Stephen G: Hello, this is Property Question Time, the program where you get to ask our panel of property experts the questions that you’ve sent in. I’m Stephen Galpin. Joining me today in the studio are Mike Gray, director of Deadman Gray Auctioneers.
Mike G: Hello, Steven.
Stephen G: John Howard, author and property developer.
John H: Hi.
Stephen G: And Paul Mahoney with a live link to Australia.
Paul M: Hi, Steven.
Stephen G: So Mike, the first question is for you. “I’m looking at buying a property at auction for 80,000 pounds. I’d like to rent it out, but it’s in a bad state. I’ve done my research and believe, done up, it will be worth 115,000 pounds. I know there are fees involved. There will be refurbishment costs, but I wondered if I could raise the full capital from myself, my parents, my grandparents to buy the property outright at auction. And then do up the property, have it revalued, and then would it be possible to remortgage and get an up to 75% buy-to-let interest-only mortgage.
“This would pay the funds back to my parents and grandparents. I’ve heard that the Six Months Rule, where I wouldn’t be able to re-mortgage for six months, which wouldn’t be too much of an issue, but I wondered if it would be possible to re-mortgage to pay the family back.”
Mike G: Yeah, yeah, I mean, too, that’s exactly what happens on many occasions. And let’s on this situation just forget that it’s family and friends, because it doesn’t have to be. Often small builders will have an investor to find the funds to go ahead and acquire the land or the property, and then gradually pay out towards the refurbishment.
And let’s face it, the best time to get funding on any property or any project is once it’s finished, because then the value will… and the lender will realize the full value of the project. And exactly that’s what you’re keeping longterm to rent out.
So what you’ve asked there is a common procedure. And it makes sense.
The negative side of doing it the other way around is sometimes, people will get their first mortgage, and then they’ll overspend on the refurbishment and find themselves a little bit short anyway. So then they have to go back to the lender a second time, which is never the best way of dealing with your lender.
Stephen G: Okay.
Mike G: Go to them once for the right amount and then let it out. So principal, absolutely ideal. Yes, it can happen. And if you’ve got the luxury or the benefit of having a third party, whether it’s family or external source to fund the upfront, why not? And if they can get it financed at the right level, if we have some really ambitious investors tuned in today, the next trick is to then go out and do it again.
John H: Spot on. Yeah. And again and again and again. Use the same trick again. Use the family money each time. Remember to give them some interest back, some interest on their money to make sure they want to do it again for them. Yeah? And they’ll get more and more confident about doing it. But Mike’s right. Do not try and refinance it twice.
Stephen G: Yeah.
John H: Because these building societies, or whoever you’re going to are expensive when you start to have to do it again and again.
Stephen G: Well, I suppose it’s going to look like you haven’t done your homework.
John H: [crosstalk 00:03:24] Correct. Spot on. And everyone wants to be confident. Your family want to be confident you can do it. And once you’ve got a track record in doing it, they’ll be happy to do it again and again, I’m sure. It’s a great way of doing it. It sounds like they’ve got it sorted, doesn’t it?
Mike G: And as John said on a previous message, treat it as a business. And the fact that it’s family, don’t treat them as a friendly family environment. If you go back, give some interest. Fun enough, they’ll be there ready to do the next one.
Stephen G: I think just quickly we should ask Paul if he’s got any comments on the financing of a property that’s been refurbished. Paul, what do you say?
Paul M: Yeah, so you know a couple of comments there. It depends on the lender that you’re working with as to how quickly and to what level they’ll allow you to remortgage your refurbished property. Especially if you’ve bought it yesterday, you know, and spent today refurbishing it. Some lenders won’t allow you to actually remortgage it at the market value for a period of at least six months. So it’s important to be aware of that. Some lenders will allow you to do it straight away.
I suppose the point here is if, assuming based upon the question your strategy is to add value, re-mortgage, and then release that equity to perhaps go again. You definitely should seek independent advice to allow you to get in place the the most suitable finance products for you.
Stephen G: Okay. Paul, thank you very much indeed. Right. We’ll move on. John.
John H: Yes.
Stephen G: “I’m looking to acquire a buy-to-let property in the short to medium term, and wondered how often I should review tenant’s rent. Should this be written into the rental agreement with the tenant?”
