UK Start-Up Dot Residential Aims To Take The Pain Out Of Investment Properties

Investment properties have always been a hands-on venture but until recently the attractive returns on offer have made it worthwhile for amateur landlords across the country. However, recent changes to the tax regime and other regulations around buy-to-let properties have left many owners of investment properties wondering if it’s still worth the trouble.

Market experts say many have already come to the conclusion it is not and already have or plan to sell up. UK Finance figures showed an 8% drop in the number of buy-to-let mortgages taken out in February compared to the same month in 2018.

However, UK start-up Dot Residential, founded in April last year, believes it has come up with a technology-based and user friendly model that takes the pain out of owning investment properties in a way that will tempt landlords back. Its approach wraps up property purchase, management and accountancy in a single package that takes away any subsequent time commitment from the owner.

Dot bulk buys residential units, normally the kind of compact 1 or 2 bedroom apartments in attractively located new buildings that are most competitive on city rental markets, directly from developers. Each property is then ‘wrapped’ in a kind of company classed as a ‘passive investment structure’, or SPV. The company has branded this a ‘Dot container’. That means income from the property is taxed at the 20% corporate tax rate rather than the 40% income tax rate of higher earners. If the investor subsequently wishes to sell the property, it can be sold within its company wrapper, which would be transferred to a new buyer, or taken out and sold as a stand-alone property.

Dividends withdrawn from the company structure are then charged at an additional tax rate of 27.5% but only after expenses such as mortgage interest, management and accountancy fees etc. have been deducted.

Dot finishes and furnishes apartments it has bought, ready for the rental market, with buyers charged approximately £5000 for a ‘ready-to-rent’ furniture and appliances package for a 1-bedroom apartment. Along with closing costs and stamp duty that’s added to the 30% deposit buyers need to have in cash. The rest of the purchase price is covered by a ‘1-click Dot mortgage’ immediately available and charged at an interest rate of 4.99%, which owners can subsequently replace at a lower rate with a re-mortgage through a traditional lender.

The company says the one-click mortgage provision is possible as they know the property and that it is sellable if things go wrong, referring to it as similar to ‘asset based lending’. Dot then takes care of rental and general property management and filing of annual accounts, charged at between £500 and £1000 and processed by ‘Big Four’ accountancy firm EY. The owner does nothing.

Despite the property management fees, that Dot says should be expected to come in at around 10% of renal income, the company says that investors should see returns of around 4% on a Dot mortgage, increasing to 6% once the property is re-mortgaged at a better rate.

Dot properties available in the UK are based in Manchester and Liverpool. The company started off with a view to the London market also but says that it cannot currently find properties at prices that would allow investors to make reasonable returns after all expenses are taken into consideration.

The company says it believes its model takes the ‘friction’ and time commitment out of being landlord, opening up the asset class to every investor. The company will also launch this year in the USA. Like in the UK, it is targeting ‘secondary’ cities with cheaper property prices attracting millennials priced out of places such as New York and Los Angeles for property purchases. Austin and Denver are mentioned.