Build to let mortgage - self build then rent out

[Lingwood]

Hi, I have enquired about building a small (6 x 10m) 2 bed bungalow in the far corner of my garden and have pre planning approval from my council.

 

Initially I looked at building with cash, but bought another property which I rent out.

 

I am now back on with building this bungalow, but looking at ways to finance it and thought a self build mortgage might be the way as I believe the mortgage company values it from plans on the final value?

 

We already own the land, and mortgage company OK with the land split (although technically I would still own it all), as my plan would be to rent out the bungalow rather than sell.

 

I estimate build costs to be ~£50K and final value of £150K.

 

I will get a builder/bricky I have sued for previous work on my main property (double garage extension, kitchen extension, and indoor swimming pool)  and then as with these projects I then did all fit out including plumbing and electrics (signed off), thus keeping contractor work to a minimum.

 

I would be looking for a builder to in effect make a water tight shell, with only internal work to be skimming and maybe boarding.

 

Any advise please?

[Crofter]

Hi and welcome to Buildhub

Your plan is not dissimilar to mine- I'm building a 5x10m one bedroom house on land I already own, with the intention being to let it out. I've been fortunate enough to be able to do this in cash rather than needing to go to the bank.

FYI my total project cost is going to be about £40k, hopefully just under that, which includes some very expensive work on drainage and access issues that hopefully you won't have. However I am doing absolutely everything myself so the cost is materials only.

 

If you build to let, I don't think you will get your VAT back. I think you have to actually live in the property to do the VAT reclaim. So it might be best to go down that route, and not bother telling your bank that you plan to rent it out at a later date.

[Lingwood]

Thanks or the reply. Nice that your budget is not a million miles from mine, even accounting for builder doing my shell, and your extensive drainage.

Nothing too major for services etc connection, but still about £6 in services connections (water, gas, electric , drop curb, phone and sewerage).

 

I guess like many things you can get away with but you never know. The house I have just bought last year and renovated was for my mothering law (who the bungalow was originally for).

We looked at buy to let mortgages but actually told because a family member could not do buy to let, so ended up with a defined mortgage and used the cash as a very large deposit.

 

I will look into the VAT claim back, and see.

 

After all my recent building work and thought no more! But recent thoughts and savings etc for future I think this might be back on in a bit. I am just turned 40 and even if completed by 45 and rent out for 10 years, that will be a nice pot in the future (along with main house and other renter).

 

Estate agents have said in future if sold main house, people buying would never notice bit of land missing if bungalow was then, plus in addition we have bought a strip out back as part of the pool extension.

 

I have just contacted the mortgage broker I have used in past, but don't think he is into self builds.

 

Thanks

[Crofter]

My drainage issue was for the sewerage, as there is no mains connection around here. So my services came in at about £11k, of which about 6 was a fairly fancy septic tank and treatment system. The access was about another 5 and I think still needs another thousand to bring into truly usable condition. So between them, all those will be not far off half my total budget

[dogman]

As mentioned above you cannot claim the self build exemption unless you or the person claiming use it as their main/sole dwelling for 3 years from completion. We fell foul of the rule for our last house which was a holiday cottage. They did pick up on it.

[Lingwood]

That's ok about the vat.

 

my main reason for the self build is the finance issue

 

also does the new stamp duty fir a second (or more ) home still apply to self build? Got hit with it last year.

 

my broker got back to me this afternoon and said he dies stiff build so I gave him my ideas and will see what he can offer 

[NSS]

You may also want to check out the CIL liability as this also is only exempt for self build and retrospective if you claim exemption and then live in it for less than 3 years.

[Temp]

What Crofter said about VAT. You won't be able to reclaim VAT on materials you buy but the builder can if he buys them. So perhaps get him to do everything not just the shell.

 

I recall there might also be a VAT issue on houses built and then immediately let out. will try and find more on this.

[Temp]

I think the VAT issue on new houses rented out only applies if you are a VAT registered builder. See "Reclaiming the VAT" on this page aimed at developers...

 

http://www.wrightvigar.co.uk/vat-new-build-residential-development/

 

It suggests that if a VAT registered builder let's a new house rather than selling it he can't reclaim the VAT he paid on materials. I don't think this will apply to you but perhaps check.

[Ferdinand]

10 hours ago, Lingwood said:

 

my broker got back to me this afternoon and said he dies stiff build

 

Your poor broker God rest his soul 

 

I would think that the way to finance may be to take a 3 or 5 year smallish say 60% remortgage on the other rental you were talking about and pay for the build from that cash. The Osborne tax is coming in over the next few years so you squeak in before too much damage is done. Perhaps do it via a lower rate taxpayer if one is available to avoid that.

 

Ferdinand

[Lingwood]

7 hours ago, Ferdinand said:

 

Your poor broker God rest his soul 

 

 

 

Thankfully he is still alive.

 

The benefit of an honest broker is bouncing ideas off him and him offering/ backing up my sensible thought,

 

He said as not living it, pretty much rules out most self build and not many self build about now. He then stated talking about small scale development loans etc etc, to which he then just said you might as well get a loan and or credit cards for it!

 

This was my other thought, but when your broker says it, it makes sense

 

SO plan now is, to save up some cash and or loan and or credit card(s)

 

I probably will do it in stages as when time/money permits as I nearly killed my self doing last extension and rental renovation.

