Jo: Hello, welcome to Property Question Time. I’m Jo Grimwood. Now this is the show where you get to pose your questions to our panel of property experts. And joining me here in the studio today, we have Simon Zutshi who is the founder of the Property Investment Network and author, welcome to you Simon.
Jo: And we also have Evan Maindonald who’s founder and CEO of MELT Homes. Welcome, Evan. Also joining me remotely, I have Paul Mahoney, the MD of Nova Financial, who has offices both in Australia and in London. Welcome gentlemen.
I think we’ll get cracking with some questions. So Simon, I’m gonna start with you actually. “I’m about to move into a house. My current house will be empty, so I’m looking to rent it out. I’ve had a couple of letting agents out to look at it. For a fully managed option, they’ll charge about 10 percent of rental income. However, we have a friend who although can’t afford to pay the market rate, is desperate to rent the house. I’m prepared to take the reduced amount each month because he’s a known entity, I obviously want to do everything above board though and make things fair for both parties. So just a few questions on this. Is it enough for me to download and print off a tenancy agreement? Is that legally binding? I’ve seen some websites that offer you this where it creates an off the shelf agreement. And do I need to keep his deposit in a third party bank account? And also, what expenses can I claim against the tax? Is it just essential maintenance or are there other things as well such as decorating and legal expenses? Any advice appreciated.”
Simon: Okay, so that quite a lot of information. Let’s try and run through things. The very first thing that owner needs to do, if he has a mortgage on the property, I think he said it was his own home, and if he’s moving out, his own residential mortgage is based on him living there, so he needs to get consent to let [inaudible 00:02:03] he’s allowed to rent out to someone else. So that’s really important to get in the first place if it’s a residential mortgage. Secondly, you should always get contracts. If he’s using a letting agency, they should have the latest up to date contracts. For very small amounts, less than a hundred pounds, he could join one of the landlord associations, which is good because they have help lines and things and they have the latest up to date contracts which again, you can download.
So, even if you have friends, and particularly if you have friends, you always want to have a contract in place. I’ve heard many horror stories where someone moves a friend in or family member at a very low rent, trying to help them out, and for some reason, that person stops paying. It’s very difficult, very awkward and people aren’t friends after that. So you absolutely need to have a contract to make sure things are done properly. So there are various expenses that you can offset. So if you do pay a management agent, you can offset those fees. Any maintenance, repairs you want to offset, any advertising costs, all of those things can be covered. The tenant generally will pay their own bills. So the gas, electric, the council tax. If for any reason the owner paid those, if they were renting to multiple people, they would generally pay the bills and they could then offset those. And then obviously there’s the mortgage.
Now, in April 2017, the government board did something called Section 24 which changed the way [inaudible 00:03:21] treat the interest, which formally, we could offset all of the interest against the rental income to reduce the profit and thus reduce the tax. However, that is now changing. So I’d suggest that this owner speaks to an accountant, a property accountant who understands the implications. They will be able to offset some of that interest, but the amount will be phased down over the next few years such that it will only be a 20 percent margin relief. Now that’s quite a lot of information there, but it’s all about getting the right expert advice. That’s the general stuff, but I really would get to look at their particular situation to understand the implications.
Jo: That’s great advice Simon, thank you. And I’ve heard exactly the same, what you’re mentioning about those situations. I’ve had friends who have gotten in quite awkward situations by renting to other friends. And you know, the property could be left in bad condition and they’re not charging deposit. So it does need to be set in stone.
Simon: You don’t need to, if you don’t want to charge deposit, you don’t have to charge deposit. But if you do put [inaudible 00:04:19] towards it, it has to be registered upon two schemes. You’ve got to let the tenant know where it is. There’s certain things you have to do and certain time scales. So again, if you join one of the landlord associations, they’ll give you all the information exactly what you need to do. Because it does change over time, so keep up to date. Really important.
Jo: Brilliant. Anything to add there?
