Commercial Property Investment Mortgages

All these forms may have a big advantage over other types of investment. Unlike buying shares or commodities, you can borrow to fund your investment with property. And it's this gearing that can make your investment particularly rewarding

At Rangewell, we can help you find the funding answers you need

With property, there are three main ways to make a return:

• Rent - you can earn an income by letting out your property to tenants.
• Selling for a profit - you can buy a property and later sell it at a higher price.
• Development - you can refurbish or build property to sell on - or rent out

The general trend of the property market is inflationary, meaning the prices of property will tend to go up over time. This should make it easy to profit by buying property - but, in practice, it is rarely as simple as that. The overall market trend may be up, but individual properties can fluctuate in prices and the entire market can fall at times when economic conditions are against it. 

Property prices and demand for rentals can go up and down, so direct and indirect property investments are for the long term.

However, if you can wait, you can ride out the losses in a slow housing market and earn profits again when times are better.

Rent and Buy-to-let investments

Buy-to-let property investment means buying a property to rent it out to tenants who can be residential, or commercial and you should consider the property as a medium to long-term investment. However, a buy-to-let investment is very different from owning your own home. When you become a landlord, you’re running a small business and it is one that comes with important legal responsibilities.

These include

• Allowing your tenant to live in the property without interference. When you grant a tenancy to a tenant, you are effectively selling it to your tenants for a period of time. You can’t even go in l unless your tenant agrees.
• You are responsible for keeping it in good condition. There are repairing obligations set out in section 11 of the Landlord and Tenant Act 1985 and include the structure, water, electricity, gas and sanitation, and space and water heating. You also need to comply with numerous regulations
• You can only evict your tenant through the courts. Your tenant has the legal right to stay on and the law will continue their tenancy indefinitely. If your tenant wants to stay on, you will have to serve the proper form of notice on him and then go to court to get an order for possession. If you try to evict your tenants in any other way, this is harassment which is a criminal offence.

How does buy-to-let property investment work in practice?

To buy a residential property, you can use your own cash or take out a buy-to-let mortgage with a cash deposit.

You cannot use an ordinary homebuyers mortgage.

Buy-to-let (BTL) mortgages are designed for landlords who want to buy property to rent it out. The rules around buy-to-let mortgages are similar to those around regular mortgages, but there are some key differences. 

• The fees tend to be much higher
• Interest rates on buy-to-let mortgages are usually higher
• The minimum deposit for a buy-to-let mortgage is usually 25% of the property’s value (although it can vary between 20-40%)

Most BTL mortgages are interest-only. This means you pay the interest each month, but not the capital amount. At the end of the mortgage term, you repay the original loan in full. BTL mortgages are also available on a repayment basis.

Most BTL mortgage lending is not regulated by the Financial Conduct Authority (FCA). There are exceptions, however, if you wish to let the property to a close family member (e.g. spouse, civil partner, child, grandparent, parent or sibling). These are often referred to as consumer buy to let mortgages and are assessed according to the same strict affordability rules as a residential mortgage.

Advising, arranging, lending and administering BTL mortgages for consumers are covered under the same laws as residential mortgages and is regulated by the Financial Conduct Authority (FCA)

There will also be charges to pay:

The costs of buying can include:

• Survey fees
• Solicitor’s fees
• Stamp Duty Land Tax

There are also running and maintenance costs associated with any kind of rental home. For example, a sales or letting agent will charge a fee.

• Landlord insurance – isn’t legally required, but taking out a policy can help protect you and your investment from all the major risks
• Buildings insurance – which you’ll need if you have a buy-to-let mortgage – can also help protect your investment

Tax and buy-to-let properties

Stamp Duty Land Tax, Land and Buildings Transaction Tax and Land Transaction Tax will all need to be factored into your calculations

You’ll have to pay an extra 3% on top of each Stamp Duty band when you buy an additional home or a residential buy-to-let property. While Stamp Duty doesn’t apply in Scotland and Wales, there are other charges that do.

In Scotland, you’ll pay Land and Buildings Transaction Tax (LBTT) when you buy a property. For additional properties, you’ll pay an extra 4% in LBTT on top of current rates for each band on properties costing more than £40,000. LBTT is collected by Revenue Scotland.

