Buying a Commercial Property
Buy-to-let mortgages
Most investors in residential property will need to borrow in order to get their foot on the buy-to-let ladder. Here are some key points that you need to keep in mind about buy-to-let mortgages:
• You'll need a much higher deposit generally between 20% and 40% of the value of the property to get a buy-to-let mortgage
• Expect to pay higher interest. This is because there's more risk for the lender your tenants may not pay their rent or you may have periods when the property is empty meaning no rental income.
• Your mortgage charges will be higher as you often have to pay set-up fees.
Lending criteria
Lenders not only take into consideration the size of the deposit you have, but also how much rental income the property will generate. Typically lenders accept rental income of 125% that’s 25% over your monthly mortgage repayments.
Buy-to-let property and rental yield
This is an important figure to have in your mind if you're thinking of buying a property as an investment. The rental yield gives you an indication of what kind of return you'll be getting from the property.
The rental yield is quite simple to calculate but you need to be fully aware of all of the costs you may encounter when you become a landlord. By far the biggest cost to you will be your mortgage but there are others fees to consider including (but not limited to):
• Buildings insurance.
• Maintenance costs.
• Ground rent and charges.
• Letting agency fees.
Once you have deducted all of the costs from the amount of rent you receive, the figure you end up with is known as the 'net rental income'. The rental yield is calculated by dividing the net rental income by the value of your property.
So if you own a property worth £250,000 and the net rental income is £12,500, your rental yield is:
• £12,500 / £250,000 = 0.05 or 5% per year
5 Legal Considerations When Buying Commercial Property
Whatever spin the pre-election politicians (and associated think tanks) put on recent economic news it’s clear that what really matters (confidence) is returning to the market.
An obvious knock on effect with greater market activity particularly in buying commercial property.
If buying commercial property is part of the next steps for your business either for trading use and/or investment then here are 5 key issues you should be considering;
1. Finding Opportunities
Unlike the residential sector you won’t find a glut of commercial agents on your high street and many commercial investments are sold through private treaty however auctions are a useful source of good value particularly if you are just starting out.
Goes without saying that care is required at any auction we’re not talking bargain hunt here because if successful you will need to hand over 10% on the day and complete within a month.
Instructing a good commercial agent to help beat the market and getting advice from a chartered surveyor/commercial lawyer (as opposed to a conveyancing solicitor) specifically with investment expertise is key.
2. Freehold or leasehold?
Freehold owners generally control and own all of the property: the land itself, any structures on it, the subsoil below etc. If inexperienced in this world be aware that part of the ownership may be restricted by a third party e.g. there may be a right of access over the property.
With leaseholds the owner contractually holds the interest for set period limited to the length of the lease. The content of the lease will depend on the property and the relationship between the landlord and the tenant.
Business lease terms have gradually reduced over the years and the average lease length is now <8 years. Some commercial property tenants have a legal right to extend the contractual term of their lease. There is also the potential to hold a long leasehold interest (up to 999 years) and these are usually granted by paying a premium and then a low or peppercorn rent.
You will probably spend more in buying a freehold but you will probably achieve a greater return.
With both check if there are any restrictions on use whether (in leaseholds) you need consent for alterations whether the building is listed and/or in a conservation area.
3. Cash Buyer or Loan?
Cash is often king and commercial property is no different. Great deals are available if you can move super quick.
If you are using a loan provider then keep them updated every step of the way it should go without saying that commercial property lenders are more interested in lending against the income generated by well-let properties rather than empty ones.
4 Costs
Costs for buying commercial property include:
• The initial purchase price or lease premium
• Stamp duty and land registry fees
• Surveyor, estate agent and solicitor charges
• Initial alterations and/or decoration
• Prepayment of initial rent (for leaseholds) and insurance
• Possibly VAT
Additional costs for drafting the lease can be expensive as there is no standard format for buying commercial property. Obtain due diligence advice (including the usual property searches but also environmental searches and registered charges).
You also need to factor cost of empty business rates into any price valuation a building survey & an environmental report particularly if there is future redevelopment potential.
Self Promotion Alert;
Obviously you need to get your lawyer competing on price so I’d recommend using a comparison service to find the right lawyer at the fairest price.
5. Tenants
As above lenders are much happier lending against well let properties so unless you want to immediately use the property for your own purposes it’s clearly beneficial to buy a property which has a tenant in situ.
Good tenants are worth their weight in gold so it’s clearly a great advantage to inherit an immediate rent roll which allows you to accurately budget your costs going forward: the rent is fixed you are paid in advance and rent reviews generally increase. But make sure you get pre-completion advice on the terms and rights you’re inheriting.