Speaker 1: [inaudible].
Stephen Galpin: Welcome to property question time. This is the program where you can have your property related questions answered by our team of experts. I’m Stephen Galpin with me today. Are Paul Mahoney MDF? No, Vine Nova financial group. Sorry. Welcome Paul. Uh, Aisha Ofori, founder of propel accomplished property investors and developers. Welcome to you and John Howard, property developer, author and of course investor Angel on our program. Property out of eight. I sound like I’ve been busy. Hello. Sounds like you have John, but welcome back. Anyway. Um, Paul, we’re going to go to you first. I’m looking to set up a venture with my wife of buying large properties and splitting them into two or three flats for resale. Perhaps three story George and townhouses into three apartments. We’d appreciate some guidance on how to finance these deals and the necessary conversion work. Also, how should we structure it if this is a business, hold on. No, that’s music.
Paul Mahoney: It’s your right as you want to have. It’s a business. Yeah, it’s good they’ve described in that way. Um, so far as answering all those questions in depth, you know, we’re going to have to extend this show by about five hours. But um, yeah, I’ll give a very brief. So the three points they mentioned there so far as financing them, um, structured, what was the other one? I’m, that’s what the work’s involved, how to find this works involved as well as the coaches yet. So there’s a number of different ways it can be financed. Um, generally what people do when they’re looking to buy a property to do work to it, to you to, to convert it is either used development finance or, or short term finance, um, being bridging now that wood that’s in a way to do it determined by both price and experience. It seems that they’re just starting out, um, in, in doing this. Yeah, as a business. Um, so they’ll probably get the, the higher rates to start off with because they don’t have much experience. Um, development finances usually for a period of 12 months plus, whereas bridging or short term finances is usually for a period of less than 12 months. So that will be I suppose in a way determined by how long they expect these works to take. They’d obviously need, unless they do have experience in the works, the sales or at least managing the works, they need to speak with someone who does have experience in that and, and get their advice on each and every project they’re considering or each and every deal they’re thinking of doing. Um, to give them a clear understanding of those things. Um, and you know, always overestimate them. Um, and sort of don’t get caught up in your own hubris. I suppose a lot of people become their own worst enemy by thinking they can do things a lot better than the how it actually. Yeah.
Stephen Galpin: Well I think it’s a clever person isn’t it? That knows what their limitations are. And I think property development, so an ideal ground for that. Paul I wonder if you would, just for the benefit of our view is not understanding perhaps some of the more technical terms you’re using. Could you just briefly explain the difference between development, finance and bridging finance?
Paul Mahoney: Yeah. So, so in short development finance he is, is as, as it says on the tin, you know, it’s, it’s for developments but usually it’s for a period of 12 months plus. Um, and, and usually it’s, it’s targeted at people that consider themselves developers, you know, people with experience I suppose. So there for the life of the development under control for the life of the development. Um, ideally a lot of developers, as I say under account for time and then need to use short term finance to top themselves up. Um, but ideally they would get it for the period for which they see the project, you know, progressing. And usually that would be a little bit cheaper than, than short term finance. Short finances is the sort of thing realm, the, that the bridging finance fits into as well. And they’re pretty much both the same thing. Um, but that is usually for a period of less than 12 months. Sometimes it will go for longer than that, but usually a maximum of 18 months.
Stephen Galpin: Why would you use bridging as opposed to development then?
Paul Mahoney: It’s usually easier to get. Um, usually experience isn’t considered as much and that’s quite often because the rates are higher. So these lenders, they’re usually short term finance lenders are willing to take a bit more risk than what development lenders in the true sense of the word are willing to take.
Stephen Galpin: So technically then you’d go in with bridging perhaps in theory and then replace it with development finance halfway through.
Paul Mahoney: Um, not, not usually, no. It’s, it’s quite often the other way around. Um, in the development finance is usually from the start. It probably can work both ways, but it’s more about what’s available to you given your, you know, you’ll your profile I suppose particularly in an idea on rates. Usually development finance is somewhere between seven and 12% per annum, whereas bridging finance is quite often between one and 2% per month.
