Stephen: Hello, and welcome to Property Question Time. This is the program where you can have your property related questions answered by our expert panel. I’m Stephen Gelapin and joining me today, are, Steve Jacob. Steve, you’re CEO Fabrik property group, welcome. Paul Mahoney, you’re M.D. of Nova Finance Group, again, welcome to you. And Nick Wallwork, CEO of propertyforum.com, welcome.
So, gentlemen, we’ll get straight on with the questions. And the first one goes to you Steve.
“My children have now left home, but I don’t want to downsize. Can I change my home into an HMO and stay in part of it myself? What would I need to do?”
Steve Jacob: Well, I don’t specialize in HMOs. The area that I’m in, is in an article 4 area. So, that’s one of the things you have to look out for. If you’re in an article 4 area, they won’t allow new HMOs into the town. But, if I were to want to rent my property into it… Turn my property into a HMO, I would go seek advice from a local planning consultant or architect. And they’ll be a procedure to follow to get your HMO in the state it needs to be, and licensed.
I would consider the management of that as well. Because managing HMOs as well is quite a tough thing to do. And I wouldn’t go for the first tenant that comes through the door. I’d interview quite a few tenants.
Stephen: Okay. And is there a difference between creating a HMO out of your own property as opposed to going and investing in a property for the purpose of turning it into a HMO? Is there in regulations?
Steve Jacob: In regulations, I wouldn’t say there would be. I don’t know, that’s probably something Nick could answer. But, the one thing to think of is how it’s going to affect your personal life, having other people in your property while you’re living there. I think that’s the biggest thing.
Stephen: I was just thinking that. If you live in quite a big home, to have it suddenly invaded by sort of four, six, or eight other people, that’s got to be quite a lifestyle change, isn’t it.
Steve Jacob: Definitely.
Stephen: Nick, you got any comments on that?
Nick Wallwork: There are slight differences in the regulations, I believe. I’ve never done it, not in the recent 15 years. So, I wouldn’t like to comment specifically on that regulation. But, suffice to say, you do need HMO licensing for most HMOs. And that basically covers a lot of health and safety stuff, so it’s the fire doors, fire alarms, making sure you’re up to spec and you and your tenants are safe. So it does change the nature of the property from a residential one to a higher grade of safety when you got more time.
Stephen: That’s only right, isn’t it.
Nick Wallwork: Absolutely.
Stephen: There should be proper regulation if you’re going to have multiple occupants, then people have got to feel and be safe. But, interestingly enough, what do you think the resistance is by some authorities in saying to anymore HMOs? What’s the downside?
Nick Wallwork: I think that… Steve, he touched upon the article 4 direction area. In certain towns, they put in an area, on a map, where the permitted development rights to change from a standard C3 residential house to a C4 small HMO has been removed. So you can’t do that. And the reason they do that in a lot of areas, is sometimes the over studentification. You might have a really populous student area in a town, and every street turns into student HMOs. So, then you’re left with people that, perhaps live in the street and they’ve got 15 houses that are all student houses. That becomes quite quite disruptive. And it can really sometimes bring down an area, you know. Students are great tenants, but…
Stephen: Well, we are moving into a time when there are far more sort of specifically built, purpose built blocks really, for students, aren’t we? And probably that’s maybe better and safer way to go.
Any comment on the financing of all this Paul?
Paul Mahoney: The finance sort of things that… Obviously if they’re looking to turn their residential home into a HMO, they would need to make sure it’s okay with their lender. And most residential mortgages wouldn’t allow that. You do need to let them know who’s living in your property, even if you’re lending it a single person. So they would need to figure out whether there’s product fit for purpose for that. And to be honest, off the top of my head, I’m not sure if there is.
Stephen: Would there be a different product, or would they simply just want to charge you a premium over and above the old…?
Paul Mahoney: It would probably be a different product. Because the residential mortgages are consumer mortgages, it’s fit for purpose for someone who’s living there as their primary place of residence, as opposed to it being a business activity, which is essentially what they’re switching over to.
Steve Jacob: I think sometimes, can you not get a right to let permission…
Paul Mahoney: You can get…
Steve Jacob: Temporary thing…
Paul Mahoney: Yeah, you can get right to let. But I’m not sure whether that would apply to it still living there and creating a HMO.
Steve Jacob: It’s quite unique.
Paul Mahoney: It also wouldn’t be a right to let because you’re still living there.
So, you would need to figure out whether there’s product available for that. Because it is a somewhat unique decision.
