Buying my first flip or rent property

THE QUESTION

I have been sourcing properties now for nearly 12 months and now I am looking to buy my first property to flip or rent, but I would like to clarify the processes I need to go through.

I am looking to buy a 3-bed terrace and split it in to two 1-bed apartments.  Can I split the title through permitted development?  What costs are there in this?

I want to use a money in/money out strategy via bridging – what is your advice?

THE ANSWER

First things first, this is not a Permitted Development deal; to convert a house to flats requires Planning Permission.  Many landlords have just gone ahead and carried out a conversion without planning approval, unaware that they have just made their property unmortgageable; no lender will give a mortgage on an illegal conversion. (This is one of the goldmine categories of unmortgageable properties that I teach investors to make outrageous offers on at my workshops, as it is cash buyer territory only.)

So the first step will be to get planning approval, or you will have dug a huge hole for yourself, as planners don’t look favourably on retrospective applications from an owner. They could even issue an enforcement order requiring you to converting it back to its original state.

How to finance it?  Regardless of which type of mortgage you use to purchase it, you would be in breach of the lender’s T&Cs by converting whilst you had the mortgage and they would be perfectly entitled to call the loan in if they knew what you were doing.

Bridging is indeed the way you would fund the purchase, or use cash (yours or someone else’s); so this is relatively straightforward as far as financing is concerned.

What are the costs?

1. Planning application fees
2. Conversion costs
3. Legal costs of splitting the title and creating two new leases
4. Setting up a new Ltd Co that will own the freehold, unless you already have one set up
5. Borrowing costs
6. Buying costs
7. Selling or refinancing costs

You would need clarity on what two flats will be valued at once you’ve completed the conversion, deduct all of the above costs, further deduct the profit margin you need to make and this will give you the max price you can pay for the property to make it a viable deal to proceed with.

Flipping it would be the easiest exit route.

If you plan to hold and rent you need to be certain you can get mortgages.  Almost all BTL lenders impose a 6-month ownership restriction before they will accept a refinance application; be aware that, in this case, that is 6 months from the creation of the new leasehold titles, not the date of purchase.

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