The management company offers a 5 year, fixed rent contract, removing from the investor the responsibility for letting, maintenance and bills during the period of the contract. The rate is highly competitive, with the company projecting an increase over the term, and estimating future trends to make the overall costs equivalent to 15% of the gross rent over the term. The hope is that gains made in the second half of the contract will offset any losses in the first half.

In addition to what is traditionally called a “full management” service, Gingerbread Homes Ltd takes all the risk associated with non payment of rent, void periods and tenant property damage. They become responsible for utility bills, fire, gas and electrical safety and compliance with Government regulations. Replacement of furniture and redecoration is also covered by Gingerbread Homes Ltd.

Overview of relationship between parties

The details of how to organise the ownership of the properties has been one of the most challenging aspects of setting this up. A property investment company which buys properties and in which investors invest is superficially attractive, but it has some severe drawbacks. Firstly, in order to figure out how much to charge an investor for shares it would be necessary to value the property portfolio – every time anyone wanted to buy or sell shares! It would also be necessary to estimate the pending Capital Gains Tax liability in order to adjust the value of the shares accordingly. Given governments’ propensity to change the tax regime with little or no warning, it is hard to calculate what this will be in the future with any degree of certainty. These factors make investment through a company more difficult.

Another reason for directly owning the property is the very nature of the tax system. Although the tax regime applied to companies is more generous in many ways than that applying to individuals, there is the additional tax on the withdrawal of money – through dividends or by selling shares. The combined effect of tax on the company and tax on the investor getting their money means that in the majority of cases direct ownership allows the investor to retain a greater proportion of their money.
 

- 18% Capital Gains Tax after annual exemption
 
Extraction of capital gain from property investment

The figure above is a highly simplified illustration of the double taxation dangers associated with ownership of residential investment property through a company. This is of course not intended to constitute tax planning advice – we do not offer advice on how to organise your tax affairs, we are just trying to explain the reasons behind the structure of this investment. For specialist tax planning advice you are highly recommended to speak to a suitably qualified Chartered Tax Advisor or Accountant.

Although there has been a lot of negative press recently about the changes to the Capital Gains Tax (CGT) regime, for owners of residential investment properties the effect is largely positive. Previously penalised by the tax system, such investors will from March be treated much more like any other business, including furnished holiday lettings. So while most businesses will be worse off, because the discrimination against this type of business is being lifted residential property investors will in most cases benefit.

Higher rate tax payers will certainly benefit, and in most cases basic rate tax payers will be better off, too. For details on how the changes will affect you personally I recommend speaking to a suitably qualified Chartered Tax Advisor or Accountant.

Now you know we can’t give a simple yes or no to that! Property price trends around the country are showing a wide degree of regional variability, with most areas experiencing a drop in house prices. Mortgage lenders are tightening their criteria on investor experience, creditworthiness, loan to value ratios and rent multiples. These factors are leading to there being fewer buyers in the market, which in turn means that properties are taking longer to achieve their selling price. Vendors under pressure of time to sell are willing to reduce the price to achieve a quick sale, especially to an investor with proven ability to buy and nothing to sell. At the same time, rents have continued to increase strongly, and this combination of flat property prices together with strongly rising rents helps the property investor. We feel confident about the long term prospect for property prices, and are very keen to take advantage of the current excellent buying opportunities.

This investment is for 5 years, and is based on the premise that over that period property prices will increase. On average, over the past few decades, property prices have increased at around 8% per annum. However, if they remained completely flat over the 5 year period, the only income to the investor would be the rent paid. In addition, purchase and sale fees could lead to a lower sum returned than was invested. If property prices fall over a 5 year period, investors would lose money. However, if they increase the proportional increase in the investment is much larger than the percentage increase in the property prices, since the amount of the mortgage does not increase in proportion. For investors who think property prices will be higher in 5 years time than they are now this may be of interest.

Nationwide produce some excellent reports on the market, to download their latest report visit:
 http://www.nationwide.co.uk/hpi/review.htm 

In summary, we can’t say whether this is for you or not, but we believe that for investors who want to invest in UK residential property without devoting a lot of time and effort to it, this is worth considering.