Evan: Well just on the deposit side of things, if you take a deposit, you can keep it in your own bank account but you’ve got to protect it. So there are a number of schemes, some of them you’ve gotta pay the money in and they’ve gotta hold it for you. Some of them you are effectively in insurance where you join the scheme and you pay a fee but you can hang onto the deposit and keep it in your own bank account. My advice in a very general sense would be, firstly, if it’s just one property, I would not use a letting agent. Because a letting agent will never take as much time and attention as you will to letting the property. And actually, I would also say, if I was you, I wouldn’t let it to a friend. I would just let it on the open market. Because it’s a recipe for disaster. You probably won’t be friends. If something goes wrong, your friendship is gonna fall apart and that’s just not worth risking.
Simon: You end up trying to help someone out and it all just goes wrong.
Evan: I mean, if they want a reduced rent, you’ve got a questionable, can they really afford the rent? It’s better to rent it to somebody who you’re at arm’s length with. You put a proper contract into place and they can actually afford to pay it.
Jo: Absolutely. Great advice from you.
Evan: Sometimes helping people out doesn’t help.
Simon: Yeah, exactly. Two other things I feel, bringing someone you don’t know, obviously do a reference check on them which you can do online. You can also, if they pass a reference check, you pay a little bit of extra money to get insurance in case they don’t pay the rent. The insurance company will pay out. And the other thing you should do also as an inventory, so that you can, especially with taking deposit, you want to inquire, “Well what was the condition before they moved in, what was it after?” And it should be as good as it was when they moved in. Expect some wear and tear, but if there’s serious damage, if it’s all documented, ideally by pictures and video, that will make it much easier to make sure that you get the [inaudible 00:06:16] you should do from the deposit.
Evan: Definitely. And the point that Simon made earlier is a very good idea. Join one of the online portals that will take you through the process of how to do this.
Jo: Okay. We’re gonna throw it to a question for Paul, who’s joining us remotely today. So, “Paul, I’m a first time buyer with a query here. I’m looking to mortgage my first property in the coming months and I’ve read online that buy to let mortgages are pretty much set in stone. Now my situation is this, I would like to get a buy to let mortgage and rent the property out for around 18 months, at which point I would be ready to move in myself. Now I’ve read the occasional post which states that in some cases, you can come to an agreement with the lender whereby you actually can live in it. Is this true?”
Paul: Right, good question. I think perhaps the posts that you’ve read, they’ve either been written backwards or you’ve read them backwards, in that you can get what’s called a Consent to Let, which applies to a residential mortgage. So that’s a property that, that’s a mortgage that you’re actually going to live in the property, and the lender would allow you to let that property out for a period of time, or even in some cases indefinitely, but usually for a set period of time which is renewed generally yearly. So as far as actually being able to live in a property with a buy to let mortgage, so far as I understand, that isn’t allowed. And it’s not allowed because lenders don’t necessarily allow it. It’s not allowed because buy to let mortgages are less regulated than residential mortgages, so the FCA wouldn’t allow it.
For example, buy to let lenders can be a bit more flexible on who they lend to and what they lend on than what residential lenders can be. And that’s to control the market and to stop things like bubbles like the last financial crisis. So I’d be very surprised if a buy to let lender would allow you to live in the property. But, that doesn’t mean that there’s no solutions available to you. If you’re buying the property to let out initially, then yes of course, the best course of action is to take a buy to let mortgage. But you could take a buy to let mortgage with a lender that also does residential mortgages. You could potentially let them know of your plans initially and put something in place which would allow you to port that over to a residential mortgage or remortgage it to a residential mortgage when it comes time for you actually wanting to live in the property.
So I’d say that’s the best course of action. You’re probably better off being up front with the lender about your plans initially, or at least with a broker, with an independent advisor that can look at different lenders for different products that might allow you to do what you’re planning to do. But, yeah, as I said, I’d be very surprised if a buy to let lender would actually allow you to live in the property with the buy to let mortgage still in place, ’cause that’s what’s often referred to as a backdoor buy to let. Some people will do that illegally because they can’t get a residential mortgage. They’ll take a buy to let mortgage and it will allow them to get the property, and then they’ll go and live in it unbeknown to the lender, but that’s breaking the terms of the mortgage and it’s actually illegal.
Jo: Okay, great. Thank you so much, Paul. Right, onto a question for you Evan. “I have a hundred thousand pounds saved up and I’m now looking to start investing with this money. I’m not sure whether to start up my own portfolio of property or start up my own estate agency. What should I do?
