah so the thing that everyone thinks about of course is the tax changes known as section 24 this was around what 2015 or so before that this just wasn't a conversation the vast majority of people just bought as individuals and we'd been podcasting for a few years by the time that happened we never even talked about this issue it just wasn't the thing you thought about but suddenly for higher rate taxpayers in particular the impact was massive you'd suddenly have properties where you were being taxed more money than you were actually making because you're paying your tax based on this phantom profit that didn't exist because you're not allowed to deduct your mortgage expenses in full that was a huge deal something else we've seen over the last decade is the relentless march of yet more legislation much of it if i'm honest seems like just kind of annoying paperwork and doesn't make much difference some of it has actually genuinely benefited the sector as a whole but both the good and the bad of this just the sheer volume of the things that you need to do now and the severity of the penalties for getting it wrong have just made it far more difficult to exist as a casual landlord another amazing stat is that 48 of landlords own just one property and if you've got just one property property is not going to be your main thing it may not be something you think about that often it's not going to be bringing in a huge amount of income for you and so suddenly it becomes a disproportionate amount of effort to keep on top of all this stuff and i don't know how deliberate this has been but the effect has been that it's mostly individual landlords people who own properties in their own name who've been affected by the tax part of this and it's small scale landlords who've been most affected by the legislation part of this is this because it's just far easier tax-wise because of the way the tax system works to bring this in for individuals and it's much harder to bring this in for companies which is why they haven't or was the intention in the first place to professionalize the sector push out individual landlords push out smaller landlords and have the sector more concentrated in the hands of people operating within companies operating at a slightly larger scale i don't know whether that was the intention but that's certainly been the effect you're right rob the industry has professionalized off the back of this and i think that's a good thing i don't think anybody would see that as a bad thing we are renting to people who live in these properties nail their homes and it should be a professional industry.

8:30I do think though that's the benefit of what really was a tax grab and I think the government has just looked at it and gone where's an easy place to tax? Ah, landlords. So taxing landlords, nobody's going to start crying for them are they? It's just not going to happen. Landlords, especially legacy landlords, people who've been in the market a very long time have done very well through capital growth. The booms we've previously seen have made a lot of legacy landlords very, very wealthy indeed. So them now being taxed, there's not going to be many people marching on Downing Street to fight for them.

9:05It's not going to happen. One of the consequences of this tax grab, I think, is a very, very good thing. Now, if you didn't listen to the property podcast, you didn't watch our YouTube channel, and you didn't consume all the other stuff that we put out, like Property Pulse, you would be forgiven for thinking that property investment is dead. It is dead for the legacy landlord. You don't carry on investing that way. It makes no sense for the vast, vast majority of people. But there is an efficient way to invest. But the media does not talk about that. They focus on the industry as a whole, because the majority of the people in this industry are legacy landlords, as we pointed out already.

9:42But the modern strategy, the modern way of investing is very effective. and it's important to fully understand this you might be doing it already but do you understand it so we're going to go through that now but the modern strategy through limited companies for the majority of people is the only way to go it is and the majority of people are doing it so the most recent stat that i found is that 74 of new rental properties are bought within a limited company you see different figures from different lenders depending on who's done the research but It always seems to be around the 70-75 % mark. So the vast majority of people have been pushed in that direction.

10:19Despite everything that we've talked about across the various channels that you mentioned, Rob, some people are still not fully aware of this issue. We had someone write into our Sunday Times column just recently saying, I just brought property in my own name a few months ago, and now I've realised that I shouldn't have done that. And that wasn't just one. We get a lot like that. So some people are still not aware. And no, of course, it's not the right thing for absolutely everyone. It's very dependent on personal circumstances. You should always take advice. and there are some people who shouldn't be doing it this way.

10:44But for the most part, it is just a better way. You get the full benefit of mortgage interest relief, which everyone used to get, but now it's only limited companies. And you pay corporation tax at a much lower rate than the higher rate of personal tax. Let's face it, the vast majority of people who are investing in property are able to do so because they are high earners. So the tax benefits are absolutely massive, but there are other benefits as well. One is that it encourages or incentivises you to scale because there are costs associated with having a limited company it costs money to run the company there's more hassle around it therefore it makes far more sense to build up to the point where you own let's say at least three or four than it does to just stick with one so it encourages you to scale if you look at property as a whole including legacy landlords 48 own just one property it's incredible half of landlords own just one property but if you're buying in a company i'd say it's very unlikely that you're going to stay at just one property most people are going to start there but you're probably not going to stay there it also encourages you to invest long term because we talked about the lower rate of corporation tax but if you're then going to take money out of the company to spend you're going to pay a significant amount of tax on the dividends to take that money out and spend it therefore the structure guides you towards investing for the long term which is in property as with everything else generally a good thing to do and the final benefit which ties into that is all the tax planning and especially inheritance tax planning benefits that you have within companies that you just don't get as an individual.

