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Month: February 2020

An introduction to semi-commercial investments.

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This week we are looking at semi-commercial property, as it is becoming a more common type of investment as property investors look to diversify their portfolios.

What is a semi-commercial or mixed-use property?

Broadly speaking it is a mix of residential and commercial making up one property. Generally, you will see a shop or retail unit below, with a flat or flats above. It’s usually all on one freehold, but sometimes they are split off onto different long leases. We see a variety of commercial elements to the property, from bars or restaurants to shops or hairdressers. This could be a very simple property, with 2 parts, or something more complicated.

Why are semi-commercial investments different?

Mixed-use properties are classed as commercial investments, and therefore require a commercial lender for the mortgage. These lenders will consider mortgage applications on a more individual basis because there are more factors to take into account. For example, the type of lease in place on the commercial part and your experience as this requirement will differ with each case. As a specialist broker, we have access to several lenders who can help with this type of finance, and who we go to will depend on your requirements.

Why are they becoming more popular?

With all the tax changes to the buy to let market, there are some advantages of commercial, over buy to let property. It is always best to speak to your tax accountant to run through your circumstances and how it would affect you.

The commercial element can offer more security to an investor, with longer leases than a residential tenancy agreement and the tenant having responsibility for the repair and upkeep of the property. This can help to diversify your portfolio. It can also offer a higher yield on average than residential investments, with on average lower value properties too.

Mortgaging mixed-use property investments

As I mentioned, you will need to use a specialist mortgage lender to access commercial funding. We have a range of lenders available, all with differing appetites for experience, interest-only and higher loan to values. They also have some types of property they are interested in lending on and others that they are not! On the whole, we can find a lender for most properties, but we must know what we are looking at from the beginning.

You would generally be looking at between 70-75% for interest-only options, with a term up to 30 years if more than half of the value of the property is made up of the residential element, or 10 years if not. For capital repayment options we can look at part and part or full capital repayment with a term up to 30 years, as long as the rental yield is sufficient.

Interest rates are higher than residential, so it’s important to factor that in when assessing your particular property. We would generally see rates start at 5.3%, but this very much depends on the loan to value, type of property and your experience so it’s always best to speak to us to get a figure that is more personal to you.

In terms of valuations, it’s a common misconception that lenders will usually use the market value or investment for lending purposes. In reality, it is more likely to be the vacant possession figure they use. There are some exceptions to this, but only really where you have a well-known company in the commercial element on a long fully repairing and insuring lease. You can, of course, pay more than the vacant possession figure, and the valuation that the lender instructs will allow you to see the other figures and then you would need to put in the additional funds. This may work for you in terms of yield and a long term investment.

As this is a more complicated proposition, we will require you to have more experience than with buy to let’s. Generally, lenders will need you to have owned several buy-to-let’s for a couple of years as a minimum. As we can have a conversation with the underwriter and so exceptions can be made where we can demonstrate other relevant experiences, so again having that conversation with us at the beginning is vital.

As always, please give us a call to discuss your options and any potential deals you have

Interest rates: The role they play in your decision making

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Frequently the first question I’m asked when looking at a deal is ‘what’s the best rate?’ or ‘is that the cheapest option?’ I cannot give you advise on what the best thing is for you, I am here to give you options for you to make a decision on what you want to proceed with.

What I can do is talk through what is important to you and what you are trying to achieve, and when help you with those options. There are many other factors to consider other than the interest rate, and that’s what I wanted to talk through today.

What is your timescale?

Generally, when you are looking at lower cost options, it is going to be a longer process. These lenders will typically ask for more information and are stricter on the documents you need to provide. This can slow down the process. They also tend to have a longer legal process which can slow things down. Do you need to repay a bridge or investors, or have you got a refurbishment to pay for? How quickly you need that money needs to be a consideration, and being upfront with your broker can be really useful. They should know the rough timescales for each lender and will be able to let you know your options based on your timescales.

What is your cash flow?

If you have a property with a very low yield then rate is going to be a big part of your decision making process, but when you are looking at a higher yield there may be other considerations that are higher up your list. Lower rate options can be more restrictive in other areas, so the maximum loan to value, whether they have an interest only option and who will conduct the valuation may be further up your priority list.