John H: Okay, well, a tenant is either going to sign up for six months or a year, traditionally. You might get one or two that want to sign for two or three years, but personally I wouldn’t go for that. That way, if it’s six months, you can review after six months. If it’s a year tenants, you can review after a year, for the following year or the following six months, depending.
Get the tenant in. Be sensible on the rent. You don’t want to be waiting two months to get the tenants in because you want an extra 20 or 50 pounds. Get them in, and then increase the rent after six months if you can or a year, depending.
Stephen G: What it’s almost like a trial period, isn’t it? Six months, that is.
John H: Absolutely. Good point. Yeah.
Stephen G: Gets your tenant an opportunity to get to know you or your agent.
John H: Very much so.
Stephen G: And of course, you too to look at the quality of tenant.
John H: Absolutely. And the idea is to keep them there as long as possible. So you know, you might think, “Oh well, I can get another 20 pounds or 30 pounds.” But actually if you have one month’s void in that year or the following year, that’s gone. So look after your tenant. Be fair with them. And don’t charge them too much. Because if you do, they’ll go.
Stephen G: Right. Mike, any thoughts on that?
Mike G: Yeah, I think that’s exactly the right advice, to be honest.
John H: Thank you, Mike.
Mike G: And we have, we have clients who say they’d rather have a tenant paying a little bit lower on the rent…
John H: Yes. Keep them in.
Mike G: And keeping in there. Than this maximizing rent every single time. Getting the last penny out of them, and then every six months, you’re turning them around.
John H: Exactly. It’s expensive.
Stephen G: I think that works right through the property industry, doesn’t it? We have commercial owners now saying, “Well actually, we’re not chasing the highest rents for the longest period of time. We’re looking for quality tenants. Tenants that can pay their bills.”
Mike G: Yes. That is certainly spreading into the commercial world. And you can see that in the press where people actually almost volunteering a reduction of the rent to keep the tenants there.
John H: Absolutely.
Mike G: In fact, commercially, sadly, it keeps some of them trading.
John H: Literally trading. Yeah.
Stephen G: Yes. Paul, over to you now, and here’s your question. “I’m a first time buyer who’d like to purchase a property using a buy-to-let mortgage. Where would be the best place to start looking? I don’t earn very much, but hope to save between six and seven thousand pounds a year. I’m not interested in stocks and shares, and I’m not interested in a lifetime ‘icer,’ as it wouldn’t be good for me, as I’m only planning to save for the next two or three years. Any suggestions would be great.”
Paul M: All right, good question. [inaudible 00:07:42] cap the question there and just point out some of the unknowns. Because I think that’s quite important. So you mentioned you’re a first time buyer. You’d like to buy a property with a buy-to-let mortgage. And your income, is it going to be about six to seven thousand pounds per annum, and you’re only planning to save for the next two or three years.
So something that’s obviously quite important is to make sure, firstly, you’ve got the deposit to be able to buy. Most buy-to-let mortgages go to a maximum of 75% loan to value. So for example, if you’re buying a 100,000 pound property, you’d require a positive at least 25,000, plus some costs, like legal fees and things like that. So let’s assume you have that. Because you’re asking the question, so I assume you’ve got that.
Where you might run into some difficulty is because you’re a first time buyer, and your income’s only around six or seven thousand pounds per annum, quite a lot of lenders, again, because you’re a first time buyer, would require you to have income of around 20 to 25,000, as a minimum.
Once you have a property, that becomes less of a concern, given that it’s a buy-to-let. Because the serviceability for a buy-to-let mortgage is generally much more to do with the rent you’re receiving from the property than it is to do with your actual income yourself.
But as a first-time buyer, lenders are a bit more conservative, because this is your first time. You’ve never been a landlord before. So they want to see that you’ve actually got some personal income, as well. Just in case anything goes wrong.
And other thing to point out is you mentioned you’d like to buy a property with a buy-to-let mortgage. You actually need to make sure that property is going to be a buy-to-let. Where a lot of people try to sort of skirt the rules, and in fact it’s quite illegal, is buying a property with a buy-to-let mortgage because buy-to-let mortgages are easier to get than residential mortgages. And then actually going and living in the property.
That’s something that you can’t do. It’s a clear breach of your mortgage terms. Lenders are actually quite onto it. It’s referred to as a backdoor buy-to-let. And if you do it, you can get in quite a lot of trouble. And the lender is within their rights to recall the mortgage on the spot. So please don’t do that.
