Flat conversion and financing strategy

by Readers Question

4 years ago

Flat conversion and financing strategy

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Flat conversion and financing strategy

Let me first take this opportunity to thank Mr Mark Alexander and team for creating this excellent encyclopaedia for landlords. I have decided to venture into converting house into flats.

We are in process of converting a 3 bed semidetached house into 3 one bed flats. I have enough equity to cover this conversion. I am looking to keep all the flats as buy to let and not planning to sell.

I wonder what would be the best financing strategy to release maximum equity: a multi-unit property mortgage from commercial lender or creating new leases and get a standard buy to let.

The house without conversion is valued at £500k and each flat will be valued around 300k.

Many thanks for your help.

Sonnyflat conversion



Comments

Neil Patterson

4 years ago

Hi Sonny,

First off is my health warning that you should not act upon generalised advice for a specific project and borrower. Lenders criteria, and the decision of which lender and type of loan to use depends on hundreds of individual factors specific to you and the project.

However one very good reason for splitting flats into individual leaseholds is the increase in options this gives you. It is easier to find cheaper off the shelf Buy to Let mortgages for these individual flats and you also then have the option to sell them individually at a later date if you wish.

It may not be easy though to place BTL mortgages on all the flats. Lenders have exposure limits for the percentage they will lend on in one block. You still may find you need to consider one commercial loan over the whole property dependent on circumstances.

Therefore it is vital that you investigate and get decisions in principle on the finance before you make an irreversible decision on how to split the property.

Obviously dependent on the cost of conversion the uplift in value from one house to 3 flats seems very attractive.

If you need any assistance just let me know 🙂

Mark Alexander

4 years ago

I concur with everything Neil has said with regards to splitting the title to create separate leasehold flats. This is almost certain to enhance the value of the development on the basis that separate units will appeal to the widest possible audience of buyers whereas the property on one title deed will only appeal to investors similar to you.

Please take advice from a good accountant and solicitor combination who thoroughly understand this type of transaction. Let the accountant be the lead. I use this chap >>> http://www.property118.com/member/?id=452 and he's brilliant.

It may be beneficial from both a tax and cash raising perspective to sell one or more of the units in the open market. This will also determine comparable values for the others.

If you don't know much about freehold management then I recommend you speak to Annette Stone who has managed freeholds for my family and also purchased one from us - see >>> http://www.property118.com/member/?id=384

I can't really comment too much on finance because there are some pieces of the jigsaw missing, e.g. mortgage outstanding now and cost of conversion. In terms of getting advice on financing I would recommend that you speak to a commercial finance broker who is a member of the NACFB. If you can tell me where you are based I will happily refer you to one who would be willing to meet and discuss your options with you at no initial charge and in complete confidence of course.
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Mark Alexander

4 years ago

PS - thank you for the compliment 🙂
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Sunny K

4 years ago

Reply to the comment left by "Mark Alexander" at "29/08/2014 - 10:55":

Many thanks for your comments. I am working on similar lines but a few problems.
a. Legal: Transfer freehold tittle from personal (partner and me) to our limited company (it seems I need two separate conveyancer for each end of transactions) and creating 3 new leases. This amount to about 3k of legal fees. And additional money for stamp duty!! I might keep the purchase price below 125k to avoid it but don’t know whether that’s legal! We may also get around by keeping the freehold in personal name and granting leases to individual/limited company.
b. Mortgage: Difficulty in getting standard BTL mortgages for new built flat (at least for the first 6 months) vs higher and limited rates of commercial mortgage.

Hence we decided to start with commercial mortgage and move into leases in couple of years’ time. The property is based in west London and has outstanding 65% LTV BTL mortgage. I have similar houses on my BTL portfolio and might consider converting them depending on outcome of this test case.

Sonny

Mark Alexander

4 years ago

Reply to the comment left by "Sonny Kagdi" at "29/08/2014 - 12:00":

Hi Sonny

It is for these very reasons that I suggest utilising the services of a good accountant.

For example, one of you could retain the freehold interests and transfer the leasehold CGT free to your spouse. Commercial mortgages tend to be far more expensive than BTL mortgages. Also, the use of a limited company can reduce financing options.

Accountants fees, legal fees and broker fees tend pail into insignificance in transactions of this nature when compared to the benefits.
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Renovate To let

4 years ago

I will just echo the need to take personalised advice (from your accountant/tax advisor and from a good broker who has access to both commercial and BTL finance) based on your financial circumstances combined with your life plan and goals.

If your desire is to hold for a long time then leasehold conversion may not be the right route. If you keep the whole property in your name then simple commercial finance can be obtained on the building, and will be based on somewhere between the bricks and mortar value and the market value yield from the 3 lets (a key here is the nature of the surrounding properties - are they family homes or other flats?).

If you split, you need an entity (company) to hold the freehold and then finance for the 3 units (probably from different lenders to overcome their "too many in one block" restrictions). This will result in lots of fees for the leases, the holding company and the set up fees for up to 3 mortgages. However, you will then have 4 separate "things" you could sell or pass on individually rather than 1!

If your desire is to sell, then creation of 3 leases and packaging up the freehold gives 4 saleable units and will maximise value. There is, however, no need to do this (and take the associated costs) now IF your plan is hold and let......

Whatever route you take, make sure you keep meticulous records re the planning consent and building control completion for the conversions as this is vital in order to sell on any flats under a lease to a buyer needing a mortgage.

Key point is to speak to a professional advisor who is also an investor in their own right.

In my case, I worked out the cost of both options and had valuations done both ways - holding as one freehold in my own name was the right route (as the commercial lender valued the property almost completely on the basis of the professional tenant yield I was achieving and so the sum released met my needs).

It is also well worth getting up to date advice about the lending appetite on newly created leases - criteria and therefore the list of eligible lenders keep changing.

Sunny K

4 years ago

All great advice. I agree with need for personalized advice especially as this is one of three jobs for both of us. Unfortunately most of the brokers and accountants we have seen hardly understand our requirments and start selling us other products.

Neil Patterson

4 years ago

Hi Sonny,

Sounds like you just haven't found the right people yet. Our accountants and commercial finance brokers would not be phased by your scenario as it not an uncommon project to deal with.

Please do remember that fully qualified and insured accountants will not give you advice in isolation and will need to take over your tax affairs to complete the whole picture.

Mark Alexander

4 years ago

Reply to the comment left by "Renovate To let" at "29/08/2014 - 13:29":

Great post and in your case, given the investment valuation suited your purposes the advice you received in clearly right for you. However, in many cases the valuation of three leaseholds will be greater than either a bricks and mortar valuation or an investment valuation of the unit as a whole, thus potentially affecting the the level of finance which can be raised.

For these reasons is well worth investing time and money into understanding the options available in order to make informed decisions.
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Mark Alexander

4 years ago

Reply to the comment left by "Sonny Kagdi" at "29/08/2014 - 14:30":

Hi Sonny

I agree with what others have said in that some of the best professional advisers in property are also into property themselves.

One of the reasons we created Property118 was to introduce people to professionals we know and trust ourselves.
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