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jack joan

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My long term girlfriend and I have been looking for a route onto the housing ladder. My girlfriend’s Dad owns a commercial premises on which he runs a profitable laundrette from. He also owns the freehold to the first floor which has separate access and is currently being run as a 3 bedroom HMO.

 

Long story short, the property is well suited for a loft conversion / extension, next door have already done this a few years ago. My girlfriend’s Dad has agreed to “gift” us ownership of the proposed 2nd self contained flat should we fund the works. The works would comprise a small ground floor extension to the business coupled with a light refurbishment, first floor reconfiguration within the existing footprint and a second floor loft conversion. The first floor is currently very dated and a complete refurbishment with a better layout would increase the rental income massively.

 

By day I am a QS and comfortable with the planning and construction aspects of the project.

 

The construction works will cost in the region of £100k-£130k depending of scope and final specification. My girlfriend and I plan to raise the capital from a family member who will release some equity in one of their properties. We will then repay them at full cost plus additional interest. Up until now, it all seems fairly straightforward, however this is where it gets a little complicated.

 

The approximate financials of the project:

 

All in construction costs (including fees): £130,000

Cost of borrowing (from family member): +/- £7,000

 

This next part is on my to do list in the coming week, I have been meaning to take the plans to a few estate agents and see if they will do a desktop valuation of the proposed plans. At this stage, all I can do is compared to the current market. This property is based in Teddington, London, comparable 1 bedroom flats, just across the road are selling for £330,000 (these are about 15m2 smaller than our proposed flat). To show the feasibility of the projects financials I will assume a final appraised value of £250,000, which is way under what I anticipate the value to be (anyone who knows the areas, will know 1 bedroom flats rarely appear for less than £300,000).

 

Total spend: £137,000

Final appraised value: £250,000+

 

We would then mortgage the flat after 6 months at the appraised value of £250,000 +/-, using a 60% LTV mortgage.

 

Meaning we would maintain 40% equity (approx £100,000) and release 60% (approx £150,000).

 

This £150,000 will be used to repay our total spend to the family member.

 

Should the appraised value be more and we manage to release more equity, this will be used to begin our property portfolio under the ‘buy, refurbish, refinance’ model.

 

We are currently facing two areas we need some advice on.

 

Question 1:

 

My girlfriend’s Dad owns the property in question as a second home. Once the works are complete, we need to figure out the best way to transfer ownership (the new lease hold) of the second floor flat from my girlfriend’s dad to us! I understand we could be facing capital gains tax and I know there can be issues when gifting a property.

 

I am looking for any tax experts who may be able to recommend the best way to go about this handover?

 

Question 2:

 

As mentioned previously the existing property comprises of a commercial space on the ground floor and HMO on the first floor. The proposed second floor flat which we plan to own and mortgage will be above both the commercial space and HMO. I am aware that when it comes to getting a mortgage on a property above commercial space you are faced with far fewer mortgage options. This is why in the calculations above, I have opted for a 60%LTV mortgage as my gut feeling is this would open up more mortgage options, if we can get a lower LTV, we would probably go for it.

 

My concern is that for whatever reason we may not be able to get a mortgage at all on the second floor flat. Can anyone see a reason why this would be the case?  If so, who would be the expert to consult, I am assuming a mortgage broker?

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