Stephen Galpin: Okay. Ouch. Ouch. Yes, I issue, what do you say about it?
Ayesha Ofori: I would say just be very cautious about which method of financing you choose and to make sure that it’s appropriate for, for the project. Where you don’t want to have happen is to be on one sort of finance path. And to find out, for example, if you’ve gone down the bridging route, um, you know, the loan expires in 12 months, you have to pay it back, but something’s gone wrong in your development and you need another six months. That’s a very, very uncomfortable position.
Speaker 3: Presumably they’d be quite ruthless about the rates for extending. Yeah.
Ayesha Ofori: You don’t want to be on a, on a loan that sort of in default because typically what happens is it does ratchet up and it rushes up quite a lot. Um, so you need to be mindful about how long your project is going to take. Give yourself a buffer and get the right debt package in place with the right amount of, of time as well.
Stephen Galpin: Okay, John.
John Howard: where did we start? Goodness me. The first thing I would say in Paul’s absolutely right, um, here, um, don’t, don’t, don’t take too big a bite of the cherry, you know, start off with a small development. Learn from that, get it done. Obviously, um, develop finances, the way to go. Make sure it’s rolled up. So you’d put your novel is the interest is rolled up to the end of the project. It’s very important that you’re not paying out every month. So roll wold interest up to the end. Keep yourself plenty of time giving yourself two years, not a year and a half to get it to get it to, to get it all paid back. So I know in other words, to some of this, then there’ll be a bullet payment. In other words, every, every say three flights, every time a flight is sold for you kind of range. Are you kind of rage with the funder that you, they take 80% of every 8% of the funds or 100% or 90 a hundred depending on what the situation. Right.
Stephen Galpin: So that goes down. It’s a diminishing. So you guys actually, yeah, yeah, yeah. You’re fine. Yeah. All right. What would it be sensible in terms of building in time? Would you treat that in the same way that you’d perhaps build in a contingency of say 10% on your build costs? Or would you take the same view over, you’re fine.
John Howard: It’s without question. I’d always out another six months on at least. Okay. Yeah. All right.
Stephen Galpin: Yeah. All right. Thank you. Um, Ayesha sales rates can obviously influence the profitability of a development. Are there any set formulas for calculating the appropriate rate? And I’m presuming they mean that, um, you know, across the country, um, rates are going to be hugely different.
Ayesha Ofori: Well, I mean, I, I wish there was a formula. It would make a lot of, uh, people’s lives very easier. But no, the answer is there isn’t a formula and it will be very much dependent on where you are, what’s going on in the local area. And then also importantly what’s going on in the sort of wider market. You know, the, the way that one could get a good grasp of the sort of sales figures in an area would be to speak to local agents. You need to understand, you know, what is going on at the moment, what has been happening, you know, previously. Um, and then get an idea of what’s new could potentially happen in the future. But just bear in mind that nobody has a crystal ball and you need to be prepared that, you know, if you, you’re expecting something to, to go up, for example, it may not happen, let’s say typically look at sold prices rather than sort of foresail. Yeah, yeah.
Stephen Galpin: I mean, I, I, I, I can’t tell you the amount of people had down here in Canary Wharf who two years ago thought the market was going to explode because of Crossrail. And of course that’s now been delayed by two years. So what that’s done to some developers expectations of it. Yeah,
Ayesha Ofori: exactly. You can’t predict the future. So whilst you may, you know, if you’re, if you’re a particular, if you’re a developer, you know, it’s, you’d like to be optimistic, but I’d say try and refrain from doing that. You know, look at prices that have been sold and, and to be honest, even, you know, maybe use numbers that are a bit lower, be a bit more cautious
Stephen Galpin: and a bit more conservative. We would always use five to 10% less. Yeah, yeah, yeah, totally. If you, if you were creating a strategy for these people developing, I mean, how would you recommend that they, they factor in the sales rate? Yeah.
