XMAS TAX PRESENT FOR DEVELOPERS
For those landlords who develop empty & derelict buy-to-let investment properties the tax man has a Christmas present for these landlords.
In his pre-Budget report, Chancellor Alistair Darling announced a change in the VAT rules designed to provide incentives for landlords to take on derelict properties and hopefully breathe new life into rundown areas. From 1 January 2008, a reduced rate of VAT will apply – 5 per cent, opposed to 17.5 per cent – on the cost of materials and labour when renovating a home that has been empty for two years. The current law stipulates that homes must have stood vacant for three years to qualify for the reduction.
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Why develop & invest?
Experienced landlords have continued to shun the new build packaged ‘buy-to-let investment opportunities’ that many newbie landlords were seduced into buying and are now unfortunately saddled with. Instead professional landlords have known all along that there is no ‘gain without pain’.
Professional landlords know that there is nothing like developing investing as a long-term investment strategy. This is where a landlord buys a wreck, renovates it and then uses the development profit as their deposit. This proposition though has been made increasingly difficult over the last 5 years as the likes of Sarah Beeny & friends have bombarded us with tales of how we can all make a make a mint by developing property.
Firstly, I’ll let you into a secret; she isn’t really a property developer, it was her brothers that did the hard work she just did the soft furnishing. Nevertheless, she was compelling viewing which probably explained why she ended up in front of the camera rather than her brothers.
The result of programmes like Property Ladder were that every man, woman and child with any entrepreneurial zeal wanted to be a property developer. This distorted the property market in a way that resulted in property wrecks selling at a premium to ‘sound’ properties as newbie developers competed over these ‘development opportunities’.
Thankfully the likes of Beeny & co are moving off into other ventures such as trying to get their single friends married off.
Fortunately for serious male and female landlords a like; the credit crunch has injected a welcomed bit of realism into the residential investment market.
The latest round of auction results from Savills’ auction showed that about half the entries remained unsold and that a 2 bed terrace properties were available at £60k and a 1bed bedsit was still on offer for £30,000.
These prices are starting to have a more realistic feel and also are beginning to represent an opportunity for developer investors to make a good long-term return.
For more information on how to find and purchase property investment opportunities have a look at this recent article.
One crucial aspect of buying a development opportunity is being able to access the development finance to allow a landlord to purchase the property and then carry out the refurbishment work.
If a landlord is purchasing a property at auction they will need to be able to find 10% of the agreed bid price on the day, with the remaining amount being payable within 4 weeks. For most landlords this means that they need to secure bridging finance from a specialist lender to enable them to complete the purchase. It is then possible to refinance the bridging loan before the refurbishment with a more permanent buy-to-let mortgage.
The mortgage required for a refurbishment project is different to a standard buy-to-let mortgage in that the lender has to be prepared to lend without the security that the borrower is able to let this buy-to-let investment property out immediately. One lender who is prepared to do this is Capital Home Loans. They currently offer an 85% advance on initial value. The landlord then has 3 months to complete the refurbishment work after which the lender is prepared to lend up to 85% of the improved value of the property providing the rental cover is 115% or more. The interest rate payable on this product is 1.15% above bank base. There is an application fee payable of 1.25% of the loan amount.
Some essential tips for potential investor developers
- Where possible try to minimise the number of times you refinance – because of fees it is an expensive business
- Make sure you have thoroughly thought out your refinancing strategy and have checked with lenders and advisors that what you are thinking of doing is acceptable – you don’t want to buy a buy-to-let property to find you cant obtain the finance you need to do what you want with it
- Remember when it comes to development – time really is money. Every day your buy-to-let property is empty and unlet it is costing you double. Firstly you are paying interest on any loan; secondly the property is unlet and empty meaning that you are not getting any rent. Look to minimise any refurbishment and development period by having a full development schedule planned out before hand.