'Refurbish-to-let': the latest trend in buying-to-let
10-08-2014
As rising property prices push down rental returns, more landlords are trying to profit from refurbishments. Here's one solution to financing the process
University friends Sandip Chauhan and Ket Patel are investing in Lancashire property, but say it is a challenge to find a mortgage for refurbishment projects
By Kate Palmer
Britain's growing army of private landlords are battling to maintain returns in the face of rising property prices. An almost certain increase in mortgage rates over the coming months isn't helping.
As a result, many are turning to refurbishments as a way of boosting total profits.
The strategy involves buying run-down homes and swiftly increasing their value by undertaking a radical refurbishment. Lenders say more landlords are now hoping to buy property in need of major work cheaply, with the intention of undertaking drastic refurbishment - adding more rooms in the process - before putting it on the rental market.
In part this is because of a trend towards "HMO" investing, where multiple tenants live together in a single "house in multiple occupation". As Telegraph Money has reported, this is generally seen as the highestyielding form of buying-to-let.
Refurbishment not only increases the value of the investment, landlords say, but also cuts down on long-term maintenance costs and attracts higherquality tenants who tend to stay put for longer.
But there's a catch. While investors have their pick of buy-to-let mortgages - currently free from the strict affordability tests imposed on owner-occupiers - financing for a refurbishment project is harder to obtain.
Traditionally most investors wanting to refurbish would pay cash or, especially where they have large portfolios, raise mortgages on one property in order to pay upfront to refurbish the next. Once that project is complete they raise a loan against it, and so on.
But this process can entail multiple applications, booking fees, valuations and surveys - and even early repayment charges on the initial mortgage.
'I wouldn't be able to borrow elsewhere'
Hazel Clarke has been investing in buy-to-let properties for 15 years, and knows this problem well. She exclusively buys rundown properties to refurbish and rent.
"I always want to put my own stamp on a property," she said. "I'm horrified at the standard of the rental properties I buy. I would never hand over something that I would not want to live in myself."
Ms Clarke, who is 40 and owns 23 properties, said the current mortgage market was lacking for landlords like herself. "It's almost impossible to secure a mortgage if a property is uninhabitable. I want to buy and add value, but getting hold of capital can be a challenge."
She said banks were slowly waking up to the issue. On her latest project, she took out a combined refurbishment loan and mortgage with Shawbrook, the "challenger" bank.
The lender lets her take out a short-term loan of up to 70pc of the value, giving her 18 months to carry out the works, after which it rolls on to a mortgage deal offering up to a 75pc loan against the new, higher value.
Shawbrook's deal let Ms Clarke borrow £70,000 on a £100,000 house in Gloucester. Initially she pays an eye-wateringly high rate of around 10pc. Before the purchase, Ms Clarke and the bank agreed that the property would be worth £130,000 after the refurbishment is completed in January.
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When it is complete, she will be able to borrow £97,500 at less than 5pc. She estimates the rental income will be £90 per week per room. With four rooms let that makes a total of £1,560 per month. "The house already had tenants but it was uninhabitable, with an overrun garden and leaking bathroom. It would have been unmortgageable with most lenders."
Even where refurbishment is not part of the process, it can be difficult to obtain loans for HMO investments. Buy-to-let investors Sandip Chauhan and Ket Patel concentrate on converting older properties in Leicestershire to high-quality HMO lets.
They recently took out the Shawbrook loan, paying around 8pc on a £139,000 property with a 30pc deposit.
The two friends, who met at university and have been landlords for a decade, admitted that the loan was less competitive than a traditional buy-to-let mortgage. But they said there were few mortgage products that gave them the flexibility to convert.
Mr Chauhan said: "Lenders see HMOs as riskier, perhaps because the rooms are let separately and there are extra regulatory requirements like being registered with a local authority.
"But we'd rather stick with a bank - our other option is borrowing money from thirdparty angel investors who we don't know or trust."
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When it is complete, she will be able to borrow £97,500 at less than 5pc. She estimates the rental income will be £90 per week per room. With four rooms let that makes a total £1,560 per month. "The house already had tenants but it was uninhabitable – with an overrun garden and leaking bathroom – it would have been unmortgagable with most lenders."
Even where refurbishment is not part of the process, it can be difficult to obtain loans ffor HMO investments. Buy-to-let investors Sandip Chauhan and Ket Patel (pictured, left) concentrate on converting older properties in Lancashire to high-quality HMO lets.
They recently took out the Shawbrook loan, paying around 8pc on a £139,000 property with a 30pc deposit.
The two friends, who met at university and have been landlords for a decade, admitted that the rate was less competitive than a traditional buy-to-let mortgage. But they said there were few mortgage products that gave them the flexibility to convert.
Mr Chauhan said; “Lenders see HMOs as riskier, perhaps because the rooms are let separately and there are extra regulatory requirements like being registered with a local authority.
“But we’d rather stick with a bank – our other option is borrowing money from third party angel investors who we don’t know or trust.”
Refurbish-to-let: the verdict
Ray Boulger, mortgage expert with broker John Charcol, said landlords could still undertake major works using traditional buy-to-let borrowing - if they looked hard.
“Landlords with multiple homes could refinance existing properties and so keep to lower rates," he advised.
Mark Harris, from broker SPF Private Clients, said properties needing only "light" refurbishment may not require a specialist loan. “If a landlord is sprucing up a property, they can keep back some of the money that would otherwise go towards the deposit to fund the works.”
The cheapest deal for buy-to-let borrowers with a 40pc deposit, for example, is from the Post Office at 3.45pc.
Stephen Johnson, mortgages director at Shawbrook, warned that only experienced landlords would be eligible for the loan. “We’ve always targeted seasoned operators who are less risky - we tend to shy away from first time landlords.”
He said that the mortgage suits financing uninhabitable homes, which are not yet fit for renting out. “If the property is very tired it might not be mortgagable elsewhere.
“Also, with a combined loan you don’t have to pay for two valuations and all the legal work is done upfront.”
Less experienced landlords could look towards Interbay – with a 30pc deposit it offers a 7pc rate for light refurbishment and 7.5pc for medium to heavy projects. Both Shawbrook and Interbay customers pay a 1.95pc broker fee.
Britain’s high street banks are playing catch-up in the refurbishment market. None of the major banks we questioned said they offered a similar product.
Although this could be set to change. HSBC said that - after feedback from buy-to-let customers - it is considering introducing a hybrid loan and mortgage deal.