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I have been carefully considering my options for a property purchase and have some priorities - No mortgage, no ASTs, no licences, high yield, minimal direct ownership. My experience is mainly with lodgers and a few short term lets, although I have had 1 AST let.
I'm particularly focused on mixed use properties, preferably 1 commercial unit with 2 residential units of unequal size. The income from the commercial is self explanatory, the larger residential unit will be shared with lodgers, the smaller unit will either be let on a unregulated tenancy or short term let. This is all reasonably straightforward if I purchase in my own name, but I don't want to do that!
If I purchase the property within a company several issues arise. I will be a tenant, therefore I will require an HMO licence if I have more than 1 lodger. I will no longer be a resident landlord so the smaller unit will default to an AST if let long term, so I will be limited to short term lets. If I don't pay the company market rent, I may be liable to BIK taxes, although if the company receives the income from the short term lets this may not apply. I believe, as it is a dwelling, it will also then qualify for the additional stamp duty - 'mixed use' appears to be only for sole trader purchases.
One solution I have considered is to split the property into 3 leasehold units. I would take a short leasehold on the larger unit, 7 years plus, so my direct ownership would be minimal. I could also arrange a R2R agreement between myself and my company for the smaller unit. I would then retain the resident landlord status on both units. There would be no BIK tax liability. This would also allow me to sell the commercial unit to my pension if this was advantageous. I would need to create a freeholder as there would be 3 leaseholders, myself, my company and my pension.
There's no question attached to this, I'm just sharing as it may of interest to somebody. Obviously, professional advice would be required, but I'm amused at what the mind can conjure up if you ask "what if?" enough times.
"...I will be a tenant, therefore I will require an HMO licence if I have more than 1 lodger..."
I'm curious as to why this would make it an HMO - so aren't the residential units totally self-contained?
"...I believe, as it is a dwelling, it will also then qualify for the additional stamp duty - 'mixed use' appears to be only for sole trader purchases..."
A mixed-use property like this is classed as non-residential for SDLT purposes, so no 3% surcharge.
The HMO exemption for 2 lodgers specifically applies to owners, not tenants. As a tenant with 2 lodgers I would have an HMO, as an owner with 2 lodgers I wouldn't.
If the residential units weren't totally self contained (e.g. an annex) this would also create an HMO under S254. Even if they were self contained, but there was no evidence of 1991 Building Regs this would create a S257 HMO. As I don't want to require a licence its best to avoid HMOs.
I'm happy to be wrong regarding the mixed use SDLT. I notice that SDLT within a company structure refers to 'dwelling' which is not synonymous with 'residential property'.
I'm happy to be wrong at any time, as I often am, as long as I'm learning along the way.
Yes a tenant with two lodgers is an HMO, but an HMO of three sharers does not usually require a licence.
I'm looking at South Wales, Selective and Additional licencing and Article 4 if I'm lucky.
Apologies for a slight tangent to the thread - I just wanted to ask you if it's a good time to be getting into commercial units with business rates and online retail killing the high street and likely another recession on the way.
Genuine question I don't know the answer to, so interested to hear thoughts on this.
Its a very good question. This will be a new strategy for me, but I am attracted to the small business that has been in place for many years and properties that are sold with a 10 year+ FRI lease. I've looked at hairdressers, fast food, cafes, pharmacies and post offices that inspire confidence, but nothing's guaranteed. Yields are around 5 or 6% on the commercial aspect, which may be a bit low for a commercial investor but are adequate for me. The residential aspect is usually shabby and often vacant, which also appeals.
As a comparison I could buy a 3 or 4 bed terrace or semi for around the same price. As a resident landlord that would achieve the same residential income but there would be no commercial element. Resale would clearly be easier but that is not part of my plan.
At the moment its all academic, but I have accepted a good offer on my one and only rental property, so I may soon be in a position to follow my instinct.
So if purchase price is the same and residential rent is the same, then the commercial element is basically the bonus.
Am I understanding you right here?
Yes, that's my understanding. Its a similar strategy to HMOs but without all the extra legislation.
The payoff is resale and capital gains.
Would you mind if you get a minute Gary running the numbers please for the example you mentioned:
1/ Purchase Price of 3/4 bed terrace
2/ Gross Rental Income of 3/4 bed terrace
3/ Purchase Price of Mixed Use
4/ Resi Rental Income from the mixed use
5/ Commercial Rental Income from the mixed use
Tell me to bugger off if I'm being too intrusive, just find this a very interesting topic!