But assuming that this is just a buy-to-let, you’re looking at it as a property investment. First off, make sure you have the deposit. Look at your mortgage options and how they relate to you. There may be some limited options, lenders that will lend to you based upon your income, but the rates are probably going to be quite a bit higher. Because they will consider you as a higher risk.
So I suppose first off, go and seek advice on the finance side of things, and also seek advice on the property side of things. So you making sure that you’re going into this with your eyes open and actually understanding what it is that you’re trying to achieve. Putting in place a strategy for doing it, and then selecting the right properties and the right finance structure for doing so.
Stephen G: That’s all we have time for in this part of the show. Don’t go away. We’ll be back after this short break.
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Speaker 7: Now we’re here today to talk about your book. It’s John Howard’s Inside Guide to Property Development and Investment for Newcomers. So John is an expert in property. He’s bought and sold over 3,500 properties. Can you tell us a little bit about what motivated you to write it in the first place?
John H: So it’s a really good guide,, I believe from the very start to the end of the of the process. In the book, I actually explain the pitfalls that I’ve had. So after every chapter, there’s an example of what to do because I’ve done it.
Speaker 7: And what would you expect a reader to walk away… The main sort of pieces of information that they come away with?
John H: This book can save them a lot of time and a lot of money. And if they’re serious about getting into buying and selling property, or buying and renting property out. I go through how to fund things. I go through about picking a agent. About picking a solicitor. About picking a builder. About the pitfalls of builders. They always have three jobs on at once.
Speaker 7: Now the market, the property market is always changing. So it’s very important to keep up with things like this, isn’t it? If you’re looking to get into property.
John H: So in the book, I explain what to do in a hot market, and what to do when things start to go wrong. And that’s the most important advice in the book. Totally I think, what to do when it goes wrong. I’m not gonna tell you now. You can buy the book and read all about it. Because I’ve done it. I’ve survived four property recessions, three or four.
Speaker 7: If you’ve got a question about property, why not ask an expert? Property Question Time gives you the opportunity to ask anything you want, whether it’s about planning, finance, conveyancing, moving abroad. Literally anything that’s property related. The Property TV panel of experts are available to answer your questions, no matter how complex they may seem. Simply email your question to firstname.lastname@example.org, and join us on Sky Channel 189 to hear your questions answered.
Stephen G: Welcome back to Property Question Time. I’m Stephen Galpin. With me are John Howard, Mike Gray, and Paul Mahoney joining us from Australia.
Paul M: Hi, Stephen.
Stephen G: John, I think you’re next.
John H: Good.
Stephen G: “My property isn’t selling and has been on the market for over a year. I’ve lowered the price. Still no luck. What am I doing wrong?”
John H: Well, it could be a number of things. I haven’t got a lot of sympathy for them, to be fair, because I believe that any house will sell within three months if it’s priced right. It might need decluttering. Now, some people don’t see the mess in their houses, even if it’s there and others do. So I would ask the agent for some straightforward, honest advice. Why isn’t it selling? Is it because it needs decorating internally? Is it because it smells of dog? Is it because it’s in very poor condition? Am I burying my head in the sand because I won’t tell the agent to reduce it and the agent’s too weak to tell me to reduce the price? They’re the questions that they should be asking. There’s no excuse whatsoever for a house that hasn’t sold for a year.
Stephen G: Okay.
John H: Sack the agent as well, of course, could be another suggestion.
Stephen G: And I’m sure Mike, you’re going to tell us that at auction-
John H: Put it in auction.
Stephen G: [crosstalk 00:16:02] Something’s going to finish his word.
John H: I set you up there, Mike, for that one.
Mike G: Thank you very much.
John H: That’s okay.
Mike G: You’re going to have to work closer with us. That may be auction, but as I’ve said before, that not all properties are right to be sold by auction. We are very careful in selecting the right property at the right price at the right time.
The other thing that of course I noticed that John mentioned about. Get an honest answer from the agent. Because some, unfortunately, if they’re not so experienced they’re a little bit weak in giving advice, that often get drawn to just going along with what the client’s saying. So you need to analyze is it actually with the right agent? Yeah? Whether that’s an auction or a private treaty, maybe it’s time off for a year, to take some advice from somebody else.
Have a second person in and see what they say. Perhaps if you could try not to even give them the price and the background and how long it’s been on, and get a fresh look at that.