Stephen: Well I think, like a lot of our subjects, it needs professional advice, doesn’t it.
Steve Jacob: Definitely.
Stephen: It needs advice from the local authority, it needs advice from specialists in finance, and of course…
Nick Wallwork: Just good conversation with a bank.
Paul Mahoney: Just one more comment on that, so far as whether they should do that or not. And Nick kind of touched on it, as to whether a HMO even makes sense where their house is because it may not. HMOs have been a big buzzword in the market over the past few years, and some areas are just flooded. And that’s why the local councils want to control them as well. Because, you know, I think everyone just assumes if they create an HMO they’re going to get a fantastic yield. But if it’s not let, then there’s no yield.
Stephen: Right, Paul. We’re going to move onto your question. So, “Can somebody please explain to me the advantages of putting a buy to let property in a company rather than having it as an individual? And what percentage of the property’s value would be loaned to a company on a buy to let mortgage?”
Paul Mahoney: Okay. So the idea of investing through a limited company is a little bit controversial as to whether it’s the right decision or not, and who it’s right for. But, in general, a lot more people have been investing through limited companies since section 24 for announced. So, essentially the removal of tax deductibility of buy to let mortgage interest. You know, for example, I saw some stats recently… Before section 24 for announced, only 5% of new buy to let mortgage applications were for limited companies, and in the final quarter of last year, over 70% were. So now the vast majority of new purchases are being made through limited companies.
From a tax perspective, where it starts to sort of make sense to consider that, is if you’re a high rate tax payer. Because basic rate tax payers aren’t actually affected by section 24. And that’s a common misconception, that they are. But in fact, they’re not. If you’re employment income, plus your property income is less than 50 grand a year, or a hundred grand combined between a married couple, you’re not affected by section 24 at all. If you’re a high rate tax payer, you are.
So that’s where, if you’ve got properties with high levels of debt, and then that debt is less tax deductible than it was before, then assessing the limited company option might be worthwhile. It’s difficult to move existing properties in, that can be costly. But, perhaps new purchases can be made through limited company.
And loan to values, and in fact rates now, are becoming quite similar to buy to letting your own now. In the past, it was a lot more expensive, and loan to values were lower. But because the market… Because of that shift I mentioned towards this being very popular, competition has grown greatly.
Yeah, the rates are still slightly higher than only buy to letting your own name, but they’re getting closer and closer.
Stephen: And what are lender’s attitudes to lending to startup companies with no track records? Are they still looking at the individual?
Paul Mahoney: They actually prefer it.
Stephen: Do they?
Paul Mahoney: So, the vast majority of lenders prefer lending to a special purpose vehicle as opposed to an existing established company that’s operating in some other right. The reason for that, is it separates the risk. So, if I’m… If I own a launderette with loads of debt, and I want to buy a property in that same company and my launderette goes bankrupt, well then that could affect the properties. Whereas, you know, if it’s in a separate company, you split the risk.
Stephen: What about the relationship between the sole director of the company, and probably sole shareholder, and a limited company? Are they going to look for personal guarantees?
Paul Mahoney: Yes, they do ask for personal guarantees. For the business buy to let, a limited company buys to let, it is a bit more about the purchaser, not just about the property they’re buying. As buy to let itself is more to do about the property you’re buying than it is about you as a person, but they do look more at the person when it’s through a limited company.
Stephen: Got it. Okay.
Nick Wallwork: I think it’s also just as important to add, if you’re deciding on a limited company versus personal route is what’s your goal with that deal? If you want to flip it on, you might want to get capital gains treatment on the sale, which actually buying it personally would be a better option than cheaper. If you’re holding it long term, you probably want to have it the limited company route. You can choose when to take your dividens, and you can leave money in the company and therefore have less tax.
Stephen: So, would you sell the company as opposed to the property then?
Nick Wallwork: You could. If it was in the company you could or you would.
Stephen: Would that take you out of stamp duty too?
Nick Wallwork: It reduces the stamp duty I believe to half a percent in company’s shares. So you’re transacting a company. But if you were to flip it on immediately, you wouldn’t want to buy it in the company if the first place ’cause you could get capital gains treatment as a private sale rather than the sale of a company.
Stephen: I see. Steve, anything to add to that?
Steve Jacob: Not really. I mean, ever since I started property, I’ve put all of my properties into one limited company. And the thing I like about going into a limited companies are charging to go with one bank whose helping me grow, so I bank with Handelsbanken. And the bigger my portfolio gets, the better the relationship I’ve got with my bank. Now I do know that other people have had bad experiences doing that, and I was careful to choose what bank I went with.
