How do I sell a buy to let investment property portfolio?
If you are looking to sell an investment property portfolio of buy to let’s, there are a few ways you can do this. But of course this may depend on the size of your portfolio. You also need to consider tax implications of selling your portfolio as one transaction. Plus of course the Section 24 Tax (or tenant tax) on unincorporated landlords may be your driver.
What’s the best way to sell my property portfolio of buy to let’s? The best way to sell your property portfolio of buy to let’s is to sell to another landlord who’s looking to expand their own buy to let investment portfolio. The alternative is to convert each property back to a residential house, give notice to each of your tenants and sell them to home owners instead.
Although the best way to sell your property portfolio of buy to let’s depends on how large your investment portfolio is. Let’s take a look in a bit more detail.
What are your options when you want to sell your buy to let property portfolio?
Selling an individual buy to let investment property is relatively straight forward.
This can be achieved through an estate agent. This individual buy to let property can be sold either by selling it with paying tenants as an investment property. Or alternatively, you can sell it after giving notice to your tenants and sell your property as a home instead.
Your investment property can only be sold to home owners if the property is a conventional property. That means it must be easily converted back to a ‘normal’ residential home. This can sometimes be more difficult with a house of multiple occupation or HMO.
The options for selling a single buy to let property include the following:
- Sell your property using a high street or online estate agent as an investment property with sitting tenants.
- Sell your property using a high street or online estate agent as a home by giving notice to your tenants.
- Find a private buyer yourself.
- Sell the house to another landlord using a landlord to landlord service.
- Find a cash investor or developer.
- Have your tenant buy your property.
Which option you choose from the above lists will define the size of your market. If you choose option two on the assumption your property lends itself to this solution, you’ll be marketing your property to a larger market. This will likely mean you’re going to get the highest price for your buy to let property.
However, the downside of using option two is you’ll lose out on rental income in the period it takes to sell your property. There is a market to sell directly to another landlord. But for another investor to be interested, the numbers must stack up and the return on investment must work.
How do you sell an investment portfolio of buy to let properties and who will buy a property portfolio?
If you have only a few properties. This could be you have perhaps two or three buy to let’s. It should be relatively straight forward to sell this small property portfolio.
You could sell them one by one using an estate agent by using one of the above options for a single selling a single investment property.
However, if you have a large property portfolio. Which is especially the case if the portfolio is greater than 10 or 15 properties. You’ll need to sell this larger portfolio to a specialist landlord or portfolio-buyer instead.
But what are your options for selling a large property portfolio?
If you are wondering who will buy a property portfolio, this includes the following options:
- Sell to another landlord who’s looking to expand their own buy to let investment portfolio.
- Look for a private buyer through your personal network.
- Sell via a landlord to landlord service.
- Find a cash investor or developer.
- Sell on an option or lease option contract(s) to mitigate your tax liability.
Selling your investment portfolio immediately isn’t going to be that easy. But the process will depend on the quality of your properties. It also depends on where they are located in the U.K. Plus on the level of return you’re achieving. All of these will impact on the sale and the value of your portfolio of properties.
Property portfolios are not normally worth the sum of the individual properties in the portfolio
But be aware that your property portfolio as a whole will be worth less than the sum of the parts.
In other words, if each property of a 15-property portfolio were worth say £120,000 each if sold individually. If they are sold as a portfolio, they may only be worth £1,350,000 as compared to a total of £1,800,000. (i.e. 15 x £120,000).
But if you’re prepared to spread the sales over a period of several years, you may achieve a higher final sale price. See option 5 below for more on selling your portfolio on a option agreement.
If you’re the type of landlord who keeps your property in a good state of repair. Also, if the rents provide a good cash flow and a good return on investment, then your investment portfolio is likely to be more appealing.
However, if your investment portfolio is very run down. Plus in need of serious investment spending for repairs, you’ll not attract so many buyers. Or if you do, the offer you’ll receive will be much lower.
But let’s take a look at the above options in more detail.
1. Sell to another landlord who’s looking to expand their own buy to let investment portfolio
If you sell to another landlord, you are probably looking for a landlord who is set up as a limited company. Having your investment property held in a limited company avoids the problems associated with the Section 24 Tax noted below.
Depending on the size of your property portfolio and the types of properties you own, will depend on the type of landlord who may be interested.
We have connections with a wide number of portfolio landlords who are looking to expand their portfolios. These range from investors with one or two properties to those with very large property portfolios.
Please contact us to find out more and how we can help you to sell your portfolio of buy to let’s and houses of multiple occupation or HMO’s.
2. Look for a private buyer through your personal network
Many landlords, which may include yourself, tend to know other landlords or people in the business of investing in property. If this is the case, and you know other landlords, you may want to approach one of these investors to see if they might be interested in buying your portfolio.
3. Sell via a landlord to landlord service
There are UK property agents that are specifically set up to sell directly from one landlord to another landlord. Of course if you use one of these companies, you’ll have to pay an agent’s commission.
Selling in this way will also depend on your portfolio and what landlords the agency has on their books.
4. Find a cash investor or developer
This isn’t too different from option one above, except for you might be looking for an investor who has the cash in their pocket to buy your whole portfolio in one go.
However, for this to happen, you will need to take a serious hit on the total value of your portfolio for an investor or developer to pay a cash lump sum.
5. Sell on an option or a lease option contract to mitigate your tax liability but still sell your property portfolio immediately
This is the option we love at Bowfin. This can also be a great win-win option for us as the buyer of your portfolio and yourself as the seller.