John H: The problem is with that, Mike, these days is because all online. It’s on history. You can go back. I mean, I can find anything out about you I want.
Mike G: It’s true, yeah, it’s true.
John H: Anything I want, Mike, about you. And vice versa.
Mike G: And any price we have on. Yeah.
John H: So that’s the problem.
Stephen G: I think from an agent’s point of view, it’s quite difficult, isn’t it, to comment and advise on somebody’s style of living. As you said, there are a number of things that are a bit off putting it.
John H: I know I’m known as being a hard-nosed developer, if you like. But you’re not doing your client any favors by not being honest with them. And you’re not doing yourself any favors by not being honest with yourself. Burying your head in the sand, if you want to sell a property, is not the way forward.
Stephen G: Yes. I think you’re quite right to take sort of supplemental advice, because I think an agent is always conscious of wanting the instruction for nice property. And of course, some do have a tendency to tell you what you want to hear.
John H: Really? Never.
Stephen G: But I mean, I suppose that’s life, isn’t it?
John H: It is life.
Mike G: And then just a little bit of support to the agent in question here, is it’s often the client actually when having given some good advice, doesn’t take it.
John H: Well you know what? He or she should not put the property on the market then, Mike.
Mike G: No. No.
John H: It’s a waste of time and money, putting a property on the market that you can’t sell.
Stephen G: I think a good agent will say no.
John H: Should do. Yeah. Absolutely.
Mike G: But in the last 12 months, the market’s been too good and strong not to have sold a property.
John H: Absolutely.
Mike G: John says three months? Correct. Eight years ago could have taken a year, but right now, it shouldn’t be on for more than three or four months without a buyer.
John H: There’re no excuses.
Mike G: Two little quickies that the viewers might like to think of. Have a look at the website and the, should we say, the right moves entries. Do the photographs look crisp and clear? Do they look nice? If there’s any rooms that don’t display so well, take them off. Don’t have photographs the sake of it. Cut the numbers down. And one of the old favorites things that they should not miss out is have they got a for sale board outside. Because that works.
Stephen G: I think you’re right. It does, doesn’t it?
John H: Good old fashioned advice. I’m not saying you’re old. It’s good advice.
Stephen G: Yes. Okay. Thank you for that, John. Mike, come to you next. “We’ve seen a bungalow for sale in the area we want to buy. Little comes up for sale in that area, but on the right move list, it’s saying, ‘For sale by auction, unless sold prior.’ What does this mean? Is it for cash buyers only? Is it likely to be something that has something structurally wrong with it?”
Mike G: Okay, well there’s three questions there. No, it’s not for cash buyers only. At an auction, if anybody turns up and have done their due diligence. They want to buy, all they’ve got to do is be the last and highest bidder on the day. They give 10% to the auctioneer, and they’ve bought the property. So it doesn’t have to be cash buyers.
Secondly, it doesn’t necessarily mean to say it’s structurally unsound or there’s a problem. The myth of auctions 15, 20 years ago was it was always structurally damaged or properties in possession. That’s no longer the case.
So taking those two out of the frame, the last one is you said it was available or unless sold prior. That’s quite professional. What the auctioneers are saying there carefully is it’s available on, let’s say, the 23rd of all of August. Yeah? Unless sold prior. What they’re flagging up that they are instructed and obliged, if an offer comes in at the right level, to sell the property before the auction.
So they’re just flagging out the good advice. Because on the morning, check with the auctioneers to see if it’s still available. Or register with the auctioneers to say you’re coming along to bid on that property. Because there’s nothing more frustrating, is you get to the auction on the day, and you found out they sold it the day before.
So that little caveat, “Unless sold prior,” is probably just good housekeeping.
John H: It’s very professional. The other thing I would say is that if you’re getting a mortgage on a property prior to the auction, make sure you have your mortgage offer prior to it.
Don’t assume that you can get your mortgage off for two weeks between exchange and completion, because that’s stressful. Don’t take the risk.
Stephen G: It may not happen.
John H: It may not happen. Make sure you have your offer prior to going in that room and bidding on that property. One, you’ll be more confident about bidding. The second thing is you can sleep at night afterwards.
Stephen G: So I’m presuming then, Mike, that purchased at auction, once you’ve said, “Yes, it’s mine.” That’s equivalent to an exchange of [crosstalk 00:21:17].
