Positive planning and building to sell?

by Readers Question

9:27 AM, 14th September 2015
About 3 years ago

Positive planning and building to sell?

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Positive planning and building to sell?

Following the adage that one should prepare for the worst and expect the best, I am sure we are all dreaming up plans of how to cope with the outrageous attack on landlords by the Conservative Government. I am assuming we will get the lunatic tax change reversed. However, I like to have a Plan B, C and preferably D up my sleeve.positive

My Plan A which I am considering implementing soon, is to buy a plot, build on it and sell the property built. My (wide-boy) local estate agent tells me that I can purchase a building plot for £80,000, build a house on it for £80,000 and then flog it for £220,000 (obviously the figures will be very different in different areas of the UK).

Never having done it in this country I would like to ask for people’s opinions: are the figures realistic for the house build? What costs would I incur and what taxes? What are people’s experiences of this?

The plan is that if I could turn around one of these in 6-8 months (realistic?), and if I could clear £40,000 in profit, I would be building up a tidy amount to combat the tax grab and allow me to sell my portfolio at a time of my own choosing, instead of the forced sales scenario the Government is inflicting on us.

I don’t know how realistic this is for others – I have some savings to get me started – but it would be good if someone has finance advice relevant to this discussion, too – as then it might be a tactic others could also adopt. It is obviously risky as it involves more investment in property at a time when many of us feel like washing our hands of it, following the Government’s betrayal of us as business people. It also depends on how easy or difficult it is to find building plots and we also have to hope there isn’t a drop in property prices. But, as we know, us entrepreneurial landlords have always been willing to take the risks that the more timorous haven’t.

Anyway, I am hoping that some of you with expertise and experience in this can assist and that this thread can be a useful resource. I am aiming to post some other POSITIVE PLANNING threads in the near future and would encourage others to do the same, if they want. We can share our good ideas and really support each other through what is a very difficult time.

Ros



Comments

Neil Patterson

9:42 AM, 14th September 2015
About 3 years ago

Hi Ros,

I love a bit of positive thinking and when I was on the mortgage desk at Barclays many moons ago my absolute favourite type of customer was the self builds. They were by far the most interesting and you got to spend much longer with a customer helping them, and seeing the property go from a plot of land to finished was very satisfying 🙂 Also everyone one else was scared of doing them so I got all the self builds - double bonus.

The hardest bit really is finding the right plot, making sure you plan for the right type of property for that plot and area and then beating the competition to it. You will often be up against a builders who have the advantage of reduced costs by building themselves so they can afford to offer slightly more than an investor that has no building expertise to call upon themselves.

The finance is usually done in stages with a typical LTV of 65%-70% at each stage eg purchase, foundations, first floor etc. The LTV can be higher if you are building your own main residence.

As a very rough rule of thumb you are normally looking for 1/3rd purchase costs 1/3rd build cost and 1/3rd profit, but this is harder if you are not the builder so will be a little less profit.

I would be a little concerned with a planned profit of 40K on a 220k property as one thing I know for sure is it nearly always runs over budget and the lenders will be looking for a bigger margin if possible for their own security.

If you find anything and need help give me a call as I love a chat 🙂

Mark Page

14:08 PM, 14th September 2015
About 3 years ago

try this http://www.jewson.co.uk/working-with-you/for-self-builders/preliminary-planning/calculators/build-cost-calculator/
bear in mind a single plot better to go for a 3 bed if you can and the difference between standard build and high quality is £900 to 1300 per m/2 so a typical 120m/2 house may be 120K to build

Dr Rosalind Beck

14:34 PM, 14th September 2015
About 3 years ago

Thanks Neil and Mark.
A few questions:

Neil - so would I go to a specialist broker to get a 65-70% mortgage to purchase a plot? Any ideas of the interest rates on that sort of thing?

Mark, where the calculator says floor area I put in the 120 sq metres as you suggested and then put in '2 floor' - I assume that means roughly 60 sq metres per floor - is that correct? This was what came up, in case others are interested (I did standard build as in my area there's not a lot of money sloshing about; I also put in self-managed ocntractors as I like to be in charge):

The cost/m<² is £786. This means the average build cost for a floor area of 120m² will be £94,320 .

