Looking beneath the bonnet

21st January 2020

Last week I was offered a commercial deal, shop and uppers as they are known.  This property has a beauty salon, with two flats above it.  It’s producing a return of £36K, giving a yield of 6.5%.

There’s a massive yard in the back which will allow for another flat on the ground floor at the rear of the commercial.  This new flat can be accessed from the rear.  Many on the street have already done the same thing, thereby establishing a precedence.  We have checked this with our planning consultants who have confirmed the same can be done with this property without an issue.  This will circumvent the need for full planning, and go under the permitted development route.

Even though, strictly speaking, the property is only 1/3 commercial, for the purposes of stamp duty you will pay only commercial rates on this property which are far more reasonable; and you get away from the nasty 3% premium for BTL properties.

The commercial element is let out to an individual.  At times this can, believe it or not, provide a stronger covenant than a Blue Chip company, especially the case if there is a personal guarantee attached to the lease.

At times Blue Chip tenants are not actually your tenants.  They set up a property company for the purposes of being the counter party for the lease.  This keeps the main trading business away from any issues in regard to payment of rent.

As is so often the case, things may not be as they seem.  Under certain circumstances, an individual paying your commercial rent may be stronger than a corporate company.

Back to our deal, the steps would be to gain an extension on the ground floor; this can be done under permitted development.  Once this has been achieved, the property can be converted from commercial to residential under permitted development.  This does not mean it does not require planning; but it is a very light application which if it ticks certain boxes it is not refused and is granted in 56 days.

I would try and eat into some of the commercial property from the rear.  A residential square foot is generally double the value of a commercial square foot.  So, the more you can get converted, the higher the value.

With an extra flat to the rear this property is expected to produce another £14K per annum.  This makes the deal produce £50K per annum.  If we value it on a 7% yield you should be able to extract £535K back from the deal, at 75% Loan to Value.  With the property being commercial you do not have to wait the normal 6 months before you extract the funds.

This is an interesting plain vanilla deal, within most people’s budgets, and does not have much down side attached to it.

In addition, there is something else which can be done on this property.  The lease could be split once the work has been done.  This would give you one commercial unit and 3 residential flats.

The commercial unit can be placed into a pension scheme which could be set up to take your tax free income, any growth on this property would therefore also be free of tax.  The flats could be refinanced individually to extract funds.  You may end up with the same funds taken out, as the yield for residential is likely to drop to say 5%.  And you would have in effect saved roughly 20% + on the tax on your money to purchase the commercial.

The last part of this article does require proper advice, so that it is understood and is followed correctly.  There may be some tweaks required according to your individual circumstances.

Interested in this deal?  Get in touch today, before it gets snapped up.

Suresh Vagjiani

Suresh Vagjiani
Suresh Vagjiani
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