 

I just naturally assumed self building = self build mortgage but the simplest route is usually the best.

 

 

 

[Ferdinand]

1 hour ago, Lingwood said:

 

Thankfully he is still alive.

 

The benefit of an honest broker is bouncing ideas off him and him offering/ backing up my sensible thought,

 

He said as not living it, pretty much rules out most self build and not many self build about now. He then stated talking about small scale development loans etc etc, to which he then just said you might as well get a loan and or credit cards for it!

 

This was my other thought, but when your broker says it, it makes sense

 

SO plan now is, to save up some cash and or loan and or credit card(s)

 

I probably will do it in stages as when time/money permits as I nearly killed my self doing last extension and rental renovation.

 

I just naturally assumed self building = self build mortgage but the simplest route is usually the best.

 

 

 

 

It is worth a note that some btl loan providers deal direct such as National Counties, Aldermore and Kent Reliance.

 

That would save about £500 a time and let you donate a pauper's funeral to your now destitute broker...

[Lingwood]

Thanks I will give them a try. but if I can do the build fir what i am thinking if maybe £40k, I had gone upto £50k when I was doing build for myself buy as a rental, fixtures etc would be at lower spec.

 

on the potential of rental, any rent will go to paying off loans etc, so likely to be paid off sooner and lot less interest than a mortgage of 20 odd years 

[Lingwood]

18 hours ago, Temp said:

I think the VAT issue on new houses rented out only applies if you are a VAT registered builder.

 

 

I pi think you are saying if I use a none vat registered builder I don't pay vat? Is he is below threshold level? As builder I did get quote off said no vat!

 

obviouly would have to pay vat on everything else,

[Steptoe]

VAT,?

you pay VAT on everything,!

makes not one jot whether the builder is vat registered and adds it on or not,

if he doesnt add it on, its just built into his bill, as he has already paid the vat on the materials anyway, if you buy the materials, then you have paid the vat ,

the ONLY advantage of having a VAT registered builder is if you can claim the VAT back,

if a builder is NOT VAT registered then there is a big probability he will be labour only.

 

[Lingwood]

36 minutes ago, Steptoe said:

VAT,?

you pay VAT on everything,!

 

if a builder is NOT VAT registered then there is a big probability he will be labour only.

 

 

 

Yes, I should have clarified as vat on his labour. I have no issue if he is only labourer or just the bricky. I have seen his work and have managed enough projects to take on an unknown "builder" and not like on these cowboy builder programmes where the customer gives them all money up front and even pays to fix their van etc 

 

[Steptoe]

21 minutes ago, Lingwood said:

 

 

Yes, I should have clarified as vat on his labour. I have no issue if he is only labourer or just the bricky. I have seen his work and have managed enough projects to take on an unknown "builder" and not like on these cowboy builder programmes where the customer gives them all money up front and even pays to fix their van etc 

 

 

I didnt say labourer,

i said Labour only,

ie, not supplying materials

 

[Lingwood]

12 minutes ago, Steptoe said:

 

I didnt say labourer,

i said Labour only,

ie, not supplying materials

 

Thanks for clarifying that. 

 

His price was including all materials 

[Steptoe]

I wouldnt think a builder supplying materials can build too many houses a year without hitting the VAT threshold,

I may well be wrong though.

 

[Temp]

20 hours ago, Lingwood said:

I pi think you are saying if I use a none vat registered builder I don't pay vat? Is he is below threshold level? As builder I did get quote off said no vat!

 

obviouly would have to pay vat on everything else,

 

No that's not what I was referring to.

 

Normally if a developer builds a house the sale of that house is VAT exempt and the developer can reclaim the VAT he paid on materials with his quarterly VAT returns. 

 

However suppose the developer can't sell the house and decides to rent it out instead. In that case there is a little known clause that means the developer cannot reclaim the VAT on the materials he has purchased to build the house.

 

See..

 

http://www.wrightvigar.co.uk/vat-new-build-residential-development/

 

Quote

Recovery of VAT

Claiming back VAT you have paid depends on whether your initial intention is to live in, sell or rent the new dwelling you are constructing.

The first sale of the freehold or grant of a major lease (terms exceeding 21 years) is a zero rated supply for VAT. As a property developer this means you are eligible to register for VAT and reclaim the costs on your quarterly VAT returns.

If however you plan to rent out the property this is an exempt supply, which means you are unable to recover any VAT you have paid out on this project.

 

 

Edited January 18, 2017 by Temp

[Ferdinand]

31 minutes ago, Temp said:

 

No that's not what I was referring to.

 

Normally if a developer builds a house the sale of that house is VAT exempt and the developer can reclaim the VAT he paid on materials with his quarterly VAT returns. 

 

However suppose the developer can't sell the house and decides to rent it out instead. In that case there is a little known clause that means the developer cannot reclaim the VAT on the materials he has purchased to build the house.

 

See..

 

http://www.wrightvigar.co.uk/vat-new-build-residential-development/

 

 

 

 

Cheers.

 

So what happens if I sell it to another company I own?

 

(I expect that the first company gets the VAT back).

[Temp]

 

3 minutes ago, Ferdinand said:

 

Cheers.

 

So what happens if I sell it to another company I own?

 

(I expect that the first company gets the VAT back).

 

Yes that should work.