Care Provider leases on HMO properties

Happy Friday everyone – I never thought I’d moan about the weather, but when everything is so busy and taking so long at the completions end, it is pushing a lot of us to our limits.

Today we are covering Care Provider leases on HMO properties.

Having got more investors wanting to get involved in this sector, I thought it good to cover this week.

As some of you know, I have been involved in this area for some time, starting some years ago with refinancing large HMOs for vulnerable women and their children. This was daily emergency housing, so the most difficult to place.  In recent years, lenders have shied away from the vulnerable areas, as they didn’t want the prospect of reputational risk.  Which really made me mad, as it is so important that they have options, which need funding.

Moving on, last July, I worked with one of our investors to get a supported living contract approved – which I did.  It wasn’t for the very vulnerable area, but a start.  Since then we have enabled funding for a number of HMOs on this is basis and this lender has now changed their policy regarding care providers.  This has enabled us to have much more certainty around what we can offer our clients.

So how do you get involved in this area…. 

The assumption is that you need lots of experience, but you actually only need to have had one buy to let (single let) for 12 months. You don’t need to have any previous HMO experience.  The refurbishment part is slightly different if it involves one, but if it is a light refurbishment then yo don’t need any previous refurbishment experience.

The important part is to check out is your potential care providers; a lot of them are not regulated as they cover areas that fall outside CQC etc.  Check their reviews, as the lenders will not tolerate those with poor reputations.  Doing your due diligence early on will save a lot of time and cost later on.

  •  Type of property – each care provider needs a specific type of property, whether it is the number of bedrooms, amount of communal space etc; and so on.  It’s a balance between making sure that it is not so bespoke you can’t do anything with it if this doesn’t work out without spending further money, if for any reason it doesn’t go through.
  • Area – again, this will be dictated by the type of tenants.  Location is so important to your care provider, so make sure you find this out before you start sourcing your property.  Distance to local amenities, transport links, particular things that need to be close (or not!) are vital to your provider.
  • The lease – ask for a copy of one of the care providers draft leases in advance.  Lenders will need to approve them, so it is important that you give us a copy of this to get it approved, in principal, before the transaction starts.  A recent case needed some amendments which the care provider agreed to, but this may not always be the case.  This is really important as the fund is dependent on it.

FYI – if a lease goes over 7 years, then it is registered at HM Land Registry and the care provider will pay SDLT on it.  Something to consider.

As a recent example, a client came to us who had bought a property cash to convert to an HMO.  He had bought it for £130,000 in January of this year.  As he started the refurbishment, he engaged a care provider early on to understand the requirements they had for the HMO.  They are a charity who help young adults leaving care, providing them with supported living as a stepping stone to living alone.  Their ethos is around helping their tenants not only with housing, but also with with their finances, employment and ensuring that they are supported at a time when so many are not.

The refurbishment cost £60,000 in total.

After looking carefully into comparables for the end value the clients estimated this would be around £200,000.  The surveyor inspected the property and lease and gave it a value of £210,000 – a great result, the lease created an uplift in value well as long term security.  The rental income is £2250 per month on a 3 year contract.

We were able to lend 75% of the new open market value, within 6 months of the purchase date. This is on an interest only mortgage too, which historically was an issue for this type of lease.

I genuinely believe that having commercial leases in place, with the current climate of uncertainty, can only be a good thing for both investors and lenders.  There are no void, referencing of new tenants and most of the contracts include the bills – so it is a much more profitable, both money and time for these type of contracts.

I hope that is of help, but were here for a call, as always.

What can you do if you don’t have planning?

I hope you’ve all had a lovely week enjoying our new freedoms, I know I have! It is tiring though!

This week I want to talk about what to do when a property doesn’t have the right planning for your plans. This covers a number of areas, and some are easier to overcome than others. There are a few solutions though.

Create a back up option 

This is probably the easiest solution to the issue. It works particularly well with conversions to large HMOs (when you’re not in an Article 4 area).  Large is classed as everything 7 bedrooms or more and requires a separate planning class.  Also semi commercial property that you want to convert to residential and can’t under permitted development. What it means is that you have an ideal scenario (if planning is approved), but also an alternative that could work without any change of planning class.

