Buy to let vs SPV
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December 3, 2019
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Buy-to-let is referring to a property which is purchased specifically to let out, in order to produce a rental return and income stream. It can also grow in value, producing a capital gain when you sell.
Benefits can include a stable income from rental receipts, as well as an accumulation of wealth if house prices increase over time. When you set out to purchase a buy-to-let property, one of your first considerations will be whether to run your buy-to-let business on a personal basis or to operate as a limited company.
To buy a residential property, you can use your own cash or take out a buy-to-let mortgage with a cash deposit. If you’re taking out a buy-to-let mortgage to purchase a property the lender will want to know you can secure enough rent to make the repayments. Landlords must be able to achieve higher rents in order to secure the mortgage. However, some lenders will allow a landlord to use their own disposable income to meet any rental income shortfall.
Keep in mind that a mortgage comes with risks – if you need to sell the property for a loss, the sale price might not cover all that you owe on the mortgage. Also remember, that if your tenants leave and there is no rent coming in, you will still need to make your mortgage repayments.
By running your buy-to-let business via a limited company structure, it may, therefore, be possible to minimize your tax liabilities.
SPV (Special Purpose Vehicle)
Special Purpose Vehicle (SPV) is sometimes called a Special Purpose Entity (SPE). It is a subsidiary or a legal entity created by a parent company to isolate financial risk. Its legal status as a separate company makes its obligations secure even if the parent company goes bankrupt as it has own legal standing that separates assets and liabilities.
It is normally used as it is a company on one project only and therefore represents fewer risks and liabilities for the lenders. It can generally set up to hold a property and do nothing else.
The actions of an SPV are usually very tightly controlled and they are only allowed to finance, buy and sell assets. SPV's are extensively used by real estate investors to structure investments and also develop joint ventures, due to their numerous advantages in acquiring and holding real estate:
- Risk Isolation Factor – helps to fend off risk since it allows the investor to isolate the property in question from the other assets and liabilities they own.
- Flexible Investment Structuring - can be structured in different ways for raising capital and/or regulating business activities, depending on the investor. An SPV is capable of raising capital by issuing shares, and multiple share classes can be created to exercise control over it.
- Ease of Asset Transfer - By holding assets in an SPV, property and contracts can be sold in an isolated vehicle instead of getting involved with the array of tedious contracts, licenses, permits, etc. separately, which is time consuming and may involve counterparty negotiations.
An SPV is mainly formed to raise funds by collateralizing future receivables. SPVs are mostly formed to raise funds from the market. Technically, an SPV is a company. It has to follow the rules of formation of a company laid down in the Companies Act.
SPVs are used for a number of purposes such as the acquisition or financing of a project through structured finance transactions, or purchase of a specific asset through securitization so as to not inherit risk or a structured investment vehicle.
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