Stephen: But is that all your properties in one limited company, or a number of limited companies each ring fenced holding the one property.
Steve Jacob: No. All of properties are in one limited company with one bank, Handelsbanken. I chose Handelsbanken because of their ability to advise me on the market. The bank manager they give me, is someone whose on the ground all the time. And he knows the market just as well, if not better than me because he looks at hundreds of deals every week. So I like the fact that I’ve got quite an intelligent business partner working with me to ground my portfolio.
Nick Wallwork: It’s interesting ’cause with that scenario, if you’re building a portfolio and you want to sell that as a whole, that’s a really good way of doing it. Someone could buy into a yield and buy a whole portfolio from you very easily and cheaply. If you wanted to sell an individual company out of that portfolio, you might struggle because you’d have to sell it as a property rather than a company. So, someone would be paying more stamp duty. So this swings around about… so every scenario.
Steve Jacob: 100% and definitely, going back to what Nick said, make sure you know what you’re goals are when you’re entering property from day one. Mine was for a legacy, for a long term investment, for a pension. That’s not everyone’s goal, so…
Stephen: Okay. Nick. We’re going to move onto you now. Good job, you’re not in the government ’cause you’d love this one.
With property demand still being high and getting higher by the day, what are developers doing about this to help solve the housing problem that we have in this country?
Nick Wallwork: I think the first thing to say is that developers are trying to build as much as they can. They’re always up against the wall of planning. And although there’s lots of incentives from the government level, actually that trickling down to local councils is quite tough. I think, we need to see a bit of relaxing of certain planning rules, especially at the local level. That’s why we get held up, always as developers. We’re ready to build stuff, and there’s seemingly endless hurdles to overcome that can be quite tricky and… You know, not thinking about the bigger picture side of things.
In terms of sort of physical developments, we’ve obvious touched on HMOs. A lot of developers are doing conversions for HMOs. And that’s getting more people into the same building, provided they’re are good quality standards and they’re built to the correct safety standards and quality, that’s a really good solution for the low rent professional market that can’t necessarily afford to get onto the ladder of buying a property.
Micro studios is big. We’re micro studio developers as well. We’ve got numerous sites through the Thames Valley, Reading, and Anuburry. So, we’re taking permitted development offices, converting them into residential, into… Lots of units into one building. All good size, all very well specced. But it’s been clever about the design and the entire layout.
Stephen: I suppose the obvious question is, are developers building what’s needed? You know, we have in London here, this almost daily criticism of developers building great big glitzy blocks and they’re going off to Singapore, to Hong Kong, to KL to sell them and it’s not really helping our home market.
Nick Wallwork: I think that’s quite a specific problem to London. I think London is a… in it’s own market. It’s almost completely…
Stephen: You don’t think it’s the same in Manchester and Birmingham and…?
Paul Mahoney: I think it is to a certain extent. You know, we work with a lot of developers that have clients who invest in 30 plus properties a month, and I think sometimes there is a disconnect between what the developer wants and sort of money they’re going to make from it, and what the market wants. Sometimes someone of them get it really… Hit the mark, and other really miss the mark.
Stephen: Yes. I’ve always thought, actually, the key to this is actually if developers know they can sell what they’re building, they’ll build as much as you like and they’ll supply as much as you like. And we should probably learn from the car market, because both collapsed in 2008, the car market came out steaming, why? Because they offer phenomenal finance packages to people, that make it affordable. But there were…
Look gentlemen, that’s all we’ve got time for in this half of the program. Thank you very much. We’re going to take a short break now. We’ll be back soon.
Welcome back to part two of property question time. I’m Stephen Gelipin, and with me again, is Steve Jacob, Paul Mahoney, and Nick Wallway. Welcome back gents.
Steve, your second question. “In our development the lease clearly states that no animals of any kind are to be kept in the building. I want to have a very small dog and therefore wonder if it is indeed fair to preclude me from having one. I’m pretty sure I’ve seen other residents coming in and out of the building with their pets”. There’s a good management question for you.
Steve Jacob: Okay. So technically, if the lease states you can’t have pets, you can’t. However, I know that my property litigator has had two or three of these arguments go all the way through to court. And if you’ve got a small pet for comfort purposes, most of the time the judge will go on the side of the tenant and it will be thrown out. However, that is a circumstance based argument. So, you know, is it easy access for the dog to go to the toilet, it’s not big dog in a small flat. But that is an argument my property litigator has won on a number of occasions for the tenant.