With the example of an HMO it could work as either a large HMO but also as a 6 bedroom. You will need to asses the refurbishment costs and the rental for both options and ensure that it works either way.  Some clients will do the works assuming they will get planning, and then use the extra space for a study or additional communal space if they don’t. Others convert it to a 6 bedroom and then wait for planning to be approved to do an additional extension or garage conversion for example. What you do will very much depend on the layout of the property and the timescales needed for either option.

With commercial property, this can mean keeping the existing commercial if you don’t get planning to convert it to residential. The rental again would need to work either way and you need to be comfortable with either option. Vacant commercial buildings can be difficult, so there needs to be a good demand for the commercial unit for the bridging to work, and then let out before we move it to a term mortgage.  We have had other examples of when this scenario works; converting semi detached properties back to a single dwelling, houses to flats and licensed HMOs in Article 4 areas looking to extend to larger properties.

A favourable pre-planning application 

There are instances where a back up option just doesn’t work. This could be where the costs or rental potential just don’t work financially for the back up option, or when there isn’t a back up option! This is usually for vacant commercial buildings but there are some other examples too.

In this instance, buying yourself some time to get planning is the ideal solution. This can be done through a conditional exchange or an agreement with the vendor. Where this isn’t possible, achieving a favourable pre application can really help. It really does depend on the overall case and it’s not necessarily a guarantee but it can be enough to complete on your bridging loan. Where a precedent has been set, or there’s been a previous application that has expired then it really does help.

Take advantage of  permitted development rights

There are plenty of areas where permitted development rights exist, and the rules have relaxed considerably recently.  Knowing what you can and can’t do is so important and can give you an edge over other investors.  We can complete without the full approval, as long as we know that is falls under PD rights.

Use alternative funds

The final option is to avoid mortgage finance entirely. This is not something that will work for everyone, but when you have the cash to purchase the property and are willing to take the risk, then this can help. Once planning is granted then we can look at refurbishment finance and can take advantage of the uplift in value that planning has created. There are clearly risks involved with this, so ensure that you have carried out your due diligence, and we are happy to talk about the potential exit routes before you purchase the property.

It’s really important not to get emotionally involved… you are in for a return in investment, keeping your eye on the prize can mean saying No!!

As always, we are happy to chat through any specific deals that you have and talk about your options.

BTL first or straight in to HMOs?

This week we are looking at the pros and cons of both strategies; single let’s first or HMOs? It’s a question that comes up lots so here’s what I think!

 

Single let’s first 

 

The big advantage of this method is experience. Most lenders require you to have some rental experience before you go into HMOs or other more complicated properties such as commercial and blocks of flats. It also allows you to gain some rental experience and possibly some refurbishment experience too. You may want to do this first to feel more comfortable moving to bigger projects; to test the water and see if it’s something you enjoy doing. 

 

The main disadvantage is the money that you will end up leaving in the project in order to gain the experience. I have completed projects with clients that have enabled them to pull all their money out, but this is usually where they’ve added bedrooms within the existing floor plan or clever extensions. Usually you will end up leaving some money in, and that can then restrict how quickly you can move on to your next project. The other issue can be that you end up with a property that isn’t yielding as much as you would like and you didn’t really want a single let anyway! 

 

What about going straight to HMOs? 

 

The big pull towards HMOs are the rental yields. Of course this can apply to blocks of flats or serviced accommodation as well. This dilemma will apply to all of these properties to an extent as you need some experience for all of them.

 

What you need to decide is whether you want to pay an increase in the interest rate, to compensate for your lack of experience versus putting cash and cost into an asset which isn’t part of your long term plan.

 

In terms of interest rate for for HMOs, up to 5 bedrooms will be a slightly lesser rate than over 5 bedrooms. Both options will be higher than if you have some experience. In both instances the valuation will be a bricks and mortar figure and you will need to own your residential property. We can look at 2 year products to allow you to refinance to a more competitive product and hybrid valuation if that’s something that can be achieved. 

 

You will need to be looking for a property which doesn’t need extensive works (planning or building regulations) unless you have done something similar previously. You will require a management agent in place to look after the tenants. When you’re looking at refurbishment experience, you need to have done something similar previously, but this can include projects on your own home. 

What if you don’t have a residential mortgage? 