In Wales, Land transaction tax (LTT) replaced stamp duty land tax from April 2018 and is collected by the Welsh Revenue Authority. If you buy an additional residential property, such as second homes and buy-to-let properties, you’ll have to pay an extra 3% in Land Transaction Tax (LTT) on top of current rates for each band on properties costing more than £40,000.

Special types of buy-to-let

Letting to a 'standard' family tenant is one model for buy-to-let and it can be one of the simplest - families tend to be stable and may rent for a long period without interruption. But returns aren't as high as some other types of buy-to-let:

HMOS

An HMO - or Home in Multiple Occupation is basically a “house share”, The property is rented out room-by-room to unrelated individuals. There are different definitions of what constitutes an HMO for different purposes, but the chances are that if you are letting out individual rooms, you are operating an HMO.

Renting out a property by the room tends to generate more revenue than letting it as a whole. As a single property with 3 bedrooms, you might only get £1,000, but by rearranging the internals of your property you could rent out each room for £400 per month and could potentially then see a return of £1600 a month.

What's more, you also have multiple income streams - if one tenant stops paying, there's still income from the others.

But there are also higher costs. HMOs tend to be let furnished with bills included, plus there's likely to be more wear and tear. Management is more time-consuming too, which means higher letting agent fees.

HMOs still have a downmarket image, although this may be changing as young professionals take the HMO route at the start of their careers.

Student lets

Student lets are a specialised type of HMO, with some particular characteristics. Obviously, it will only be possible if you have a large student population in your area. The management of student property is more predictable because they sign up for a set amount of time and you know exactly when they'll be moving in and out. However, there will be long voids in the summer vacations, and demand for traditional student house-shares are coming under pressure from new purpose-built student accommodation. In some areas, this has made traditional student houses hard to let.

Housing benefit tenants 

Local Housing Allowance (LHA) is being rolled into Universal Credit (UC), but many people still refer to it as DSS. This type of renting is to tenants who have their housing paid for by the local authority. The rent is paid by the local authority is the same for all similar properties in the same area and can be higher than a private renter would pay for the same property. It can be a high-yielding strategy – but there are many downsides.

Holiday lets and serviced accommodation

A holiday let is a property that's rented out short-term to holidaymakers. Serviced accommodation is also short-term letting, aimed at business travellers in urban areas. This type of short-term accommodation can be very profitable if you achieve a high level of occupancy. For example, for a seaside cottage, it'll be easy to fill up the summer months – and more money is made if you manage to fill up the rest of the year, at a lower nightly/weekly rate.

Commercial property

It is possible to buy commercial property for letting out to tenants. Shops, units on industrial estates and shared office building are often provided in this way. In most cases, the price of the property will be higher because of its size, but on the positive side tenancies tend to be longer-term and tenants are responsible for maintenance. There may be some tax advantages too, but the sector may be harder hit than residential in times of recession. 

Getting a buy-to-let mortgage

At Rangwell, we can help arrange buy to let mortgages.

You may be able to get a buy-to-let mortgage under the following circumstances:

• You want to invest in houses or flats
• You can afford to take and understand the risks of investing in property
• You already own your own home, whether outright or with an outstanding mortgage
• You have a good credit record 
• You earn £25,000+ a year - if you earn less than this you might struggle to get a lender to approve your buy-to-let mortgage
• You’re under a certain age - lenders have upper age limits, typically between 70 or 75, although at Rangewell we know lenders who will look at older borrowers. This is the oldest you can be when the mortgage ends not when it starts. For example, if you’re 45 when you take out a 25-year mortgage it will finish when you’re 70.
• The maximum you can borrow is linked to the amount of rental income you expect to receive - lenders typically need the rental income to be 25–30% higher than your mortgage payment.

To find out what your rent might be, talk to local letting agents or check the local press and online to find out how much similar properties are rented for. Remember, if your tenants leave and there is no rent coming in, you will still need to make your mortgage repayments. If you can’t find tenants – or if you can’t charge the rent you expected – you might not be able to cover your mortgage repayments, leaving you with a loss.