Stephen: Was that a Chihuahua.
Steve Jacob: For comfort purposes.
Stephen: Okay. Any comments on that Nick?
Nick Wallwork: Well, no. I have a small dog, so I’m happy. But I don’t rent thankfully, so…
Stephen: And are you in a block of flats? Or are you in a home?
Nick Wallwork: No. I’m in a house.
Stephen: In a house, okay.
Nick Wallwork: But I think, from a landlord’s perspective, joking aside, we just want our properties well kept. And we make exceptions in our portfolios for people that have sensible pets. Like you say, you don’t want a Doberman in a studio flat that’s going to chew every piece of wood and furniture in there, but…
Stephen: Paul, any consequence for lenders over these potential breeches of lease?
Paul Mahoney: I think, obviously, if you’re breeching the lease and it becomes an issue, that might create a problem with the lender. But based upon that circumstance, I’d say a very sensible path would just be to just ask the landlord first rather than escalating it too quickly.
Steve Jacob: Yeah. We say no pets allowed, but if we get asked my [inaudible 00:15:47] manager will go and meet the person, look at the pet and take a view, so…
Stephen: I think I’d fire them. I have to say you know, I’ve had these questions probably about the last 35 years, and I’ve come to the conclusion that the tenant has a lease, he reads the lease, okay. The landlord produces the lease, he reads the lease. They both agree it, and they let the property. So, why don’t they just do what it says in the lease. It saves an awful lot of trouble.
Nick Wallwork: That’d make it so easy though, wouldn’t it
Steve Jacob: What you find though, you say that… No, no. You might find that you’ve got an old lady, husband’s passed away, she wants a pet for comfort. In that circumstance, you’ve probably got a tenant in there for 10 or 15 years, going to pay on time every time…
Stephen: She might’ve forgot what’s in it.
Steve Jacob: Could come out just because a piece of paper says… Don’t agree with that. Sorry.
Stephen: Okay. Right. Well we’ll move on. Paul, your second question.
“Is there a common denominator in calculating the amount that would be loaned against a property in a buy to let mortgage? And how does it work taking into account rental income?”
Paul Mahoney: Okay. So, there’s two ways that lenders look at how much they’ll lend against the buy to let property.There’s loan to value, and there’s serviceability. The loan to value is, of course, the loan against the value of the property. And the average maximum, and what I mean by that is the average loan to value that lenders will go to and still be at sensible rates, is 75%. Some will go a bit higher, but the rates get higher. And some, if you go a bit lower, the rates get a bit lower. So that gives you a bit of an idea.
So if you’re buying a 100,000 pound property for example, it’s pretty straightforward to borrow 75,000. And at 25% deposit.
From a serviceability perspective, generally, buy to let mortgages the serviceability is the rental income from the property. Some changes that took place last year, was the Bank of England introduced… They mandated a benchmark rate of 5 and a half percent. Meaning that your rent needs to cover a stress test rate of 5 and a half percent. And it needs to cover that 125% of the time.
Stephen: To take into account voids and everything.
Paul Mahoney: Void, maintenance, all that sort of stuff. Costs.
So, the way of working out how much you can borrow based upon that, is take your monthly rent, times it by 12, divide it by .055 and divide it by 1.25.
Paul Mahoney: That will give you the amount.
Stephen: That’s good and simple.
Nick Wallwork: Off the top of your head, what’s that Stephen?
Paul Mahoney: If you remember those figures[crosstalk 00:18:24]
But there is a way around that also. Because five year fixed products are exempt. So, the issue with that change is high value low yield properties, it affects most. So London for example. If you run that calculation I just gave, the maximum you can borrow most London properties about 55, 60%. So, that’s a big lump of cash to buy a place in London, which makes it difficult…
But if you go for five year fixed product, quite a lot of those products are at the actual rate. So the rate might be 4% or something, and rather than it being stressed at 5 and a half, it’s stressed at 4.
Stephen: Okay, I understand. Steve are you finding any different in the north of England on these calculations? Are you finding it easier or harder to finance buy to lets?
Steve Jacob: Financing buy to lets… I won’t be able to answer that in my particular area. But definitely, the rink cover situation, that’s never really been a problem for us in the north. The loan to value is lower I find, I mean a lot of lender will say 75%, but then get closer to the point of lending the money, the loan’s value will come down to 70.