 

This is more tricky at the moment but there are still options. Single let’s are easier to place but there are more restrictions on affordability. For HMOs we need to think outside the box to find a solution, but it can be done! Some  clients choose to buy something cash and then refinance after they have owned it for a period of time and others use bridging to get around the experience. Looking at occupied properties can be an option too. 

 

When you don’t have the experience required, we need to balance this with something and this is usually a higher cost – whether that is using bridging or an increased interest rate on your mortgage.  This is a short term issue though, and once you have one property under your belt you have far more options.

 

We can usually find a solution somewhere though, so call with your enquiries and we can chat through the options.

 

Jackie’s summary: What a year it’s been!

Happy Friday everyone… and it does feel like the one way ticket to ending lockdown is really on its way. It’s been a long time coming but finally there’s light at the end of the tunnel!

As we are now starting to get our vaccines and life is about to get back to normal, I though I would reflect on how the business has been for the last year.

Lockdown started on 23rd March and investors were super busy trying to get properties through and start buying new ones, we had a lot more at auction than usual too.  Perhaps having had Brexit for 3 years, followed by the election; COVID wasn’t going to stop you any longer. Usually, during a downturn, property and finance are hit hard; this hasn’t happened during COVID at all.

Apart from the initial valuation issues and lenders pausing lending for a short period, it bounced back very quickly. For those of us who remember previous economic problems, it has taken a lot longer for normality to resume historically so I think this took us a bit by surprise. The days of the last lockdown full of confusion of what we can do seem like a distant memory thank goodness.

What has inspired me through this is just how inspiring our clients are. It’s very easy to batten down the hatches when things get tough, but the courage and energy of our clients really has blown me away.

We have funded everything from the vanilla refinance, through small refurbishments and all the way to full on development – and everything in between. There were challenges with each deal, and it’s been our solid relationships with lenders which has enabled us to deliver on what our clients have needed. Each day brought new lender decisions and criteria so it really was a tricky time!

With all the issues from furloughed staff, lack of seeing and speaking to people, then coping with part time staff around home schooling (of which I helped with), it’s certainly been one of my most challenging years. There have been so many positives though, for example I have never had so many conversations with underwriters and lenders. Perhaps we all needed more than a quick chase up conversation.

As you will know from my previous blog, it has also given me the push I needed to start my own development. As busy as the year has been, I have spent more time listening to people and being mindful of just what we can still learn. Having something else to focus my time in has been really important, and I’ve thoroughly enjoyed it so far – although I’m sure the hard work is to come we haven’t started the development yet!

The lenders have also become so competitive. After the initial drop out of some, so together with the bullish attitude of others, we are able to now offer better deals than ever.  Also, by spending the time in lockdown conversations, we have really benefitted by having sensible discussions that can help with getting a deal across the line or working through getting a better LTV.

Overall, this year has really shown us just how amazing our industry is at bouncing back – both from a lending point of view and investors. We feel so privileged to be part of the industry who have been able to take advantage of this situation which has caused so many problems for so many. I really hope that this year will change the way we view situations too; we are all becoming more understanding of each other’s difficulties and challenges and I hope that we will continue.

There are always winners and losers in tough times.  I really believe that the tenacity of the investor community has shown just how resilient we are.  Onwards and upwards to June 21st and stay safe.

How does an 85% LTV bridge sound?

Here we are at Friday again, although the days all seem to be merging into one! I hope you are all doing ok, for those home schooling like me we’ve got one week left before a slight break of half term which I am so excited about! The irony of children’s mental health week being in the middle of a winter lockdown is not lost on me…

This week we genuinely do have some good news though. After a bleak January and with the stamp duty relief deadline inching closer we really do need it.

Shawbrook Bank have this week re-launched their 85% loan to value bridge. There are a few caveats to this, which I will go into but this is a great sign of confidence in the market moving forward. It allows you to borrow an additional 10% on top of the 75% (net of lender fee) for refurbishment costs.

What you need to know:

  • The 10% is for refurbishment costs, so you need to be spending at least that amount on the refurb. You can spend more (and fund it yourself), but if you spend less than the additional loan will be capped at that.
  • This is for a light refurbishment, so nothing which involves planning or building regulations or any structural changes.
  • You do need some experience, one similar project is enough
  • The maximum loan is capped at 75% of the post works value, so we need to give the valuer a copy of the schedule of works and they will give us a figure to work with.

