Out of retirement

[Trw144]

So, just over a year after finally finishing our house and vowing I m retiring from self build for a while, we ve acquired another plot for a four bedroom house. We don’t intend to live in it, but build it to let out. This obviously brings with it some issues - I have some ideas on answers but am not 100% yet. Perhaps people could chip in to the below if they have some thoughts....

 

Vat - as it won’t be a selfbuild then we can’t reclaim the vat back. Two options seem to be

1) Get everything as zero rated as possible (ie supply and install)

 

2) Set it up in a vat registered company. Downside of this means the final house will be sat in in the company which might give me other tax issues with the rental (or it may be beneficial).

 

CIL - I m assuming I can’t get a CIL exemption

 

Mortgage - I don’t believe a build to let mortgage exists, or even if I could get a second self build mortgage. This means finding the build of cost which whilst doable, just is nt quite so straightforward.

 

House Finish - Whilst we don’t intend to live in the house, it would be a fall back position if we ever needed to sell our current one if we did hit harder times. However I would nt want to spec it like we have our current one just as a plan b house, as it will be rented out. Thoughts are to get the external finish to a high standard (as it’s hard to change this), and then go price conscious internally on kitchens and bathrooms - these can always be changed.

 

Any thoughts, input welcome.

Edited May 1, 2018 by Trw144

[Mr Punter]

I would go with the VAT company.  You will also need to register for CIS and be aware that Health and Safety requirements can be more onerous.

 

Regarding finance could you get a Buy To Let on your current house?

[ProDave]

In so many ways, it would be better to build the new house to live in (CIL exemption, VAT refund etc) and rent your current house instead. Then in 3 years flip them over.

 

It's a question of could you stand a tenant in your present house and the damage they may do, but the savings in CIL and VAT would surely more than pay for rectifying any damage they do?

[Ferdinand]

Not wanting to discourage, but have you done the business homework? Is it even worthwhile considering renting it out?

 

eg What rent will you get and what yield? How do you plan to finance in the long term, if you do? How will you manage it? Type of rental Single Family or HMO? What is the Council attitude? Have you compared to a pair of semis or two bungalows?

 

If you plan to refinance they will now stress test you at something like 150% interest cover at a 5.5% interest rate to set your maximum mortgage.

 

Round here, hell will freeze over before it is viable or sensible to build a 4 bed detached for rental to a single family, since the monthly rental ceiling for such properties is at about £800-£900 without something exceptional, such as being in an overtly expensive area or unique or a lot of land. You can buy an existing one in a nice position on an estate from about £200k, which at £833 a month rent gives a yield of 5%. Maximum mortgage for that would be about £120-130k. And that is before all the costs. I can do massively better than that in a financial product - even something as simple as an ISA from Folk2Folk.

 

At present Holiday Lets are treated far more favourably in the tax system, and there is a populist pincer movement against residential landlords from both sides.

 

There are also things in the tax system about property investment vs property trading, which I am not familiar with. No idea whether that will catch you out.

 

If nothing else I would recommend covering both rent and sale options, including the possibility of HMO, which means vicious cost control and things like all-double bedrooms. Join a couple of forums such as Landlordzone and PropertyTribes (a Ning community), and ask lots of questions.

 

Ferdinand

 

Edited May 1, 2018 by Ferdinand

[Trw144]

1 hour ago, ProDave said:

In so many ways, it would be better to build the new house to live in (CIL exemption, VAT refund etc) and rent your current house instead. Then in 3 years flip them over.

 

It's a question of could you stand a tenant in your present house and the damage they may do, but the savings in CIL and VAT would surely more than pay for rectifying any damage they do? 

 

No I could nt stand a tenant in my current house, and I also don't want to move for a good few years. We live in a nice village, it takes me 10 mins to get to the childrens school, and 10 mins to get to work.

 

1 hour ago, Ferdinand said:

eg What rent will you get and what yield? How do you plan to finance in the long term, if you do? How will you manage it? Type of rental Single Family or HMO? What is the Council attitude? Have you compared to a pair of semis or two bungalows? 

 

If you plan to refinance they will now stress test you at something like 150% interest cover at a 5.5% interest rate to set your maximum mortgage.

 

Round here, hell will freeze over before it is viable or sensible to build a 4 bed detached for rental to a single family, since the monthly rental ceiling for such properties is at about £800-£900 without something exceptional, such as being in an overtly expensive area or unique or a lot of land. You can buy an existing one in a nice position on an estate from about £200k, which at £833 a month rent gives a yield of 5%. Maximum mortgage for that would be about £120-130k. And that is before all the costs. I can do massively better than that in a financial product - even something as simple as an ISA from Folk2Folk.

 

So, some additional context/info. We have not had to pay for the plot - we have been given it (it is land next to my inlaws), the only condition is we cannot sell the property whilst they still live next door - that's likely to be 20 years or so, hence why we would rent it out. End value of the property is probably £400k+, and I think I could build it for £150-160k. I can just about cover the build costs from savings, and raising some from equity in other rentals.

 

Rental yield for this house is likely to be £1,200 per month as a single family, so a nice yield on the outlay (only build costs), plus the profit we will one day make on the sale of the property. We may decide to go for a holiday let - we would need to do the sums to see if the extra work is justified with a higher cost. This latter route does have tax advantages.

 

 

 

 

 

 

Edited May 1, 2018 by Trw144

[SteamyTea]

22 hours ago, Ferdinand said:

5.5% interest rate

Danske Bank will do a 95% LTV at 5.4% (initial 5.19%).

 

I am starting to get the feeling that property prices are set on what they can be rented for i.e. they sell at a price that, if rented, the mortgage is covered.

 

So if building to rent, just throw up a cheapest build you can get away with, but maybe allow for easy future upgrades i.e. easy to fit external wall insulation, MVHR, PV, under floor heating.

Edited May 2, 2018 by SteamyTea

[Ferdinand]

5 hours ago, SteamyTea said:

Danske Bank will do a 95% LTV at 5.4% (initial 5.19%).

 

I am starting to get the feeling that property prices are set on what they can be rented for i.e. they sell at a price that, if rented, the mortgage is covered.

 

So if building to rent, just throw up a cheapest build you can get away with, but maybe allow for easy future upgrades i.e. easy to fit external wall insulation, MVHR, PV, under floor heating.

 

From their website it appears the % limit on BTL is 75%, and that they do stress test.

 

Bank of England:

 

Quote

2.14 Even if the interest rate determined in paragraph 2.13 indicates that the borrower’s interest rate will be less than 5.5% during the first five years of the buy-to-let mortgage contract, the firm should assume a minimum borrower interest rate of 5.5%

https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/supervisory-statement/2016/ss1316

 

But given the OP's reply above, this is moot.