So I’m back! Still no quieter this week but there we go – I don’t think it will get quieter for a while yet!
This week I am starting a blog series on adding value to your property. In the current market where houses are selling so fast, spotting opportunities and acting on them quickly is key.
There are so many ways you can add value to property so I’ll be covering them off over the next few weeks. This week we’re talking leases.
This is one of the most common ‘tips’ you get from property mentors and courses – buy freehold flats and create leases to add value! It doesn’t always work like that, as the way lenders value property is based on how it is likely to be sold, and if that is as a block then you won’t get the uplift on a revaluation. There are, however, ways you can do this. You could look at smaller blocks, where they could be split off and sold easily. Generally you need to consider the size of them, demand, split utilities and access. The ideal would also be to carry out a refurbishment, or wait a period of time before refinancing them as you need the valuer to disregard the purchase price as a comparable. You can also look at splitting houses into flats; additional flats into blocks and rearranging space to create more units. These can all create value though the sale or refinance of the properties.
There is a large quantity of flats around the country with short leases which struggle to sell. This is due to most people (buying property to live in) not understanding the lease extension process, as well as a need for a longer capital repayment mortgage. When you are basing your maximum mortgage on your income, and the mortgage is capital repayment, you usually need this over a long period of time (age depending!) to make it affordable. Generally you need 55 years left on the lease at the end of the mortgage so if you have, for example, 68 years currently you could only look at a 13 year term.
The difference with an investment mortgage is that you are able to look at it on an interest only basis. This means that the monthly payment is the same if it’s one or 25 years. You do need to find an alternative way to repay the mortgage and be aware that the full balance will remain at the end of the term, but this does give you options. You could, with the example above, take the mortgage over 13 years and in that time increase the lease length and then refinance. This could increase the value and allow you to take some money out of the property. This is a great opportunity as an investor that home owners just don’t have.
Share of freehold
This is another misconception among many potential home owners. Again, they see a short lease and assume it is expensive to extend it, or they won’t get a mortgage on it. The same principle applies as above with your mortgage term, but it can be much easier to extend your lease. All leaseholders have to agree and all leases need to be extended simultaneously, but it is much cheaper than extending a standard lease.
I hope that gives you a few ideas! Next week I will be back with title splits and planning ideas – if you have any questions in the meantime then let me know! Have a good weekend.