But the deal must be structured in such a way that it works for you in what you are looking to achieve, as well as working for us too.
Let’s say you have a portfolio worth say £1,000,000. But let’s assume you have a relatively highly geared portfolio with let’s say £850,000 of bank loans on the portfolio. The equity in the portfolio is just £150,000.
The reason they are so highly geared may be because these properties are up in the north of the country and prices haven’t fully recovered from the 2008 crash.
If you hold the properties in your name, rather than in a limited company, your income may be negatively cash flowing partly due to the Section 24 tax problem or Tenant Tax.
The lease option deal and how it works with property portfolios
Lease-option contracts allow you to effectively ‘sell‘ your portfolio immediately. You receive an initial option fee which is designed to ratify the contract and to pay you a part of your equity straight away.
In the above example, this would be a part of the £150,000. From a tax perspective it’s also good tax mitigation strategy for you to not receive all of your equity in one go either.
See below for the tax implications of option fees.
With this type of contract, we then take over your mortgage payments, subject to the agreement of your banks. We also deal with the management of each property. This includes taking responsibility for the tenants, the rents and the repairs and maintenance for each property.
We then agree to buy each of your properties over an agreed period of time on a per property basis. This arrangement will minimise or mitigate your Capital Gains Tax (CGT) bill.
The win-win scenario
For many portfolio landlords with a large portfolio of properties, this is a win-win scenario.
Your win is that you get shot of the management and headache of your property portfolio in one fail swoop. But without having to pay a large Capital Gains Tax liability right away. However, this will still be subject to the Capital Gains Tax on the initial option fee, see below. You will still pay Capital Gains Tax, but this will be spread over different tax years.
The win to us is that we increase our own property portfolio, but for a lower initial outlay than it might otherwise be.
What are the tax implications of receiving an option fee
The tax man, or in this case HMRC, will always want a slice of the cake when you sell your property portfolio.
Selling your portfolio on a lease option is no different, but the amount you pay can be mitigated by selling each property over time.
However, the option fee is subject to Capital Gains Tax if it exceeds the Capital Gains Tax annual allowance.
Depending on the size of your property portfolio and the level of gain you have in each property, will depend on the best approach for you. One solution would be to take a lower initial option fee on each property. This will reduce the amount of tax paid at the outset.
You will need to speak with your accountant or tax adviser about your own tax position. You need to discuss the implications for you of selling your property portfolio in this way.
The other consideration is if you own your property portfolio in a limited company. Limited companies down pay Capital Gains Tax, but instead pay Corporation Tax on the gain. Where the gain for CGT purposes is the difference between what you sell the property for, less what you paid for it. Any enhancements to your properties will also be taken into account in calculation the gain you pay tax on.
Considering the Section 24 tax (Tenant Tax) impact on your decision to sell your buy to let investment portfolio
Is your decision to sell your investment portfolio based upon the Section 24 tax changes?
If you are a private landlord and hold all your properties in your personal name, your tax position has been seriously compromised by the crazy decision by the Conservative government to disallow interest relief against rental income.
The Governments legislation is about restricting finance cost relief for individual landlords. This legislation means that being a landlord in the UK is the only business that isn’t allowed to deduct loan interest as an allowable expense.
This unfair tax started to be introduced gradually from 6 April 2017. But from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction.
However, if you have your properties held within a limited company or if you were able to transfer them across to a limited company, Section 24 tax or the ‘Tenant Tax‘ would not affect you.
Selling a property portfolio where you’re caught by Section 24 Tax or Tenant Tax
The aim of the game where you’re caught by Section 24 tax will probably be to sell your portfolio as fast as possible. Or alternatively to sell enough of your portfolio to bring you under the basic rate relief threshold. But there is an alternative solution. You
Could sell enough of your portfolio to pay down your loans on the part of your portfolio you keep.
Sell enough of your portfolio to generate enough cash to repay your finance on the properties you keep
One option that would work is for you to sell enough of your investment portfolio to be able to pay back the finance on your remaining portfolio.
For example, if you own say 20 investment properties worth say £3,700,000. Let’s also assume that the total portfolio is leveraged to the tune of 70%, which means the borrowing is £2,590,000.
On the assumption that each property is worth £185,000, this means that you could retain £1,110,000 of property loan free. Which is equal to six properties. Whilst you’ll still be taxed on the rental income, at least you won’t have interest payments that’ll create negative cash flow.
Assuming a conservative return on this investment of say 6%, your monthly cash flow would be £5,550.
However, this example doesn’t take account of the tax implications of selling the 14 properties, as I wanted to keep the concept simple. You will need to speak with your tax advisor about the tax implying selling your property investment portfolio.
What are the tax implications of selling a large investment property portfolio
The likely tax you’ll pay when you sell your investment property portfolio is Capital Gains Tax (CGT). There are no reliefs to be had as an investor. Plus the only deduction you can make from your CGT profit is the Capital Gains Tax free allowance.
Which for 2019/20 is £12,000. £12,000 across a large portfolio of properties worth hundreds or millions of Pounds won’t make much of a dent in your tax bill.
However, as explained above in option 5 of selling a large investment property portfolio, using an option agreement or a lease option contract might be a better solution. If you use this option when you sell your property portfolio, you’ll mitigate or at least spread your future tax liability over different tax years.
Subject of course to the level of the option fee and the Capital Gains Tax on this initial payment.
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