Paul Mahoney: Well, just, just a point on that. I think one thing that a lot of developers do overlook, um, is the who they’re partnering with for those cells because the market doesn’t necessarily move at one, some cup. Some teams and companies are a lot better at sales than others. Um, and so if you’re working with a company that has experience in generating significant sales in that area, they’re probably, you’re likely to do a lot better than if you’re doing it yourself or if you’re using an agent, it doesn’t have that experience. So that’s something to consider as well. So far as accounting for what the sales are, you know, are great. There’s no crystal ball know the sales last month can be different to sales this month and they can stay different. So under Ashley’s just under account.
Stephen Galphin:Yeah. I think what I’ve seen over the years is, again, you can get an awful, um, sort of variants in sow’s rates because perhaps if you take some of these big blocks here, you know, you’ve got a 70 story block here, thousand apartments in one building. Um, sounds right. Fantastic. But if you look at the actual sales that are there from, you know, the Asia Pacific area, so actually it’s not a true guide as to the true sales, right? Yeah. For the, for the area. So you can quickly get Jordanaire Casio it just goes back to doing your research. Yes. Um, yes is just, no, we can’t overstate it enough. Yeah. As Paul says, you know, some of these companies are very good at marketing and some are just totally agent with an eye on time. They, I suppose. Anyway, let’s move on. Um, John, yes. My local town has a large convenient shot, which is hardly used now because of a large Tesco being built just out in town. There were four flats above the shop and I’m sure the shop will close soon and I want to have the first option on buying it and converting the ground floor into three or four flats too. Is a conversion of a shop into flats usual and is it likely to get approval?
John Howard: Well, a lot is it got approval, whereas the question there isn’t the key, isn’t it? So most local authorities don’t like allowing commercial to go to residential on. The reason for that is one rates they get commercial rates and secondly, employment. Uh, but of course there was a, depending on where it is in the country, there’s a big housing need. So, um, how’s he ministers over the, over the last few years, and there’s been quite a few of them have pushed more to allow commercial to go to residential, but it isn’t easy and converting and ground floor flats are probably a [inaudible] shop as a problem because you’ve only got windows at the front normally and windows at the back. Nothing in the middle. So you’ve got to be careful. It doesn’t, it doesn’t lend itself very easily sometimes to be converted. Mostly shop funds. Some councils may say we got to leave the shop funds in, uh, because of the, the street scene. Uh, it might be in an area of um, conservation area or something like that. So be careful. I would always look to buy something like that subject to planning permission if I could. Although, um, I suppose this business of just windows at the front, I mean mews houses here again here in London, news houses often just have the front aspect out and they say it depends on deep the building is, but it can be, it can be an issue. I’m parking cars could be enough cause you, they may say no young got enough parking. Yeah. So you have to be very, very careful.
Ayesha Ofori: I think the, the key here was in the question, it was how likely is it to get planning. I think there are quite a lot of um, if things here that could mean that it wouldn’t. So you’d need to, you know, do a preop or have a look first or you know, get an option agreement on it so you don’t buy it first and only once you have more certainty than proceed.
Stephen Galpin: And again, the local authority duty planner will obviously be helpful to you and you know, you can have these informal conversations.
John Howard: The preop is very good. Now, you know, um, uh, you get it within 28 days or should do.
Stephen Galpin:Paul, anything to add.
Paul Mahoney: Yeah, just briefly. Um, so there are a lot of people doing these types of developers now obviously with free to develop the right. So that sort of thing. Um, the lenders that are willing to lend on them that, you know, aren’t vast good point and that can become a real issue. So that’s something, again, that developers overlook, um, with office buildings and things that are being converted. Sometimes the structures aren’t suitable for lending and sometimes they just look at them and say, that’s not a residential building. It looks on the shop. Um, so will people want to live there? That’s always a lender’s main concern. Is this going to let?
Stephen Galpin: Why is it on some of these blocks, these tall blogs, if they have shops underneath again, there’s certain lenders that won’t do it.
Paul Mahoney: Yeah, well I think, I think the concern there is if a curry house goes in there, no one wants to live above the curry house cause it, it smells of curry. Um, there’s things like that or is a gym going to go in, is going to be loud. Lenders are always worried about is this place going to let and therefore am I going to get my mortgage repayments.
Stephen Galpin: Okay. All right, ladies and gents, thank you very much. That’s all we’ve got time for in this half of the show. Join us again after the break.