This is brilliant for so many scenarios:

  • It allows you to borrow additional funds for the refurbishment and this is be upfront rather than in arrears which we often see with typical refurbishment bridges.
  • It suits conversions to small HMOs (up to 6 bedrooms)
  • Any residential internal refurbishment which can include kitchens, bathrooms, heating systems and re arranging layouts where no structural works are required.
  • You don’t have a cap on the amount you can spend on the refurbishment, and the additional funds will go towards this.

As always, we are happy to chat through any enquiries you have. We can let you know whether we think your project is something suited to this sort or product or whether something else would work.

 

Case study: When your simple HMO refinance doesn’t go to plan

Happy New Year to your all! I know it feels like 2021 has been around for far longer than just 8 days.. but here we are on week one of the blog.

For January we are focusing on case studies; as we are often asked what sort of properties we look at and what the benefits are of a specialist broker.  So here are some examples which show the sorts of things we can help with.

This week we are looking at an HMO refinance. Might seem like an easy one on paper but this one wasn’t! The client called me up just before Christmas in a bit of a panic. She had bought a property in summer the of last year with the plan of converting it into an HMO from a commercial building.  Planning was granted and the conversion started all on target but by October she had completed the works and was starting to look for a refinance options.

The broker she was using at this point went back to the lender that was used for the bridge to arrange the refinance, but they gave the property a ‘nil value’.  Now this doesn’t mean the property is worth nothing, but that it doesn’t fit with the criteria of that lender,  therefore is not suitable security. App fee and val fee wasted! The broker then tried another lender and had exactly the same outcome. Both lenders are those which we could call the ‘vanilla side of specialist’ and although they do lend on HMOs, they are strict within this area.  So the client has paid for 2 app fees, 2 valuation fees and no end in sight for the bridge.

The client didn’t know what the problem was, but reading the reports it could be any one or a combination of the following:

  • insufficient demand for that sort of property in that area. For example a property designed for professionals in an area which typically doesn’t see that.
  • Rent which is significantly higher than the market rent you would expect. Even if you can fill the property quickly, and it still fits (for a mortgage stress test) on market rent
  • The property would struggle to be converted back into a family home if the lender did have to do this to sell it on. This can be where we have 5-6 bedroom HMOs with all en suites. It may also include kitchenettes or second kitchens.

The frustrating part is that we have no recourse to challenge the surveyor, or find out why it doesn’t fit with that lender as quite often the lender themselves don’t know!

So what did we do differently? 

After a long chat with the client to find out what she was looking for, we decided to try a more specialised lender. The rates are slightly higher, but we have so much more control over the process. We can choose from some available surveyors and we can speak to the underwriters if there are any issues. This particular property had a great yield even as a single let, so I knew that if a lender saw this they would be fine – as long as I could have that conversation!

The client was so frustrated, worried that her bridge would run out without a solution and frantically trying to find a cash buyer in case we couldn’t find a solution.

We spoke about how much she had spent on the property and some comparables to see what we would be looking at for a value. She had over estimated her original value, and the broker had not given her the original bridge valuation which was frustrating. We got three valuation quotes, as we are able to with this lender, and the client made a decision as to who to go with. Again we talked about the options, our previous experiences with these valuers and the balance between cost and availability.

The application was submitted and we waited cautiously for the valuation. It came in higher than we expected, roughly the total cost of the purchase and cost of works which is what we would normally see for a hybrid valuation. I wasn’t really expecting to see a hybrid valuation given the comments around a lack of demand for HMO room rentals on the previous valuations, so that was a pleasant surprise!

The client was over the moon, she had invested so much time and money into this project. It meant she can not only keep the property,  but also pull some money out to move to another project. She was able to borrow 75% of the open market value.

The offer came through on Xmas Eve – we don’t often get tears over a formal offer, but it really made her Xmas.

The important phrase that we keep mentioning is The Route of Least Resistance.  Investors are not charities, so unnecessarily spending, particularly on small properties, is painful and difficult to recover.  Be realistic about your investment and try to steer away from only focussing on the annual rate.

The avantages of a portfolio refinance 

So how are you all this last Friday of lockdown? I’m sure there will be mixed feelings across the country as we all come to terms with the new tiers we have been placed in. With that and all the Christmas news this week it’s a lot to digest.