Evan: It’s a good question. But I’d like to start by saying that you’re talking about two totally different things there. One is an investment, and one is starting a business. If you really want an investment, so if you mean what you say, then buying a property is your only option. If you put that money into starting a business, it’s gonna take a lot of your own time and effort and it isn’t just putting the money in, it’s a decision about what you do with your life. So those are two completely different things.
If you’re thinking about starting a real estate agency, I would ask yourself a few questions. One is, what experience do you have in the estate agency field? The second is, how are you gonna differentiate yourself from other agents out there? What will you do that’s different from other agents that will make people want to come to you and buy properties through you? It’s a very competitive field that’s being disrupted by the internet, by online estate agency services, and you should be very careful in making sure that your business model is something that’s different and something that will attract customers.
A property investment is a different thing. If you put your money into property, you’re buying an asset will give you a return over time. It may be a little bit less exciting than running your own estate agency, but that is a proper investment. And if an investment is really what you’re looking for, then buying a property is your only choice.
Jo: Brilliant. And Simon, anything to add?
Simon: I think that’s a great answer. I guess that, what are you looking to do with that money? If he wants a passive investment, property isn’t always passive, but it can be passive. You get a letting agent to look after it for you. But [inaudible 00:11:27] said, setting up a business, unless you’re buying an existing business that’s already got management and infrastructure in there, it’s not gonna be passive. And so, they are totally different things, really.
Evan: Even if you are, probably you’re gonna get involved in managing it. And property may not be completely passive, but certainly a lot more passive than running your own business.
Jo: Absolutely. Sage advice, gentlemen. We are gonna take a short break and we’ll be back with lots more questions on the other side of this.
Hello, and welcome back to Property Question Time. I’m joined today ion the studio by Simon Zutshi and also by Evan Maindonald. Welcome back, gentlemen. Also remotely, we have joining us today Paul Mahoney.
So, I’m gonna get stuck into some questions. Evan, this one is for you, “I own a property which has a shop on the ground floor and a two story flat above it. Both leases have one year left. There’s a housing shortage locally so I’m thinking of changing the use and creating three small flats instead. Does this sound sensible and are there any points I should look out for in considering this?”
Evan: Okay. Well there’s a few things you need to think about year. And probably the two main ones are planning and legal. So we’ll start with planning. If there is not something called an article 4 direction, which is something that withdraws permitted development rights in the area that your shop is located in, and you need to check that with the local planning authority, then you can convert the shop to residential accommodation using permitted development. And in order to do that, you simply need to make an application for prior approval to convert the shop. And that should not be refused unless there’s some good reason, planning policy reason, that the council can come up with under which they can refuse the application. Usually the only one would be that there’s an article 4 direction enforce. If there is an article 4 direction enforce, you may still get consent to convert it, but you’ll need a full planning application. So that’s your first place to start. Is it gonna be relatively easy? In other words, is it permitted development or do I have to go through the full planning process?
The other thing you need to watch out for with a retail premises is convenance. So, it’s possible that you may have a covenant on the premises that prohibits certain uses and there could be a covenant that prohibits residential use. It’s possible to get some covenants removed, particularly if the person that put the covenant on no longer is around, if they put it on a hundred years ago. Then there’s a process that you can use to get a covenant taken off. If the covenant is enforceable, you can generally negotiate with the person who put the covenant on to maybe make a payment to them to get that removed. So that’s another thing to watch out for.
The other final thing is, if you’ve got a retail tenant in there, you need to understand what sort of a lease they’re under. With commercial leases, they can either be inside or outside the Landlord and Tenant Act. If the lease is inside the Landlord and Tenant Act and you need to look at the lease to determine this, and you may need to get a solicitor to advise you on it, then the tenant has an automatic right of renewal of the lease. Now, there are only certain grounds under which you can get a tenant out. One is redevelopment of the property, and I’m fairly sure that conversion from retail to residential would apply, but you would need to get your permissions in place first and then you would need to follow the right procedure for getting the tenant out under those grounds. Otherwise, the tenant could claim security of tenure and you may find yourself in a situation where you’re obliged to grant them a new lease.