John Howard: Hi, I’m John Howard and I’m known as the property expert. The reason for this is over the last 40 odd years I bought and sold over three and a half thousand properties and I’m still going. I’m delighted to pass on my vast experience and knowledge to you through my plot. These seminars that are taking place across the UK this year, so no more fees go to John Howard. Plop the expert.co. Dot. UK.
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Speaker 2: property is a great investment option, but it’s one of the largest purchases that you’re ever make. As individuals, we’re all limited by our resources and regardless of our experience and knowledge or time, we can achieve much more with the help of a qualified team, an extra resources being available. Nova financial specialize in assisting clients to achieve financial freedom through property investment. With over a hundred years of experience, we shape your family’s future to invest in property with absolute confidence scoreless on Oto three, 8,600 or visit Nova dot. Financial.
Stephen Galpin: Welcome back to property question time. I’m Stephen Galpin and with me, Paul Mahoney, a shirt, a foray and John Howard. Paul, your last question. How does having a number of buy to let mortgages affect my credit rating or are they classes a separate item from my credit profile?
Paul Mahoney: All right, good question. Um, and it’s a bit of a, it’s sort of black and white answer in that it’s not completely separate, but it also doesn’t affect your credit rating the same as a residential mortgage or a personal loan would. So when you submit an application or even when you submit a dip, the lender will quite often request a copy of your credit report and that leads what they call footprints. Um, so, and other lender that you go to apply with can see that previous lender has done that. Um, if you have many, many footprints, then it looks to lenders like you’re applying for many, many mortgages. And they can start to ask questions about that. However, even if you have a bad credit report, um, depending on what the reason for that is, that doesn’t necessarily affect your ability to get a bottle, that mortgage because they’re considered commercial mortgages and the service ability for those mortgages and more about the rental income from the properties and they are about your own personal income and also your own ability to service those mortgages because it’s not coming from you. It is easier to get a bunch of little more busy than it is to get a residential one, for example.
Stephen Galpin: Okay. So if you, if you have, um, for instance, you, you’re taken out of buy to let mortgage you, you’ve got to consider the possibility of having a void. Yeah. Is there a, is there a set percentage that the lenders tend to build into their calculations to allow for voice?
Paul Mahoney: There is, yeah. So, so they use a bench. They all vital lenders need to use a benchmark rate, a five and a half percent now. So regardless of what led him to you at, they use five and a half percent, unless it’s a five year fixed product, then they can use the lending rate. But to answer your question, it has to be covered. I have to come at five and a half percent, 125% of the time. That’s a strange way of saying it, but it means that effectively they’re saying when you include things like costs and voids, et Cetera, that that could account for about 25% of the rent. So, so yes, that that’s the way they account for it.
Stephen Galpin: Okay. Ayesha, any comments on that?
Ayesha Ofori: I’d say just be mindful that sometimes lenders will have a cap on the number of mortgages or buy to let mortgages that you can have. Um, so you may be with one lender and you may have say 10 buy to let mortgages and you want to get in the 11th and they’ll say, actually, no, it’s not something we’re prepared to do. Um, so you will have to go elsewhere. Um, so I think in answer to the question, you can have multiple buy to let mortgages, but sometimes it will depend on who your lender is or who you’re speaking.
Stephen Galpin: I suppose also occasionally, um, you seeing these large developments, lenders will say, we’ve got enough exposure in this building. We’re not actually then ending on that. He, yeah, yeah, yeah.
Paul Mahoney: Lenders are also quite subjective, which is frustrating because, because they don’t have black and white rules, but they also don’t have anyone that really sets the rules or the decisions that you can’t necessarily, you know, goes about or talking about for, you can’t call up the bank manager and say, come on mate, lend me the money like that. But they do make subjective calls, so you need to be aware of that as well. It’s not necessarily set in black and white.
Stephen Galpin: Right. And Ayesha, what are main differences in developing property in London? I know John’s going to jump out, jumping up me on this. Right. What’s the main difference in developing property in London and the rest of the country? I eat in more rural areas.