This week has been a bit of a crazy one for Baya, last week of the month, in a month where everything seems to be taking extra time, so then everything becomes urgent. We are seeing a good volume of business though, which is great – long may it continue!

This week I’m talking about portfolio financing. This is something that I think gets a bit of a bad reputation as being expensive, but there are so many advantages and it isn’t as expensive as you think. The cost of limited company buy to let’s and HMOs, as well as personal buy to let’s where there is a portfolio in the background is creeping up; we are generally looking at about 3.5-4% for 75% loan to value on an individual loan for each house.  As a comparison, we can get under 4% for an equivalent loan with a bespoke portfolio refinance, so not really that high any more.

So why would you choose a portfolio loan? 

  • As your portfolio grows, the time it takes you to source and refinance each remortgage goes up. How long does it take you to refinance each property and what else could you be doing with this time? Looking at properties separately means providing documentation each time which can be very time consuming. Especially when they are spread out throughout the year.
  • Using one specialist lender for a whole portfolio means that we can often negotiate a lower rate. A few lenders are now looking to compete with high street rates, but with the speed of specialist. They are also generally happy with interest only at a higher loan to value too.
  • There is only one legal fee and arrangement fee. Completing the legal work in bulk is less costly, you will only need one appointment for legal advise and to sign the documents. This means you’ve only got to do it once in 5 years if you want to!
  • Building a track record with a lender is great when you want to buy more properties. When they can see your conduct it does make further lending easier and there is less required from you.
  • If you have some low value properties (under £75,000 generally) or low yielding properties that you can’t maximise the refinance on their own, putting them into a portfolio can help. They can rely on other higher value or yielding properties and lenders will often allow you to add on security which wouldn’t be suitable if it was on its own.

We can often use a desktop valuation rather than a visit from a surveyor. This is great at the moment; it means you don’t need to worry about booking appointments with tenants, but more importantly you don’t have the added worry of a person’s opinion as we are using only factual comparables. In this market I think that this is a huge advantage.

At a time where there are opportunities out there for cash buyers, a refinance to raise capital may seen appealing too. Perhaps an area you hadn’t thought about… ?

We are happy to take a look at your portfolio and see what the options are for you.

 

 

How Covid has changed the property market

We are half way through lockdown, hopefully! How are you all finding it – is  it tougher than previously? This week I am talking about how Covid has changed the investment property market. I spoke about this at last week’s PIN meeting, but I wanted to go into a lot more detail on the blog as I think it’s such an important topic at the moment.

There are two aspects to this; the types of investors who are now coming to the market, as well as the types of property and tenancy.

Who could be the new investors on the block? 

There are plenty of reasons why people may be looking to get into property at the moment. We have had such a massive change of lifestyle and direction this year; many people have spent more time with their family and have realised that they want a career that is more flexible around that. We have all had time to stop and reassess what is really important to us – stepping off the hamster wheel can make you reluctant to get back on it!

Property can offer so much more flexibility in your life, it can be YOUR career on YOUR terms. It will be full of challenges, but also comes with autonomy…  and, of course, the potential for growth.

Grabbing an opportunity…

With plenty of working people having been furloughed for possibly a lot of months, then being made redundant, this may give some the push to use the money and put down a deposit on a property.

A lot of you will also have gained some extra time with less social activities, therefore allowing time to spend dedicated to researching potential areas to invest in and work on strategies.  Netflix or new career research…..????

Also, I think that having gone through this year and the uncertainty it has brought, it has increased the importance of having a diversified income stream. Property can be something to add to your income pot, adding an asset to any savings and/or pension, but importantly it gives an income to take the pressure off in a changing jobs market.

There are also a number of ways in which Covid has changed the way we view particular tenant profiles.

Students

This is a far more resilient market than I think anyone was expecting! Back in March lenders were worried that this academic year would be completely online learning from home; yet we have seen students return or go to university. They are craving any kind of normality it seems! There are also benefits to house sharing in HMOs over student accommodation at this time. It’s generally smaller bubbles and you have got more communal space if you are limited with your external social life. There’s also the option to encourage a two year letting period taking away the need to find and view somewhere new to live. This gives you the option of somewhere to stay during the summer if you’re not able to go home.

