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Can you extract equity from an SPV by refinancing?


tuk

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While it seems common place to refinance properties owned in an SPV and use the proceeds to fund the deposit on further properties, what options are there to access that equity if one doesn't want to grow there property portfolio any further..? Since equity released by refinancing is not a profit, I imagine it is therefore impossible to extract the equity through dividends - one would instead have to sell a property and record a profit??

This seems like a significant drawback to me compared to owning property in my own name, considering that I don't intend to just forever buy more and more property... (but might want to buy enough to otherwise make an SPV worthwhile..)

Looking forward to hearing what people have to say on this. Thanks in advance!

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You would need to check lender terms if your plan was to extract out of your company after refinancing, I am not sure they would like it depending on the purpose.

 Property investing companies typically have large directors loans so you could repay the director and then your options are salary and dividends to extract further cash.

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David M Slater ACMA 
Accufy Accounting
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Thanks David,

I hadn't thought about the terms of the loan, thanks.

If equity is released through a loan I assume that would not be recorded as a profit, and so in which case a dividend cannot be issued on this? That would leave salary only.

I am beginning to think that an SPV is an effective vehicle for continually building a portfolio, but once the desired portfolio size has been reached, how can one go about keeping a decent amount of leverage without adding more properties? (assuming value goes up, but there's no reasonable ground for increasing the loan size). If one was investing in their own name, they could just release some equity and use the money...

Thanks again.

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50 minutes ago, tuk said:

If equity is released through a loan I assume that would not be recorded as a profit, and so in which case a dividend cannot be issued on this?

There will be an increase in the companies liabilities (what it owes) as mortgage debt is increased. The increase in value of your property is profit but not distributable as it is an unrealised gain until you sell the property. 
 

56 minutes ago, tuk said:

If one was investing in their own name, they could just release some equity and use the money...

The loan terms comment I mentioned before wouldn’t just apply to property in a company but in personal name you avoid the double taxation pitfall of a company.

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David M Slater ACMA 
Accufy Accounting
01946 552801
  david@accufy.uk
  www.accufy.uk
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Thanks again David.

I am now beginning to think that over the long term, the realistic ways to maintain a particular LTV across a portfolio (eg. 70%) would be to either: A ) sell properties (thus realising gains) and take out new debt against new properties, or B ) continually expand a portfolio, thus making it more likely to meet loan terms for refinancing because the money will be used for further acquisitions. 

Option A ) sounds expensive and I don't see how it's actually any less risky to lenders compared to just increasing LTV on an existing property.

Option B ) is all well and good to a point, but there's an absolute limit on debt that I would be comfortable with, or I might want to use capital gains in property to fund different investments.

If you have any further thoughts, I'd be interested to hear them. 

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8 hours ago, tuk said:

Option B ) is all well and good to a point, but there's an absolute limit on debt that I would be comfortable with, or I might want to use capital gains in property to fund different investments.

Remember at some point when you sell a property you are going to have to pay tax on it. Make sure this tax liability isn’t higher than the equity left in the property by continued refinancing.

I’m comfortable to refinance to release my initial investment and from them on I’m happy to let the LTV reduce over time through inflation. Aiming where possible to refinance onto a long term fix with a c or above EPC to benefit from favorable rates.

 

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David M Slater ACMA 
Accufy Accounting
01946 552801
  david@accufy.uk
  www.accufy.uk
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  • 2 months later...
On 11/9/2021 at 6:36 PM, tuk said:

While it seems common place to refinance properties owned in an SPV and use the proceeds to fund the deposit on further properties, what options are there to access that equity if one doesn't want to grow there property portfolio any further..? Since equity released by refinancing is not a profit, I imagine it is therefore impossible to extract the equity through dividends - one would instead have to sell a property and record a profit??

You need to earn profits to pay a dividend. So you can still use the money from refinancing to pay a dividend (as long as your company is profitable)

You can also pay yourself a salary

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