Is this really a no-brainer?

THE QUESTION

One of my landlords, whose property I manage for him, has voiced an idea that he wants to sell his 5-bed property – and suggested I might like to buy it.

It cash flows well and we have another 10 doors down.  The demand is strong so it’s a no brainer really; I just need to concentrate on financing.

My question is has anyone already gone through this scenario, and how did you do it?  My thinking especially now is to purchase it as a limited company.

THE ANSWER

To address how to finance this, let’s examine what will and won’t work.

Mainstream BTL lenders, will not lend on a property with 5 unrelated tenants each on a separate AST; most only lend on a single AST, a few will go up to 4 but 5 is outside of their criteria. They also don’t lend to limited companies.

This means that your only option is to use specialist or commercial lenders who, coincidentally, are happy to lend to limited companies.

Expect to borrow 75% with relative ease based on the rental income it produces as this gives greater serviceability of the loan (which is the lender’s primary focus), possibly up to 85% with one specialist lender.

Points to watch

Are you an experienced landlord? i.e. you own a property that you currently have rented out for at least the last 12 months; as this is a minimum criteria for almost every lender of this type.  Managing other landlord’s properties is often disregarded as credible experience in this respect.

Unless you are intending to upgrade by refurbing to add value to the property, whatever deposit you have to put down will be pretty much trapped in the property for the foreseeable future.

Be very careful what price you agree to pay for this property. 5 bed multi-lets are invariably valued on a bricks and mortar basis only, unlike more serious larger HMO conversions, and not valued on the income they produce.  Over-paying, using an income based valuation will only result in you needing to put down an even bigger deposit.

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