Jo: These things are important, especially if you’re converting to a residential from a commercial property, as we know. Fabulous. Okay. So we have a question for Paul. Now, “Paul, I’m in the process of buying my first house and I’m unsure if I can claim relief on SDLT. I’m getting a buy to let mortgage on the property for a period until I’m ready to move in and change it to a residential mortgage. The law says you have to have the intention of moving in, which I do, but just not immediately as I’m doing my exams right now. I want to get in on the property ladder and start paying off a mortgage, but I don’t want the disruption of moving out just yet. Does a buy to let mortgage negate the intention? Is there any way to get around it if I do have to pay? And what if I borrowed money to buy it outright, lived in it for a bit, and then rented it out? Any suggestions on this would be appreciated.”
Paul: Okay. Yeah, good question and you’re right. The law does say that you need to have the intent. My understanding is that you’re only entitled to the concession if you are buying it as a primary place of residence. And therefore, given your plan to buy it as a buy to let, you wouldn’t be entitled to that concession. Given it’s your first purchase, you also wouldn’t pay the extra stamp duty premium that usually applies to subsequent property purchase or is often referred to being applied to buy to lets. So it would just be the standard duty levies or thresholds and that would depend on the price of the property that you’re buying. So without that information, I can’t really tell you whether it’s going to affect you or not. Because for example, if you’re buying a property that’s less than 125 thousand pounds, there’s not that many of them left in the UK but you might be, if you are buying one that’s less than 125 K, then you wouldn’t pay any stamp duty anyway. And if you’re buying one that’s only slightly above that, you might only pay very minimal stamp duty.
So I think the price of, I know the price of the property that you’re buying will affect your decision process here quite a bit. I think the other thing you need to consider is, you mentioned an 18 month period as far as letting out and then intending to move into it. Whether the benefit of that 18 months outweighs the potential extra cost of the stamp duty is probably something for you to look at more closely. There’s potentially a financial consideration there. You know, the actual cost or investment benefit to you. And also, a personal consideration. I think you mentioned you’re studying, so whether you want that disruption of actually having to up and move into the new place to avoid that extra stamp duty. So there’s a couple things to consider there. Probably worth seeking professional advice on the financial side, the personal side is obviously a decision for you to make yourself.
There’s a point there that you made at the end so far as, should you buy for cash and then remortgage to try to avoid these costs? I think that’s a common misconception that stamp duty only applies if you’re taking a mortgage but it doesn’t. It actually applies regardless of how you’re purchasing the property. So whether you’re buying cash or whether you’re taking a mortgage, the same stamp duty will be payable. So by buying cash, that wouldn’t solve your problem.
I think with all things, it’s worth seeking professional advice, assessing what your options are, working out all of the numbers and the personal impact it’s going to have on you, and then making the right decision for you.
Jo: Okay. Thank you so much Paul, that’s brilliant. Thank you. Right. Now onto a question for Simon. “I’ve currently come into a bit of money,” very nice, “And I’m trying to work out whether I should buy an investment buy to let property or not. Specifically, I’m trying to find out what the difference in stress levels would be between owning one in the UK and overseas, most likely in France or Spain. I’m wondering if you can give me an insight into this.” We were just talking about this earlier, weren’t we?
Simon: Okay so, I think it’s important to understand, why does someone want to invest in the first place? Are they doing it purely to get a return on their investment, which I would suggest investing in the country you live in, it’s probably a smarter idea because you’re gonna have more peace of mind. You speak the same language, you understand the legal system, same currency, no issues there. But if you want to have a lifestyle investment, you might buy something overseas where you can rent it out and also have occasional trips there yourself. So that would kind of influence part of the decision.
Coming to stress, I would suggest, as I said earlier, that in your own country, it would suggest it’s gonna be easier and it feels like you can keep an eye on it where if it’s out of sight, out of mind. What’s happening? Are the agents looking after it? Are the tenants looking after it? If there’s sometimes short term rents, are the letting agents actually telling you when people are in the property? Which sometimes happens. So, I would suggest probably investing in the UK if that’s where you live. It’s probably the less stress if that’s what they’re really interested in. But also think about what’s the reason for investing in the first place.
Jo: Fabulous. Anything to add on there, Evan?
