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Advice for the New Investor

Uncategorized Sep 10, 2021

Advice for the new investor

THE QUESTION

I'm brand new to property investing.  I've set up my limited company and have been offered a rate from a broker for a studio apartment I've reserved with a commercial ground floor (30% down on £97k at 3.4%).  They said some other lenders were at capacity on the property.  

Should I go with this or should I be getting other quotes. I just want to ensure I'm getting the best deal as I've heard brokers aren't always the best way to go.  I'm quite wary about all this because I haven't got any connections around me to help me so any advice would be much appreciated..

THE ANSWER

As you are new to property, and you will want to avoid buying a property that you come to regret, your focus should be less about whether your broker has found you a good deal and more on ensuring you don’t start you property career on the wrong foot.

My first question is, why would you want to buy a studio flat above commercial premises and use an Ltd Co to do it?

  1. Your tenant churn will be higher - studio flats are the most limited of properties space-wise.  People only rent them because they cannot afford anything bigger and as soon as they can afford something bigger, they leave. You may find it more challenging to find tenants and also a challenge to keep them.

Most lenders set a minimum size of 30 m2 for flats, as anything smaller is problematic for them to recoup their capital if they have to repossess you. Check the size of this flat.

  1. Flats above commercial premises limit your mortgage options - this means that you will be excluded from some of the cheaper rates available.  Many BTL lenders decline to lend on any flat above commercial - because they perceive there will be less demand to sell them on, if they ever have to repossess you.  Lenders prefer to lend on flats in residential blocks.
  2. Your choice of lenders is restricted still further by the commercial activity of the shops directly below and adjacent.  There are plenty of businesses that will cause lenders to refuse your application, if that business is going on below your flat.  Be very careful to check out the commercial businesses on the ground floor.

Limited company mortgages are always more highly rated than personal ones - what is the reason you think it is better to buy this way from your very first property? This is going to increase your mortgage costs.  It will increase your accountancy costs too; Ltd Co accounts are more expensive to prepare than for a sole trader.

Being able to claim mortgage interest as a business expense is not in itself sufficient justification to buy via a Ltd Co.  Your other costs could outweigh any tax savings you make.  If you are not a higher rate tax payer then it is even more likely you will be worse off by using a Ltd Co set up to begin with.

When a broker or lender uses the term capacity it refers to the over-exposure clause that pretty much every lender works with.  Lenders rarely lend on more than 25% of the flats in a given block.  This is a precautionary measure, in case there is something unforeseen that could affect the block that would have a detrimental effect on the future values of the flats in the block.  Some lenders offering better rates may have already lent on their maximum number of flats in this block.

Consider very carefully your thinking before your first entry into buying investment property.

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