Getting the right buy-to-let mortgage

A buy-to-let mortgage for a standard property and a standard let may be routine - but you will not be able to use an ordinary buy-to-let mortgage for the special types of letting such as HMOs and holiday lets, because the risks and the financial side of the business models are very different.

Selling for a profit - with buy to sell

Buying to sell, also known as “flipping”, is very different from buy-to-let. You buy a piece of property, usually at a below-market price, and then turn around and “flip” it by selling it for more than the market price making a profit in the process. Usually, it means investing in a property that is shabby or run-down for below-market price. Then, you make renovations, changes, and adjustments to the home to boost its value before you sell it.

Flipping property has become popular because it provides an opportunity to make cash in a short period of time. For example, if you buy a house for £220K, fix it up with a £20K investment, and sell it for £260K, you’ll make £20K in just a few months. But there are pitfalls and costs to consider.

As with all business deals, you need to understand all the costs involved.

• Purchase price – Buying properties that are distressed, run-down, or in bad areas will help you save when buying the property – but can result in higher costs of refurbishment, or a lower price when you’re ready to flip the home.
• Costs – Remember you need to go over all the fees of buying and selling the house, as well as restoring and renovating it. If you don’t do a DIY renovation, you can make money as long as you keep the costs of your builders and contractors under control.
• Sale price – This is the final price at which you can sell your property Ideally, you should know how much you can sell the property for before you even buy it.

As a rule, you’ll probably want to choose properties that offer a 20% return on investment (ROI), meaning that after you sell the home, you should make at least 20% more than you spent on buying and restoring the property. If you undertake the project individually, your profits will be added to your other personal sources of income, which will usually lead to a higher tax bill. But if you form a corporation, you could be taxed at a standard corporate rate, separately from your other income.

Buying off-plan

Buying off-plan is where you buy a property from the developer before it has been built. You will not need to pay the full amount immediately - a deposit will be required and you will then need to pay the remainder when the home is ready.

the benefit for the developer is that it will bring them much-needed capital when they are short of revenue. It can provide you with the chance to buy a property at a substantial discount, which you may be able to sell on as soon as it is completed, covering your costs and earning you profit. It is, however, a high-risk strategy. If the prices don't inflate as you plan, you could be left with an unprofitable property. It should, however, be easy to get a mortgage on the property and to let it out until prices rise.

The funding you need

Mortgages are generally not an option for flipping, as they are intended for homes that will be for long-term use. You could be penalized if you sell the property early, and some lenders will refuse to work with you if they see a pattern of multiple early home sales.

Most experienced/professional home flippers use cash to finance their properties since this saves on lending fees and other costs. But this may not be possible if you’re just starting out - fortunately, at Rangewell, we can help by helping you secure a bridging loan. A bridging loan is essentially a short-term mortgage that lets you borrow up to 70% of the purchase price of the home. Sometimes, you can even borrow some more money to do repairs and refurbish the home.

Bridging Loans can be arranged within a matter of hours and funds released in as little as 72 hours, under certain conditions- but remember short-term finance is always more expensive than long-term lending. The costs of bridging finance can be relatively high.

Interest rates charged will vary, depending on your circumstances and your business, and the deal to be funded. Current rates can range from 0.7-1.5% per month, with even higher rates for more difficult propositions.

In addition, there may be a number of fees, including an arrangement fee which can be 2% of the loan amount, an exit fee which can equal one month’s interest and surveyors’ and legal fees. If the loan runs over the agreed term there will also be substantial penalty fees.

Repayment arrangements can vary. In some cases, all fees and interest can be rolled up into the loan, which can be settled with a single repayment.

If you are using a Bridging Loan as a short-term solution for a property purchase it can often be paid off by a solution designed for the long-term, such as a Commercial Mortgage.

At Rangewell, we know the lenders who can offer business Bridging, and we can use our expertise to identify the deal that really is the most appropriate for you. Our knowledge can not only help you secure the funding you need - it can save you a great deal of cash. Getting the right deal can make a difference of tens of thousands of pounds. Even a fraction of a percentage point can make a substantial difference to what you actually pay, while fees and penalties can complicate the position still further.

Development and Development Funding

Investing in property development can range from taking projects that are little more than flipping a property to major, ground-up construction. The project you take on will depend on your own abilities and experience but in most cases, at Rangewell, we can find the type of funding you need. 