12:12And something I remember you saying, Rob, years and years and years back when all this is quite new, you're known for having a positive view of things. And at the time, I thought this was a bit of a stretch because you're saying, well, yeah, this might be a good thing because if you invest in a company, that could have been the better thing to do all along. Now it's making you do it. And then if you are building something with a view to passing it on, it's far better. At the time, I thought you're hunting really hard for a silver lining, but I think you're actually spot on because many, many people are investing with a view to having something to pass on.

12:38And as we talked about on the podcast recently with Nadim, as we talked about on our YouTube channel recently as well, you've got far more flexibility and far more control when you own your property in a company. So while we have been pushed or maybe dragged, kicking and screaming down this route, it actually enforces or encourages a whole method, a whole style, a whole worldview of investing that will lead to better results than if you just bought one property for a bit of rental income. Rob, I have a terrible memory, so I really do appreciate it when you bring up the past where I've been correct.

13:10And if you can be very polite and not bring out all the times I've been wrong, then our friendship is in a very strong place. But what do you do if you are an existing legacy landlord? Sob in the corner? Well, maybe not quite, but you could just deal with it. We're going to give you other options as well. But that's effectively what I've done and Rob's done. You accept the tax hit, you accept the changes, but you optimise where you can. You remortgage. The mortgage rates are a little better, remember, in your own name. You look to maximise your yields. You reduce costs where you can. It's playing around the edges, admittedly, but you still should optimise your position to be the best it can be.

13:51But if it's just not for you, and this is where a lot of legacy landlords are going, you could just sell it cash in and maybe you're done with property or maybe you reinvest through a limited company the choice is yours but that is where a lot of these legacy landlords are going whether it's now or in the future they feel like they're being slowly pushed into this position and a lot are selling up now some will consider moving it across into a limited company and that may sound like the best thing to do, but actually for the majority of people, the people with small to medium-sized portfolios, it's really inefficient.

14:29Because when you sell that property, you're basically buying it. Your limited company is buying it from yourself. And when you buy a property, you've got the stamp duty costs. You may have capital gains to pay in your own name. There's going to be hits all over the place. So that's why there are so many legacy landlords and they haven't moved their properties across. Some may not even have thought of it, but there's a lot of landlords out there that would love to move those legacy properties across, but just can't. Now, I said the majority because if you have a large, significant portfolio, there are some tax strategies out there that you may be able to deploy.

15:05And you should take advice. What everybody should be careful of is the advice that is thrown out there where there's these secrets or these clever ways you can do it The HMRC are very good at what they do and they crack down on these things very, very quickly. Some of them are very sketchy at best, even at surface level. But even those that claim that it's been checked by tax experts and you can move your one or two properties across and you'll be absolutely fine. Be very, very careful. If it was that easy to do, then that 2.8 million landlords would have already done it. It's not a simple process.

15:40It is for the minority. you need a significant portfolio but if you do fall into that category do take professional advice the situation is it really is the death of the legacy landlord not necessarily immediately but it's just going to be a slow decline because those landlords will age and probably sell off their portfolios or get so angry because the tax changes keep hitting them hard that they just exit early and just go, I'm done with it. And that number will diminish. But the number of people who invest through a limited company and that percentage of people who invest through a limited company will increase over time.

16:18It's actually staggering. Those stats actually staggered me at the beginning of the show. I knew there was more legacy landlords than incorporated landlords, but I didn't realize it was still such a dominant percentage of the pie. And while it is, the government will continue to chip. So property investment is for you. And I'm guessing it is. if you made it this far into the podcast there is only one way to go rob there is and the difference is so stark that like i said at the beginning i think we need to realize that when we're talking about landlords and about property investment we're almost talking about two completely different things now so not saying that there aren't challenges in property there always are but when you see all the headlines about how terrible everything is i think which group does that apply to does it apply to everyone all these landlords who are quitting are these people who bought in companies and just got into it in the last five ten years or are they legacy landlords who've been in it for 20 years.

17:07They've had a good run, they've done well, but now they feel like they keep getting punished and they've had enough. And I think that's really important because we've spoken a couple of times in recent weeks on the podcast about just how good property can be. So a couple of weeks back, we broke down the numbers of what is property investment actually like today? If you bought at today's prices, today's rents, today's mortgage rates, what do the numbers look like? They actually look pretty good. And then we've also, over the last few weeks, spoken about the factors that make you rich over the long term in property and how they fundamentally can't change.