When I had my cannabis farm (well, not me literally - my charming tenants) and I was accused of having under-estimated the rebuild (the conversation went like this: 'Why did you put £140,000 as the rebuild value?' 'Uh, because I know I can get it built for that') - I had to get quotes for completely demolishing the house, taking it all away and rebuilding it. That might come in useful now as I learned a lot about all the different stages in building a house - on paper, at any rate.

Can anyone run me through the issues regarding VAT and tax though? I don't want any nasty surprises. For example, if I made £60,000 profit, would I then be taxed 28% as a capital gain or 40% as income tax? Excuse my ignorance - this will be a learning curve for me.

Neil Patterson

14:43 PM, 14th September 2015
About 3 years ago

Hi Ros,

Unless you really are an expert you will need a commercial finance broker or at least see your own personal bank's commercial team.

Rates always depend on perceived risk so if/when you need help just email me offline and I will get one of our NACFB member brokers to give you a call 🙂 npatterson@property118.com

Claire Smith

16:26 PM, 14th September 2015
About 3 years ago

You may want to read the propertywire neswletter which has a report on self builds.
http://www.propertywire.com/news/europe/uk-self-build-study-2015091110974.html
Another suggestion that I have heard is to increase pension contributions to bring your taxable income back down to basic rate. You won't get your money until retirement age, but at least the government can't get their hands on it!

Dr Monty Drawbridge

14:10 PM, 15th September 2015
About 3 years ago

Ros, IME it is better to develop for resale through a company or LLP. Lenders like each project to be isolated. In the past it has been better for tax too.

Dr Rosalind Beck

20:39 PM, 16th September 2015
About 3 years ago

I popped into a local estate agents today to ask about plots. He said there is one coming up on which there is permission to build 2 x 3-bed houses. For the two plots together they are asking £90,000 (for one the price is £50,000). The estate agent reckons the completed houses could sell for £175,000 - he didn't mention build-quality. I am wondering how I go about finding whether houses really would sell that easily or if I might get lumbered or have to drop the price etc. I don't know the specific area for a start. It's got a fairly posh name for the valleys, but I'd have to look into it. When I used the calculator supplied by Mark, I got a build price of about £95,000 - but I drive a hard bargain when it comes to builders so I'm wondering if I could get the builds done for closer to £75,000. I was told 'services' are there, but again, I would appreciate any ideas regarding ball-park figures for connecting up. Don't go to too much trouble anyone, as I'm only considering it - just if you have the experience you might want to share it and maybe others could also use the info.

Roger Rabbit

23:01 PM, 16th September 2015
About 3 years ago

The cost of building a house isn't just the cost of building a house.

On purchase of the land you will have stamp duty and legals.

You will have the council community infrastructure levy which in some councils can be higher than £300/square meter so a 100 sqm build will need you to write a cheque to the council of £30,000!! Of course some councils are a lot cheaper eg £50/sqm. Check with the council website

You will also have other building costs. For example a driveway or road leading to the property which can be £100/sqm.

you will have planning permission fees

you will have fees to erect a boundary fence or wall. A simple brick wall is surprisingly expensive at >£80 per meter. So if you have a nice big garden say 30 meters long and 10 meters wide. To erect a 70 meter brick wall (30+10+30) will cost you nearly £10k. Could of course use cheaper wood fences but any good buyer will know thats a cost cutting measure

Utility connection fees

legal fees on sale. agent fees on sale

finance fees (think of a mortgage that might have £2k in fees and you pay maybe 9-12 months in interest on the money you borrow)

architect fees

risk and time too

none of the above should put you off however do your sums as best you can so you dont take on nonviable plots or projects.

Roger Rabbit

23:17 PM, 16th September 2015
About 3 years ago

forgot to add. You can potentially get a discount on building plots especially in areas of lower demand

If you go to view a £150k house and put in an offer of £75k you will likely be laughed at. If you go to view an £80k plot and put in an offer of £50k and tell them to call you back even if its months later you have a chance. Often the owner of the plot would have only spent a few thousand pounds at most truing it to a building plot so £50k is still a lot of profit for them and you may be the only interested person

of course in areas of high demand its not likely to work

Dr Monty Drawbridge

13:41 PM, 17th September 2015
About 3 years ago

I think utilities (gas water and elec) connection / upgrade set me back £10,000 for the last conversion I did (3 units). That is works in the street up to the boundary (including new infrastructure charges). Water is the priciest, elec the cheapest.

Also, you will need to provide a 10yr insurance backed warranty. This can be expensive first time round. Ballpark 5k for two houses, possibly more.

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