Refurbishment finance, redevelopment finance and development finance all exist, and getting the right type of finance for your project is essential.

Refurbishment Finance

Refurbishment Finance is designed to refurbish or improve existing properties. It differs from Property Development Finance, which is generally intended for major ground-up construction. Refurbishment Finance is used for projects that may retain original structures and use but which will update them to meet modern standards.

It can provide funding to buy and refurbish both residential property and commercial property It can be broken down into light and heavy refurnishment 

Light refurbishment

If a property simply needs redecorating, rewiring or relatively minor changes, such as a newly fitted kitchen or bathroom, this can be arranged through a Light Refurbishment Mortgage, which may cover both purchase or the works alone. Light Refurbishment Mortgages are ideal for developers looking to refurbish a property as an investment, especially those properties where a conventional mortgage might not be available because of the condition.

A light refurbishment property should be currently habitable with working utilities.

The work required should not require any planning permission approvals or structural work that requires building regulations approval. There should not be any change to the use of the property. 

Heavy refurbishment

If the works require a change of use, for example, converting offices into flats, or any structural works requiring consent from the local authorities, this would be considered a heavy refurbishment project and would require a heavy refurbishment mortgage. Heavy Refurbishment Mortgages allow experienced property developers and investors to fund both the purchase of a property needing work and the funds to carry out the refurbishment required. 

The refurb may include conversion of a single building into multiple letting units, such as self-contained flats or a multi-tenancy home of multiple occupation (HMO), where reconfiguration may be necessary.

With heavy refurbishment, the lender will want to see a schedule of works. This is a detailed breakdown of the work and costs involved in the project, together with projected timings. A valuer will comment on whether the intended budget is realistic and if the time scale is achievable. 

Lenders may also want to see evidence of your past projects, to ensure that you have the skills and vision to complete the work.

How Refurbishment Finance works

Refurbishment Finance is based on the gross development value (GDV), the value of the project once completed. This is also known as the post refurbishment works value.

Loans may available from £100k to £10m. Lenders may consider lending up to 70% of GDV, with funds released in stages. These funds may cover both the property purchase as well as refurbishment works, although funds may also be available for developers who already own a property in need of work.

Terms of up to 18 - 24 months are available, and interest payments may be rolled up in the total loan amount.

Redevelopment Mortgages

Redevelopment Mortgages may be available for homes that are basically habitable but may require extensive modernisation.

Property Development Loans are a type of short-term lending to finance renovation or refurbishment of a property. It can cover three types of projects.

These are:

• Small-scale loans to cover light refurbishment
• Lending to cover renovation and major conversion projects
• Funding for ground-up development, starting with an empty plot of land

50 – 60% of the site/property value can be advanced with additional stage payments available throughout the build at intervals agreed at the offer stage. Loan terms are flexible from 1 – 12 months and arrangements with no monthly interest payments may be available.

Loans are also available to fund up to 100% of the development costs.

Major development funding

For more extensive projects and ground-up developments, you may need a more complex finance arrangement. Funding is often sought by those who already own land, and who will offer it as security to raise funds to cover both land purchase and building costs.

However, experienced developers may be able to secure partial funding for the purchase of land as well as development costs.

• Lenders can provide up to 60% of the Gross Development Value or GDV.
• Lenders may expect at least 40% equity of the GDV to be funded by the client with the acquisition of the site.

Funding will then be provided on a phased basis to cover the costs of development or redevelopment. Very large multi-unit block developments may require pre-sale of each phase before funding can progress to the next stage of the project.

Lending arrangements can include a roll-up of interest and associated costs into the loan, which would be paid off once the development is sold.

Getting the property finance that is right for your investment plans

Finding the right lender for your property investment projects can be crucial to its success and profitability. That’s why it is important to speak to the Rangewell team without delay. It means getting the support of an expert team with personal experience both of development and the challenges you face, and in finding the financial solutions for them.

We can help with a range of property funding, including:

• finance for holiday lets
• finance for property developers
• high value bridging loans
• refurbishment finance
• development exit finance

We can discuss your objectives, and help find answers scaled to fit your business as it grows. When you call us, we can explain your funding options – and find you the solutions you need fast.