Mike G: Once the gavel goes down, it’s a exchange contract.
John H: It’s all done.
Mike G: In the English property law. Completion 28 days later, unless otherwise stated in the auction and back. And you’re under contract. Now, that may sound a little dramatic now, to think the deal is done, but the good news is nobody else can get it.
John H: Exactly.
Stephen G: That’s true enough, but I think John’s point is well. Get your financing in place because 28 days is not a long time to get the mortgage in place.
John H: It doesn’t take. It doesn’t take. It soon goes.
Mike G: We often say the auction audience now is a much less experienced crowd, whereas it used to be investors. We often say, “Would you ever go shopping without your money?”
Stephen G: Yeah, that’s true. True enough.
John H: It’s mad.
Stephen G: Thank you, gentleman. Right, Paul? Your question now. “I’m releasing equity from a property by putting a buy-to-let mortgage on it. The equity will be used to fund a deposit on a second property. The second property requires full renovation. Can I live in that buy-to-let property temporarily for the three months while the place is renovated and work completed?
Paul M: Okay, good question. Something that’s quite common is having your home, and taking a mortgage on that property to buy another. It seems from what you said that that is the scenario. However, you’re now looking to let the property that you’ve been living in up until now, buying a new one that needs renovation, and whether you can live in the property with the buy-to-let mortgage on it.
The answer is generally no. I covered this in the previous question, actually. That buy-to-let lenders don’t allow you to live in a property with a buy-to-let mortgage on it. And you can get in quite a lot of trouble for doing so.
I suppose first off they can pull the mortgage which will cause you all sorts of problems. They can actually foreclose on the property if you weren’t able to repay the mortgage straightaway, which most people wouldn’t be able to do.
So definitely use a product that’s fit for purpose. Something that people quite often do to get around sort of short term renovation projects where you’re potentially a buy-to-let mortgage or a residential mortgage isn’t suitable, would be short term finance.
So either a bridging loan or even a second charge loan against one of the properties to release some funds and allow you to do those works. And whether you’re going to live in one or the other, just make sure that with the lender that you have in place, that they’re aware of it and they’re okay with it.
Another thing to consider is if it is your home that you’re looking to mortgage to then buy the second one is it wouldn’t be a straight buy-to-let commercial mortgage. It would be called a let-to-buy, which is a consumer mortgage.
So there are a few extra hoops to jump through there. The rates are pretty similar, but there is a big difference between regulated mortgages and unregulated mortgages. Buy-to-let mortgages and commercial mortgages. They’re technically unregulated, even though they are kind of regulated at the same time. Whereas residential mortgages are very much regulated. And let-to-buy or a consumer buy-to-let does fit into that regulated space.
So again, you need to make sure you’re getting the finance in place that’s fit for purpose, that you’re not breaking any of the rules because you might get away with it. But it seems you’re doing this to make money. So if you do get caught, it’s going to be the opposite of that. You’re going to get significantly financially hurt. So even though short term finance might cost you a little bit more, that’s what it’s for.
So seek advice. Get in place the right finance that’s fit for purpose. And just factor that into your costs. If that means that you can’t put it, it doesn’t work, then it doesn’t work. But you know, skirting the rules when it comes to mortgages and breaking mortgage terms and that sort of thing is risky business. Because you’re only ever going to get caught once, and then you could end up being blacklisted. I could cause you all sorts of problems in the future.
So use the finance fit for purpose, and make sure that’s factored in and your project still works.
Stephen G: Okay, Paul, thank you very much. Gents, any comments on that?
John H: Well, I think Paul was right. I mean, it’s only for a few months, so…
Stephen G: That wouldn’t cause any legal complications?
John H: I don’t think so for a few months. You may want to inform them, like he said, but I mean, it’s the builder society or whatever. But…
Stephen G: Yes. Well, I think with most things with borrowing the money, whether it’s bank or builder society, I think if you’re fairly open and honest.
John H: Absolutely.
Stephen G: And it pays dividends, I think. Mike, any comments?
Mike G: No, I think John summed that one up perfectly for me.
Stephen G: Okay. Gentlemen, thank you very much indeed. Unfortunately that’s all we have time for today. So my thanks go to John Howard, Mike Gray, Paul Mahoney. Thank you all very much, and we’ll see you all next time.
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