Add-on Special Purpose Vehicle Investment: The Property Portfolio Transformation
Vis-a-vis property acquisition and management, implementing a special purpose vehicle investment structure has transformed our entire approach. After five years of private landlords putting together a modest portfolio, we were prompted to explore other structures that may better meet our expansion goals due to the emerging tax burdens and limited growth potential.
The transition began with digging out the advantages and disadvantages of property SPV models. The most enlightening find was that, apart from the obvious tax benefits, a properly structured SPV would give major benefits in asset protection, succession planning, and raising capital from outside investors. Finally, all those additional advantages persuaded us to go ahead with it, even in view of early arrangement costs and potential future refinancing issues.
Getting an apt company structure was the crucial part. Ours is a limited company spv buy to let with a carefully developed shareholders’ agreement, with provisions for considering future investors. This forward-looking approach has, since then, allowed us to admit two more shareholders, broaden the capital base, and speed up the acquisition timeline.
From the beginning, we have relied only on specialist lenders for products that suit our requirements. Their marginal pricing had been high, between 1% and 1.5% above residential rates. But with time, this SPV borrowing model gained more and more investors, and then of course mainstream lenders began owning the market in the face of increasingly competitive offers. The last property we acquired was funded at just 0.3% above comparable personal buy-to-let rates; now, that would not be so bad.
Operating through an SPV has enforced a level of financial discipline that has not been applied to our investments in the past. Even though the requirements for formal accounting, which include annual financial statements and returns for corporation tax, have been burdensome, they indeed give us good intelligence on property performance. We now have accurate metrics of each of our investment properties, in terms of return, to enable data-based retention or disposal decisions.
Limited liability protection has been particularly valuable because we have moved into properties allows HMOs to be acquired for higher risks and return. That gives really important protection that, because our assets are separate from personal assets, encourages us to go after bigger projects.
A surprise was the change in perception by suppliers and contractors regarding our business. Being limited has seen us enjoy better payment terms, better service levels, and sometimes lower prices – things we never imagined at the setup of the structure.
For property investors considering going down the route of SPV, I would encourage you to consider the whole process as not just a tax-efficient exercise but really an entire restructuring of a business capability, with the potential for transforming your investment capability-from initial teething issues and cost of setup to potentially very strategic advantages that can enable you to work far more quickly and effectively.