I was always advised by people that I took advice from early on, was to try and stay as low geared as your possibly can. Because in the event of a market crash, they might revalue your portfolio and will want your loan to value kept at where it is. And the more equity you have in your portfolio, the less likely you’re likely to get that knock on the door in a bad market.
Paul Mahoney: Just on that point, there’s certain mortgages that they can do that. But most buy to let mortgages they actually can’t.
Steve Jacob: Well they can’t review, no?
Paul Mahoney: No. Some they do, and perhaps with your scenario where they’re lending on the whole portfolio they perhaps can, but with your standard buy to let, even if the value drops by 50% they can’t recall until the end of the period.
Steve Jacob: That’s really good information. I mainly only work on the commercial ending, so I [inaudible 00:20:20] my clients.
Stephen: Paul, we were having an off camera discussion about service charges earlier. Are they tending to put any restriction on the percentage of service charge in relation to value of the building?
Paul Mahoney: Yeah, they are. There’s a sort of general rule of thumb with ground rents, which I believe is .01% of the purchase price. Most lenders won’t go over that. So now most landlords [inaudible 00:20:45] setting it at that.
There’s no rule, I don’t believe, with service charges. But, for example, I have just had a case where a client bought off plan, service charge was 1400 I think, and now that it’s complete, the service charge is 1650. And the lender reduced the valuation by three grand because of that.
Paul Mahoney: Yeah, so. So, yes, they do account for it. And the reasoning behind that was that all of the costs added up to about 30% of rent.
Paul Mahoney: So they were concerned about serviceability.
Stephen: Sure. Any comments Nick?
Nick Wallwork: All I’d add is it’s sort of simple mathematics isn’t, like any business, it’s money in versus money out. So if you want more money going out, that needs to be considered and will be considered by lenders and people looking to buy the property… It’s a fundamental part.
Paul Mahoney: You mention about that formula seemed complicated, you know, just seek advice. Speak to someone who understand it. There’s about 3,000 buy to let products in the market now and more than half of them are only available through intermediaries or brokers. So, going and speaking to your local bank about what you can do, you’ll often end up with a much worse product than if you spoke with an independent broker.
Stephen: I’ve always had the feeling, I think on these things, especially if you’re going into the market for the first time, better to speak to a good broker than normal bank. Nothing against banks, but brokers have got such a specific knowledge of probably the area and the product, and yourself. So, always quite important.
Steve Jacob: Definitely important to find a good broker as well. Somebody who takes your whole life picture into consideration, and not just that one deal. Because they might get you the best deal at the time, but they haven’t looked at all the other criteria to meet your life goal.
Stephen: Okay. Thanks gents for that.
Nick, your last question. “If I wanted to buy a three story property, and add a floor to it, how easy would that be? I thought I heard of some kind of approved scheme for this sort of thing, using modular building methods.”
Nick Wallwork: Okay. Yeah. There’s lots of things to consider there. It seems the question’s angled slightly towards the construction side of things, so, is it possible really needs to be checked out on a case by case basis. You’ll need a structural engineer to look at the existing building. Can the foundations take an extra load? And then, what construction method’s going to be used for that extra story. There are some very interesting modular builds coming out. And they can be sort of slotted into place almost prefabricated off site, very lightweight, they go up very very quickly, and be weather proof within a matter of days. So, very interesting construction methods out there that are allowing that to be possible. But certainly, case by case bases. You need to look at the building, the current structural, the area around it, the neighboring properties.
Obviously you’ve got to get through all the planning side of things first. We’re currently developing a site in Newbury and Berkshire, which is a 10,000 square foot three story office, which we’re looking to put a whole story onto. So we’ve had to have various excavations done to check the foundations and check it can be done.
Stephen: This seems to be a whole new industry in London of sort of popping another story on something, building penthouse on top of a block of flats or even a house, that sort of thing. Are you experiencing that where you are?
Steve Jacob: Nah, not at all really. I mean, there’s enough stock in my area at the moment, to just redevelop the commercial, adding even land value. If you were to purchase a plot of land where I am, you couldn’t build. The cost to build wouldn’t make sense to do it. So, I’m just cleaning up with the commercial conversions and the refurbishments of old blocks of flats ar the moment.
Stephen: Well all right gentlemen, thank you very much for all your answers. Very helpful I’m sure, so I’m going to say thank you to Steve Jacob, chairman of the Fabrik Property Group, Paul Mahoney, M.D. of Nova Financial Group, and Nick Wallwork, CEO of propertyforum.com. Thank you all very much indeed. Join us again next time for Property Question Time. I’m Stephen Gelapin. See you next time.
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