You don’t have to do all this, because Gingerbread Investments do it:

• Researching the right location and market
• Finding the right property
• Negotiating the right price
• Knowing the laws relating to the required improvements
• Defining the renovations and improvements and estimating the costs
• Finding appropriate, reliable contractors
• Contracting and managing refurbishments
• Deciding on, sourcing and supplying furnishings
• Deciding when to apply for, and applying for, release of equity

You don’t have to do all this, because Gingerbread Homes Ltd does it:

• Finding and verifying tenants
• Rent setting and collection
• House inspections
• Ongoing maintenance & resolving problems
• Deposit collection and holding
• Paying utility bills

You don’t need to worry about any of this, because its our problem, or that of Gingerbread Homes Ltd:

• Rental voids
• Rental returns falling short of mortgage and bills in early years
• Problem tenants
• Government legislation on tenancy deposits
• Fire safety legislation
• Electrical safety inspections
• PAT testing
• Gas safety
• Houses in Multiple Occupation (HMO) regulations
• Council Tax rebates

Perhaps most importantly, in many cases we will be joint owners so it is in our interests to make sure that the properties are well managed and maintained in order to maximise the long term returns from them. Investors benefit directly from our experience in the market, with the same investments we would be happy to make ourselves.

A number of well-publicised scams recently have involved “Deposit paid” deals, in which the price of a property is artificially inflated so it looks to the investor and to the mortgage company as though the value is higher than it is. Effectively 100% mortgages are granted, and when the rental returns turn out to have been very much inflated as well, the investor is left often in negative equity and with an un-rentable property. In this investment, investors don’t have to rely on our word that this is not so, it would not be in our interest to do it – we may be part owners in many cases, and we would be as caught as anyone!
 

This is a simple example intended to illustrate the way in which the investment works. Let us suppose we find an ideal property and in the current climate are able to negotiate a purchase price of £208,000. We obtain a mortgage for 85% of this requiring a deposit of £31,200. We identify refurbishments and improvements required and calculate that these, together with mortgage and purchase costs come to £32,000, and that the final value of the house will be £240,000. In this example, the total costs required come to £63,200. The fee to Gingerbread Investments is 4½% of £240,000 which comes to £10,800, and we shall assume that the investor chooses not to pay this but to share the ownership with Gingerbread Investments. The proportion owned by Gingerbread Investments will be £10,800 / (£10,800 + £240,000 x 0.15), which comes to 0.23, or 23%.

After the refurbishments we release additional equity to take the mortgage back to 85%, releasing £27,200 to the owners.

Tasks	Investors	Gingerbread Investments	Gingerbread Homes Ltd
Find and negotiate price	-		-
Buy Property		-	-
Identify, cost & implement refurbishments	-		-
Find tenants & manage tenancy	-	-
Legal compliance	-	-

Table 1: Areas of responsibility for each party

Table 1 shows a the general areas of responsibility and to which party they fall. Table 2 shows the total financial contributions broken down by party to the investment.

So after the initial refurbishments on the property, the investor(s) has an outstanding investment of £36,000 in the property on which they receive £14,392 per annum in net rent and from which they pay the mortgage. Gingerbread Investments has £10,800 outstanding.
Future rises in property value can be used to release equity by re-mortgaging or by applying for a further advance, which can if desired be re-invested. Owners continue to receive the rent specified irrespective of market changes and void periods.

Returns in future depend on what the value of the property does – but we are primarily interested in the long term trend. For the purposes of the example, let’s make some assumptions. Let’s say that the property value grows at 5% per year, and that every time the increased value allows a further advance of £10,000 or more, we will release the whole of the available equity. In order to keep the example simple, we will ignore the fees associated with further advances, and assume that we sell the property at the end of the 5 years. Under these assumptions, we can calculate the capital payments. The final payments include the proceeds of selling the property. Of course, the investor might decide to pay the fees to Gingerbread Investments up front, in which case the whole of the capital payments in each year would go to the investor.

If you would like to know more we would be delighted to answer any questions you have, or to meet to discuss it in more detail.

Please get in touch by email at ralph@gingerbreadinvestments.co.uk