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  • Property-a-holics

    Art of the deal- scrutinize my plan

    Hi All,

    First of all just wanted to thank Property tribes for the great content it provides and the community that contributes such valuable knowledge and opinions. I'm hoping to gather some opinions/scrutiny on the plan I have for an opportunity that has come up.

    I  currently have no properties, but my parents have always renovated the houses we have lived in- rather large projects and have rented out two properties .My fathers step dad was looking to downsize, the property was valued and I offered to give him the asking price ~190k for a 3 bed end terrace corner plot: there is a lot of junk in the house/needs a thorough clean but the fundamentals are good, new roof, boiler etc. with a small refurb (3-5K) others are going for 220k mid terrace and the other corner plot went for 245k.

    Stage 1

    Plan would be I buy the house on a residential mortgage putting down around 30% deposit (with a gift from dad) we renovate it (dad is a plasterer), look to re-mortgage(~6mnths later) on a btl aiming for the valuation 220 @ 75% ltv leaves around 20-25k in and a rent of ~900pcm (all figures given by estate agent who valued property) My father and I would split the rent which may net 250pcm each. Estimated ROI= 3000/12500=24%  or taking into account increase in equity 6000/55000= 10% ROI

    Stage 2

    Being a corner plot there is scope ( granting planning permission) to build another house. My fathers friend has some experience with this hand could project manage. Total costs could (assuming VAT free) could equate to around 60k (possibly self funded). Assuming it would be valued at the same price at 75% ltv on a btl , 0.75x 220= 165k - 60k (building costs) = 105k and rented at 900pcm.

    Obviously there's a lot here that could go wrong, and I wouldn't attempt something like this with the experience of my father, but what do you make of the plan and where could it fall down? would remortgaging after 6mnths on a variable mortgage with no fees to a btl put a bad bad mark against my name for future residential mortgages? I'm aware the stress tests are something I'd need to account for (may only get 70% ltv on mortage for the new house). Regarding planning permission I believe in-filing is looked upon favourably by the council but if stage 2 doesn't materialize there is still enough profit in the deal to make it worth while.

    I look forward to your scrutiny, hold nothing back!

    Thanks

    Jordan

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    Hi Jordan,

    Welcome to the tribe and thank you for your kind comments.

    With regards to using a residential mortgage to purchase with a view to turning into a BTL mortgage after 6 months - I don't think that is an efficient way to do this, let alone the issue of the "intent" behind your application for a resi mortgage.

    There are specialist BTL products which allow you to purchase, add value, and then refinance.

    At this early stage, you need to understand the financial products you, as a individual, have access to as this will stop you wasting time on strategies that will not work for you, as well as bringing clarity to the actual direction you can take.

    In the first instance, I recommend speaking to the highly experienced team at Property Tribes Financial Services on 01206 654444.  They will assist you in finding the right finance to achieve your goals.

    Finance is the lifeblood of any property business, so it must always come first, and an experienced broker will work with you long term to achieve your property goals, so get one on your side from Day one.

    See - Benefits of using a mortgage broker for BTL?

    Hope that helps for starters and good luck!

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    Hi Vanessa, 

    Thanks for your reply.To clarify I have spoken to a mortgage advisor and I agree that buying resi then converting to btl isn't the most efficient way however I have funds tied up in lifetime  isa which I need for the deposit and and also first time buyers stamp duty exemption which both can only be used on a residential mortgage
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    I think the "intent" still applies which Vanessa has mentioned. You're still looking to use the residential schemes on offer by the government to use for BTL which is not what it is designed for. If caught I think you'll put yourself in unnecessary problems.

    Just buy a residential. Stay in it for a year or so and then get consent to let from the same provider provided that lender allows this. 

    Just don't go down the road of using residential for BTL mortgage. I think you're opening yourself to things you don't want to especially with the sector rules getting more and more stringent. Don't ruin your long term strategy for short term gains. That's my opinion
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    Saagar

    Disclaimer: I have no legal expertise nor am I a qualified advisor on any subject. A humble landlord using an open forum to exchange ideas and experiences. 


    Thanks for your advice Saagar, I agree the 'Intent' may cause an issue and in an ideal world I would use a BTL from the start but I already have money tied up in a Lifetime isa etc. Also keeping it on a residential mortgage I wouldn't be able to pull any of the equity out after renovation which would dampen the figures significantly. 

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    Might want to speak to a good mortgage broker for advice as I think your assumption is wrong.

    Some lender allow further advance after renovation. Similarly some lenders allow to borrow based on what the ultimate build will look like. There is normally a lender for most scenarios so finding a good mortgage broker is key. Look for one that covers whole of market or at least 90% of the market. Some high street ones based in estate agents have only like 20 lenders on their books and their knowledge is limited so don't go with them.
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    Saagar

    Disclaimer: I have no legal expertise nor am I a qualified advisor on any subject. A humble landlord using an open forum to exchange ideas and experiences. 


    Its the salary multiplier which is the limiting factor on a residential mortgage for me, I'm already at the top end of borrowing and having to make up the difference in deposit so I wouldn't be able to pull any out after renovating unless I change to a BTL.Ill have a chat with my mortgage advisor again though

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    One thing you have over looked is the tax implications for you and your parents if buying below the true market value.

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    Hi Douglas, thanks for your reply. How is BMV assessed in real terms? the property is worth 190 in the current condition, which was the average of two evaluations- its only if money was spent on it, it could be worth more. Is it IHT which you are referring to?


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    Buying property below market price is ok , when you are buying from family HMRC will be all over it.

    They could demand to see valuations and compare with local properties. Also could claim the under value v true value was a gift Iht should be looked at as well..also should parents go bankrupt at a later date the official receiver has the right to over turn such transactions.

    Also it is important that both parties get independent legal advice- both sides use separate lawyers for sell and purchase for any conflict of interest.

    One big point is should you marry or be married and you fall out, the house would be part of any settlement - something your parents did not intend.

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    Hi Jordan,

    Your value in stage 2, have you taken into consideration the reduced garden sizes for both properties?
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    Omega Property (Formerly SBS Ltd.)

    I am not professionally trained to give advice, generally posting for the benefit of the community or my own personal development.