Long leases 

In this uncertain market, lenders and landlord are crying out for some guarantees, and that’s what this can offer. For a long time any lease over 12 months was a big problem, but now we have at least three lenders who are looking at this, and at competitive rates, on a 75% loan to value, interest only product as we discussed previously. The yield may work out slightly lower, but when you take out voids and repairs you aren’t far off what you would get for a professional tenant. This is definitely a growing market and something I’m sure we will see more of.

Holiday let’s

UK holidays are going to be the way forward for the next few years. I’m sure many of us (myself included!) enjoyed a fantastic UK holiday this year, and it’s made us all realise how many places there are for us to explore in the future. It’s a cheaper option, and for many that will be a big consideration next year. It’s also far more flexible with bookings and pets – abs is far more environmentally friendly!

As an investor, your self contained unit is going to be far more attractive than a hotel or B&B in these covid times. Lenders are becoming more open to these options too. We have a lender who will now allow you to purchase on a bridge to carry out some works and then move to a term mortgage in 9 months so you don’t need to worry about initial rental voids. This gives you some time to get it all ready to hopefully open once the weather improves and restrictions are over (big fingers crossed on that one!).  Also, there is a market for working away from home – which gives potential for the times of the year not traditionally busy.

We are again seeing lenders more open to holiday let’s, using both the market rent as a 12 month tenancy or the passing holiday let income if we have a proven track record.

Cities vs Suburbs

Priorities are changing for tenants. It’s no longer so important to have access to cities and towns and tenants are now favouring larger spaces both inside and out. Outdoor space has become far more desirable, and a home office or space to work is now a massive selling point. Other, more rural locations are becoming more attractive, which may open up new opportunities as investors – perhaps your local area, or something which is affordable that wouldn’t have worked previously for an investment property.

With change comes opportunity, and as a resilient group of investors I really feel that over the next few years we will see so much of both.

As always, call if you have any questions. Look after yourselves, only two more weekends to go – fingers crossed!

The benefits of a broker who wants to build a relationship with their clients

Good morning all, I hope you’ve had a good week.  This week I’m going to talk about the benefits of a broker who wants to build a relationship with their clients.  We differentiate ourselves by doing things a bit differently to most mortgage brokers, and this is how.

We are not a headline broker!

I have always said to our clients that we never try and lull them in with amazing but unachievable rates.  We want you to come back again and again, so doing the right thing is key.  When we quote a client on day one, we will do all we can to ensure that we deliver on that quote.  Things can change, and obviously the valuation can change things but in the majority of cases this is what we complete on.

The rate is also not the most important factor in choosing a lender and a broker.  We are conscious of the route of least resistance, that trying to fit a square peg in a round hole is extremely time consuming and probably won’t end well!  We have worked with our lenders for long enough to know that sometimes even when they say they offer something it generally doesn’t happen.  For example; we have a lender who says they lend to ex-pats, but in reality they make it so tricky its just not worth it.

We don’t like to over commit and under deliver.  We run our business on returning clients and recommendations and want you to love the service we provide.  We will spend time talking through deals and we have plenty of experience handling unusual cases; so whatever curve balls are thrown our way we can usually deal with them!  You will benefit from the relationships we have with our lenders, and their trust in us.  Recently we have managed to complete on a few cases without the exact information the lender required, challenged where we can to achieve something that others just wouldn’t be able to – or take the time to do.

We are transparent with you – if anything changes, we will let you know straight away

This is really important at the moment, as lenders are changing criteria like the wind.  There has been a number of examples recently where we have changed lenders after we have submitted a case as things have changed.  We want you to have all the options available to you, and we don’t want you to be disadvantaged due to COVID, or anything else which is outside of your control.  This gain can be time consuming but we will always put in that time to ensure you have the outcome you need.

We will not step off the accelerator until solicitors have completed

There are some brokers out there that will get to formal offer and stop chasing.  They just don’t have the time or resources to be able to keep speaking to solicitors; trust us, it can be very time consuming. But Baya will chase to the end and we know that this can be the most frustrating part of the transaction, so we are there ready to fight on your behalf!  We know that time is money, and delays on your purchase or refinance can have cost consequences.

Baya financial is a safe pair of hands.

Enjoy your weekend.