Should I sell, mortgage or split?

by Readers Question

8:21 AM, 2nd May 2014
About 7 years ago

Should I sell, mortgage or split?

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Should I sell, mortgage or split?

I own outright (no mortgage) a freehold building in Bristol which is divided into four one-bed flats. sell mortgage or split

The value of the building is £220,000 and rental income is £21,900 per annum.

I need to raise £100,00 as soon as possible.

I’ve had an offer of £210,000 to sell.

I have a offer of a mortgage for £100,000 @ 4% above bank base rate.

I could also create 4 separate leaseholds and sell the flats individually for circa £60,000 each.

My dilemma is whether to sell, mortgage or split.

What would you do if you were me?

Regards

James

 

Comments

Jerry Jones

8:33 AM, 2nd May 2014
About 7 years ago

Split the title and mortgage some or all of the flats. That way you are not a motivated seller giving away part of your equity. I would imagine it also is likely to be quicker.

Graeme

8:44 AM, 2nd May 2014
About 7 years ago

Hi James,
Agree with Jerry, above, if you have enough time.
Split and sell 2. Then you've got the £100K you need, possibly with some cash left over, and you will still own 2 flats outright giving you that excellent 10% return.

Sell the 2 flats with 85 year leases which means that in 10 years time the lessees will need a lease extension and you as the freeholder will get the premium for granting an additional 90 years.

Neil Patterson

8:52 AM, 2nd May 2014
About 7 years ago

Reply to the comment left by "Jerry Jones" at "02/05/2014 - 08:33":

I too am a big fan of splitting the titles for the simple reason it just gives you so many more options.

Easier to sell smaller properties and you don't need to sell them all.

Easier to finance individual leaseholds on standard BTL if you wish as well.

Mark Alexander

8:54 AM, 2nd May 2014
About 7 years ago

Hi James

I suppose it depends on how desperate you are to raise the £100,000 and how far down the line you are with each of the transactions.

The properties are producing a nice rental income and if you want to retain at least half of that, stay mortgage free and raise £100,000 or more then taking a mortgage or bridging finance in the short term would probably be the best way forward. Do consider bridging finance and seek professional advice from a whole or market broker, preferably an NACFB member. Bridging finance may appear to be more expensive at first glance based on interest rates alone but by the time you factor in lenders arrangement fees, early repayment charges and other costs associated with a mortgage you might be better off with bridging finance.

If I were you I would consider finance to raise the cash first.

Then I would get professional advice in respect of creating 4 leasehold and retaining or selling the freehold interest. The ground rent income associated with the 4 leasehold could be in excess of £1,000 per annum and investors will buy this interest for circa 20 times the income should you decide to sell that element of the deal.

£60,000 for a one bed flat in Bristol also sounds cheap, have you taken any professional advice on this? To get some comparables without it costing you anything check out our Property Research Tool >>> http://www.property118.com/property-search-tool/

Once you have all the initial finance and all of the paperwork ready to go in respect of the creation of 4 separate leases you have several option. For example:-

Option 1 - Market the flats with a view to selling two of them. On the day of completion of the first two sales you can complete the conversion of the property into leasehold titles and pay off any finance.

Option two - apply for separate remortgages on two or more of the flats in order to repay the short term finance and create the leaseholds simultaneously on the day of completion.

Consider whether you wish to sell or retain the freehold revisionary interest of the property. Whether you sell or hold this element of the deal you will probably need to appoint a freehold management company to deal with everything for you as this is very different to managing properties let on AST's. The purchasers or your own mortgage lenders will probably insist on this. I have previously used the services of Annette Stone of Grangeview Management Limited to manage one of my own freehold revisionary interests and she subsequently purchased the property off me. I can't recommend Annette or GML highly enough. I met Annette though this forum, her member profile can be found here >>> http://www.property118.com/member/?id=384

Personally I would not sell anything other than the freehold revisionary interest in the property. I would gear up and try to buy something similar as this looks like a very nice deal. Why sell the Goose that lays the golden eggs? If you can generate a 10% gross yield (say 7% after costs) and only pay 5% interest it seems to make sense to hold doesn't it? If you think property values will rise then holding is even more compelling. If you need the rental income I'd still hold if I were were you but only after a lot more consideration about the merits of gearing up with finance vs staying mortgage free.

With regards to considering your financing options I would recommend you speak to Howard Reuben at HD Consultants. I also met Howard via this forum and have since referred literally hundreds of landlords to him and the feedback I've had has always been incredibly complimentary. You will find Howard's member profile here >>> http://www.property118.com/member/?id=314

Hope this helps and at least gives you a few additional angles to consider.
.

Howard Reuben CeMap CeRER

9:15 AM, 2nd May 2014
About 7 years ago

Reply to the comment left by "Mark Alexander" at "02/05/2014 - 08:54":

Thank you Mark.

James, when I read your question my initial thought was exactly as Mark detailed above, so by the time I had read all of Mark's reply I am now left with not much else to add except, if you would like to consider all options, my details are as per my member profile.

One thing I can add is that I am actually in the middle of progressing a short term lending (bridging finance) solution for another Client who is more or less in exactly the same situation, although he is buying rather than remortgaging, a property that he is splitting the title on.

Because of what he is doing and also because of the 'need for speed', a bridging loan is indeed the most appropriate financial tool to secure his key objectives.

By the way, for most people who have not used bridging finance before, the long held belief is that it is 'expensive', however there are heavy refurbishment deals from just 0.89%pm, so if you only need it for 3 -4 months, the max interest you would pay is 3.56%. I believe that this is still relatively cheap borrowing to secure urgently required funds.

And, finally, on your situation, a £100k loan on a property valued at £210,000 is an excellent low LTV too, so I am sure we could assist in attracting the right lender and proposition.

Hope that helps.

James Noble

23:36 PM, 2nd May 2014
About 7 years ago

Hello All, Many thanks for these wise words of advice. It sounds as if I have more than the three original simple options. Indeed, it sounds as if I can have my cake and eat it. Splitting, and financing by a variety of methods looks like my best (and most recommended) option, allowing me to raise the necessary cash whilst still holding onto at least part of what is a very good investment (and I should add, has been managed in a very efficient and economical manner by my local agent.) I shall spend the weekend reading through your comments again in depth. What a useful site this is! James.

Neil P

14:33 PM, 5th May 2014
About 7 years ago

Nobody has mentioned tax implications on the disposal alternatives? Surely that could have a huge bearing on the final decision?

James Noble

21:15 PM, 5th May 2014
About 7 years ago

Hello Neil, Yes, this is something I've considered. Selling all, I'll have a profit of should push CGT payment to around £30k, less deductions and exempt amount leaves CGT on £14k profit, less also legal and estate agent's fees, which around £2k. Mortgage - fees on a £100k loan will be £5k. Splitting - some CGT may be postponed, depending on when and for how much each flat is sold. Sell two (which is one possibility) and CGT may be reduced, with the help of annual exemption. But then again, I'm hoping to make a bigger profit, so CGT may still be based on a £14k profit, for just two flats, this year. But I'll settle for that! The bigger the CGT, the better! Finally, I'm also looking seriously at Mark's suggestions, and hope to run these past my solicitor later this week. Thanks. James.


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