Do you have another project?

Having available cash to purchase a property can put you in a really strong position when looking for your next deal, so having it all in a property you have finished isn’t always helpful! If you’ve got the potential to use the funds for another project then you need to get it out of where it is. You’ve got to factor in the potential profit of the next property when looking at the sacrifices you are willing to take on your current refinance, but it’s worth thinking about all your options.

Are there other complications?

How you purchased the property can affect the lender that you go to when it’s time to refinance it. If you’ve owned it less than 6 months, have a complicated limited company structure or have borrowed some money to buy the property, this can narrow down the lender options. Lenders with lower rates generally have a lower risk appetite so will be less willing to look at these options for example.

As always, please give us a call to chat through your individual requirements

Flipping a property, and why you would do it!

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This week I want to talk to you about flips. This is a popular enquiry at the moment so I thought I’d explain a bit more about what they are, why you’d use them and what to watch out for.

What’s a flip and why do one?

A flip is a term used to explain buying a property to resell it quickly. There could be many reasons as to why you would want to buy a property to sell on again; the most common is where it needs a refurbishment to get it up to a liveable or lettable standard. This could involve a lick of paint and internal refurbishment, all the way through to a large project including extensions and so on. What you would do, very much depends on what your aim is and the potential profit. You could also want to split a property up, apply for planning, extend a lease, or something else which would add value to a prospective buyer. Again, it would all depend on the project. What you need to work out is how much something would cost versus the potential added value.

Our customers tend to use flips to build up their pot of money for future projects. By selling the property, you are releasing all your capital, so it may be more appealing than retaining it with some money in the property. It may be a project that is initially profitable but doesn’t fit with your long term strategy, or offer a high enough yield long term for you. Each investor has their own parameters though, and that’s not to say it wouldn’t work for someone else.

How does it work?

Generally we would use bridging to fund a flip. You often need to buy the property quickly to secure it at a good price, it may well not be in a lettable condition and you will usually want to redeem the mortgage without costs to exit it. There are other reasons why it may not work on a standard mortgage; lenders will work with the current condition of the property so the rental may not be sufficient to allow you to maximise your borrowing as it is. They will also generally want you to let the property and provide evidence of this within a period of time and you won’t be able to do this!

We have lenders that offer bridging finance, and some that also offer the refurbishment costs. How you structure it will depend on the project, your experience and your preferences.

What to watch out for?

The first consideration has to be the cost and timescales involved with your project. You have got to be realistic with this, and factor in your finance costs to ensure that it is profitable for you. Your minimum return on investment may be different to another investors, so don’t be put off by their expectations on a deal, but it has got to work. Factor in a time and cost contingency, and ensure it offers a return on a worst case scenario. You can quickly eat into your profits by over running on your project.

Not being able to sell is something else that can quickly use up your profit. It is so important to ensure that the demand for resale is factored in to your costs. Depending on the location and type of property you may be looking at a longer resale period, so ensure your bridge is long enough.

Having a plan B is vital! We will always ensure that the rental fits on a buy to let basis if we were need to refinance, and that we have a lender who’d be happy to lend in principle. There are never any guarantees with these things, but make sure you do all you can to reduce the risks. The market can be changeable and outside factors such as politics, holiday seasons and so on, can slow the market. Be mindful of these timings where you can, when you are planning.

The lender will always work of the current planning class so if you’re intention is to change this and it won’t be in place before completion, then you need a viable plan B that the lender can work with. Your profit needs to work on this basis too. You may look at exchanging with a delayed completion subject to planning. Be aware that if planning is granted you will have to proceed or lose your deposit so ensure that the costs work before parting with your money. We can have a valuation carried out before planning is granted so that we have the potential end values and you can ensure that it all works before committing. Valuations generally last 3 months for bridging lenders so this may mean another one is required prior to completion, depending on timescales.

An example:

We have seen a number of flips working really well recently. The pictures you can see are for a property bought in late December 2019. The client finished a light refurbishment in 8 weeks and has now got it back on the market for sale. It’s a good example of how you don’t need to take on a big project to make a profit. Once this property is sold it will allow the client to move on to his next project.

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As always, if you would like to talk through any deals you have then please give us a call and we will be happy to help.