Managing your property portfolio: when less is more

Long considered a safe bet for financial stability, a sound investment choice, and a reliable source of income, the challenges of building and managing a property portfolio have grown considerably in recent years. In the not-too-distant past, more was considered to be better, and a bigger property portfolio yielded greater returns, but is that still the case?

Following the introduction of Section 24, higher rate taxpayers can no longer claim full tax relief on mortgage interest paid on properties owned in their name, which would have reduced a large portion of taxable profit for many. And as mortgage rates recently reached record highs, the problem is exacerbated.

So, when does a property portfolio hit peak performance, and is there a point when less becomes more?

Example One

Investor A owns 22 properties, each delivering £10,000 in rent annually, totalling £220,000 in annual income. There are various costs associated with the portfolio, including agent fees, repairs, expenses, and – of course – interest only mortgage payments, and Investor A has no other income.

After such costs, Investor A has a cash profit of £56,000, which is taxable. After tax, their total income is £17,097.

Rental income £220,000
Agent fees £22,000
Repairs £22,000
Expenses £10,000
Mortgage costs £110,000
Cash profit £56,000
Tax £38,903
Income after tax £17,097

Example Two

Investor B owns 10 properties, yielding the same rent as Investor A, and incurring the same costs per property. They also have no other income.

With significantly lower tax liabilities and total mortgage payments, Investor B’s after-tax income is £17,568, with the portfolio generating more annual income, despite being less than half the size.

Rental income £100,000
Agent fees £10,000
Repairs £10,000
Expenses £5,000
Mortgage costs £50,000
Cash profit £25,000
Tax £7,432
Income after tax £17,568

Example Three

Investor C has a £60,000 salary and one investment property yielding £10,000 annually in rent.

As the investor is in the higher tax bracket, the costs associated with the property are greater than its income, leaving them £300 in the red.

Rental income £10,000
Agent fees £1,000
Repairs £1,000
Expenses £500
Mortgage costs £6,000
Cash profit £1,500
Tax £1,800
Income after tax -£300

This scenario is common, as many landlords with just one property in their portfolio are in negative cash. Sometimes landlords won’t actually realise this, as rents come in each month and a tax liability comes much further down the line – and it may not be clear which tax liability has been generated from their rents, as they have liabilities on other income too.

Considering the above scenarios, is it worth retaining a portfolio that doesn’t deliver a profit?

The question of selling property takes careful thought.

A deciding factor is the purpose of your portfolio. Do you rely on its annual income, or can you afford to retain the assets to benefit from its capital growth? In theory, a larger portfolio should achieve higher capital growth over time.

If your property portfolio represents your primary source of income, it makes sense to streamline your portfolio to perform at its peak. Equity from the sale of properties can be used to reduce borrowing on those that remain. Beware, however, of Capital Gains Tax, which could be triggered by the sale of your properties.

You can consider refinancing, although it’s unlikely that you’ll find better rates by switching in the current climate.

Increasing rent is also an option, but amid a cost-of-living crisis, this could prove challenging on multiple fronts.

David Herd, group director at Champion Accountants, comments: “Managing a property portfolio in the current financial climate is complex and challenging. There are many factors at play, from the number of properties you own, to any additional income, the purpose of your portfolio, and whether or not you can afford to keep hold of assets that don’t pay off in the short term.

“Making the right decision could be worth tens of thousands of pounds annually, and so it’s always worth seeking expert advice. Our property accountant service helps landlords and property owners to navigate the increasingly complex sector.”

Should you decide to streamline your property portfolio, you’ll need to carefully consider which properties to sell and which to keep. Keep an eye out for our next article, where we’ll outline how to approach this challenge.

Find out more about our accountancy service for property investors here, or get in touch with us on 0161 703 2500 or email David Herd at