Evan: I think you can do quite a lot of research online these days in terms of what sort of rental income you’re gonna get from a property or what you might get for it as a holiday let, and you can look at that in relation to the price of the property. That’ll give you some feel for the rental [inaudible 00:20:41] that you’re gonna get in relation to what you’re paying for the property. But as Simon said, stuff that’s further away from you is gonna be more difficult to manage. And different types of properties lend themselves to different types of letting, actually. So properties that are more in the luxury bracket, you tend to get higher incomes from if you let them as holiday lets. Properties that are less in the luxury bracket, so more basic one, two, three bedroom flats, you’ll probably get better returns just by renting them normally. So those are some further considerations to take into account.
Jo: Brilliant. And also, of course if you’re thinking of buying somewhere abroad, language comes into consideration, local government agencies and all that paperwork. So you’ve gotta be, either have a good contact that speaks that language or speak the language yourself.
Simon: Also, currency fluctuations as well. You could buy a property, the value of those properties might go up in that country, but if you come to sell it, if the pound has dropped compared to the value of that one, actually you might lose out. So you’ve got to be prepared to think about that.
Evan: And local regulations, they’re gonna be different in France to Spain to England and quite honestly, working your way around French or Spanish property law might be a little bit tricky. It’s hard enough in the UK. So if you don’t speak the language, then-
Simon: Other considerations like tenants as well. I know in France, they’re very, very protective of tenants, even more so than they are here. So again, you need to do long term tenants, short term tenants, there’s a real lot to consider. I think it’s hard to get their head around stuff just in their own country. You’re absolutely right. There’s an extra layer of complexity if it’s a foreign country.
Jo: Okay, thanks gents. Now do you have a golden nugget for us, Simon?
Simon: I do. And that is about, if you are looking to invest, rather than trying to do it on your own, it’s a great idea to send questions in to programs like this program because obviously you get the opportunity to get a bit of an insight from people who may have been doing it longer than you. Ask, you might have some family and friends who have experience investing in property. And be very careful of asking people who don’t have experience, they’ve only got opinions because they might say, “Oh, I’m not sure if it’s a good idea to invest.” And you know, if enough people around you saying that, they might put you off. But actually, they don’t have any experience.
So getting what we call a power team around you who can advise you and guide you is really important. So in that power team, you might have a mortgage broker. And I think it’s really important to get a mortgage broker who has got access to the full market. They’re independent, they can look at all of the products and find the very best for you [inaudible 00:23:11] on what you wanna do. You need a solicitor who can act for the conveyancing to purchase the property for you. You’re gonna have maybe an estate agent who’s helping you buy properties, maybe a letting agent looking after them. Maybe a handyman or maintenance company. Maybe builders. And all these people, you can find them through recommendations. Rather than just going online to find them, if you can speak to other people who are in the industry, using those people, you get a much better recommendation. How reliable are they? How trustworthy are they? Are they on time? Do they do it to price? And you know, get recommendations to build your power team, going to networking events, obviously a good way to get recommendations as well.
So don’t try and do this on your own. You don’t have to reinvent the wheel. Other people have done it before you, learn from their experience. It’ll make your life a lot easier, instead of making the mistakes yourself.
Jo: Brilliant, yeah. Get a structure and a system around you and it’ll work for you. Absolutely.
Evan: Another great place to look for people to meet, or to interact with, is social media. So, groups on Facebook or on LinkedIn. There are groups of people that specialize in property. You can join those groups, you can put your questions up. People will answer them. And you’ll get information that otherwise would be very difficult to find.
Simon: Yeah. One word of caution that I’d say, if you’re going to a networking event or online networking is, make sure the person who is giving you the information does actually have experience. There are a lot of people too on social media who are very opinionated, they spend all their time on social media, do they actually have any property? Which is a consideration.
Evan: Look into their background, that’s true. Make sure they know what they’re talking about.
Jo: Brilliant advice, gentlemen. Thank you so much. So that’s about all we have time for today here at Property Question Time. A big thank you to my guests Simon Zutshi, Evan Maindonald, and of course Paul Mahoney. Now if you’d like to send a question into our experts, you can do so by registering on our website or emailing Info@Property-TV.co.UK. We look forward to seeing you next time here at Property Question Time. Bye for now.