17:36So maybe property investment isn't right for you. There are better options for you, what to do with your cash. It's never going to be right for everyone. But don't be deterred by everything that you read. Because as we said earlier, there are nearly 3 million legacy landlords out there. And the reality of property investment for you looks very different from how it'll look for them. It's time for Hub Extra, the part of the show where we want to give you a little bit more. And Rob, let's talk AI again. so i think the overall headline of the hub extra recommendation this week is stay on top of what's happening ai is moving at such a pace that even geeks like rob and i are struggling to keep up so my recommendation my very strong recommendation is get a youtube channel a news source however you like to consume your media on what is happening within ai and keep up to date you can even use AI to keep you updated.

18:30So you can just ask for all the latest news and updates each week. You can even set it up where it'll automatically do that for you every week. You don't need to just keep going back in and doing that. I use YouTube. For me, that visual experience of being able to see the tools working and some demonstrations of that work really well. The AI channel I consume is called the AI Advantage. Does a really good roundup each week about what is going on and what new tools are available. But Rob, there's a large group of people who will listen to this and probably acknowledge that it makes sense, but do nothing.

19:03And that's what we actually want to spend more time talking about now, is that large group of people. There are a few different camps. You got the AI adopters. Those accept that. It's a big part of our world now. And you can level up yourself and all the things that you do in a big, big way if you stay on top of AI. And then you've got the haters those who hate it want to push back and say no i don't like ai i understand some of the reasons for that too but there's a larger camp and this is the camp actually that we find most worrying that just seemed to be blase about ai just accepting that it's there but not really using it than the occasional chat gbt search just as an alternative to google because it's a bit better and just letting the world advance without really truly understanding what is going on here i do find it mystifying that third group the indifferent group because i think you could definitely say there's a lot of hype there are certain technologies that get overhyped i think the strongest claims about everything about how it's going to replace all jobs and blah blah blah are going to be overdone but just at a personal level forgetting all the like broader society is it good or bad for humanity type stuff being indifferent to it at a personal level i just find so weird because in my work life and in my personal life i must have like 20 different uses every week where it saves me time or it allows me to get a better result than i would have done or it helps me make better decisions or it makes me smarter that isn't hype it's something that exists right now and i'm using it for these things multiple times a week right now i've even been talking to people about it in job interviews recently and i asked them what you know how do you make use of ai and they said oh well i suppose i don't really use chat gpt occasionally it's just so weird to me rob it's like someone who knows that cars exist but they just like walking everywhere go oh yeah i suppose i could get there a bit faster what it just makes no sense yeah yeah it's a good analogy rob it's real but you know what that's why we're talking about it because the majority of people fall into that camp it may be weird to you but actually it's normal to them because the majority of people around them are acting the same way as they are which is indifference like touching on it a little bit awareness that exists but not that utilization.

21:11It is so much than just an upgrade at Google, so, so much more. And by investing some time into it, you can become a far superior property investor, a far superior business person, worker, wherever you want to do. And it's not getting your emails written for you. It's so much more than that. You can suddenly be the most impressive person in your organization if you fully adopt and fully embrace it. Imagine you start bringing things forward in your company. You may have some people who are scared by that, but listen, if you're in a company that's scared by AI, be scared of the company because there are other companies that are going full throttle on this.

21:49We are one of them. And if you're in a company that is pushing against it or is indifferent to it, I'd be worried. I'd be seriously worried because they are going to get left behind. And the thing is, you'd be really surprised, but it's the same with companies, businesses as there is individuals there are some that are against it there are some that are very much for it and being really adventurous with what they're doing and then there's a large group that are telling their team to use it for emails and that's about it so it's not just individuals it's businesses that are playing that game as well so be that business and be that individual to enhance things in your own life that embraces it uses it for what it's best for doesn't push back or doesn't ignore it and takes advantage of it it's such an incredible opportunity right now being an early adopter will put you so much further ahead in many areas of life and it is happening people whether you like it or not if this is happening so this is not rob and i being a bit mean about ai it's happening if you like it or not it's like that wealth divide we've talked about it's happening and you can do something about it or you can be punished by it and in a way it's the same for AI you could do something about it and take full advantage of it or you can be punished by it because you don't know what's happening and in a few years time you realize you've been left behind don't be that person this is your wake-up call I feel like we've covered some big topics today happy with this episode I feel like we've done enough let's end it here but of course our newsletter goes out on a Friday morning if you haven't subscribed yet you can do that for free at propertyhub.net slash pulse and then we'll see you back on this feed on Tuesday for Ask Rob and Rob and on Thursday of course for the main event the property podcast We'll see you then.

23:32Bye-bye. Bye-bye.