Ayesha Ofori: Oh, a lot. A lot. A lot of chickens are definitely questions I do want and don’t do the other. But I guess it also depends on what it is that your, what it is that you’re looking for. So you know, typically people would say that London and the southeast, um, you know, prices have been higher. So if you’re going to do a development, you’re looking at developments that would have a sort of larger GDV if you’re looking at the same number of units, you know, somewhere else in the UK. Um, but I’d say that, you know, there are benefits for doing things in London and also outside. Um, you need to consider how much capital do you have. Um, maybe London and you know, southeast is stagnating but others of the UK are actually starting to grow. So that might be a better opportunity for you. But if you do look in what I say our rural areas, then you really need to know your market. You really need to know who is your end buyer, for example. Because I think it can be a bit less forgiving. If you are in sort of London city center and you have a development and you haven’t done your homework so well you probably can find a buyer at some level. Yeah. Whereas if you all sort of, you know, I don’t know, surrounded by countryside or somewhere, it’s just a bit more softer. A bit more removed. Yes. It could potentially be harder, be harder to, to sell. So you need to, I say have more certainty.
Stephen Galpin: Right. Well John Onto your last question. Hello. I’m looking for some advice. I’ve just had an offer accepted on a buy to let property. However, the loft has been converted but doesn’t temp building regulations or planning permission. I understand that I won’t be able to let the house out as a four bed as efficiently. It can’t be classed as an extra bedroom and that’s fine. Just wondered if there would be any complications with renting your tout in general
John Howard: I don’t think there would be, no, I think you’ve gotta be very careful because if the, if the um, attic has been converted without planning permission and building regulation approval, then you definitely need to make sure that it’s been done correctly. Cause if they’ve cut into the roof or something, it could have structural complications.
Stephen Galpin: What’d it come under? The new permitted development. So, no, no, no,
John Howard: no it wouldn’t, I mean, I mean at the end of the day, uh, you really mustn’t let it out because of a fire probably, I mean means of escape would be an issue either thought or you can tell people its storage and as you use it as storage. And I would actually get them to say sign something on the short hold tenancy agreement and no tonic, which they signed saying they’re only going to use it as storage. Now what are they then don’t do all. So you can’t really force them. But at least if you get him to sign something that covers your a little bit. Because if there was a fire and there was a lot loss of life or something, it could, it could be, well I think that was awful.
Stephe Galpin: I was sort of saying just because you can notice around your neck saying so being a burglar isn’t permitted.
John Howard: No, exactly. Yeah.
Stephen Galpin: I think you could get an awful lot of trouble too if there was a sort of fire situation and I think essentially any form of building regulations must be adhered to for just general safety for engineering.
John Howard: At the end of the day, Stephen they’re there for a reason. I, you know, they might be annoying sometimes but that there for the a reason and I’m certainly, I’ll be careful and I’ll be even more careful as to why they haven’t got that permission. Yes, it may be, but that they weren’t going to be given it or they haven’t looked at the structure properly. Okay. So I’d be careful.
Stephen Galpin: We’ll look, come to a panel of experts, Paul Mahoney, [inaudible] and John Howard. Thank you all very much for your contribution today to join us again next time on property TVs. Question Time.
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Speaker 1: The tax system has evolved significantly over recent years, but property investors and developers, you may think that you and your accounts and type of grip on these changes. However, unless you’re receiving specialist tax advice from a specialist tax advisory firms, then it’s unlikely to be the case at DTC tax. Now a team of highly experienced chartered tax advisors work with private individuals and companies to deliver effective tax planning whilst meeting HMRC compliance requirements. Let us help you to meet your personal or commercial objectives in the most tax efficient manner, etc. Tax Making the complex simple
Speaker 2: property is a great investment option, but it’s one of the largest purchases that you’ll ever make as individuals. We’re all limited by our resources and regardless of our experience, knowledge or time, we can much more with the help of a qualified team, an extra resources being available. Nova financial specialize in assisting clients to achieve financial freedom through property investment. With over a hundred years of experience, we shape your family’s future to invest in property with absolute confidence coolers on o two o three 8,600 or visit nova.financial.
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