Buying 2nd home for investment

[Dwellernf]

There maybe someone on here who can loosely advise. House next to us will be coming up for sale. It is a renovation project. It comes with a bit of land adjoining our land and we have been asking current owners for years if they would sell the land as they didn't use it. It is about an acre and we would put our horses on it. Their house and land is a mess. Half finished extension (been like it for years). Rotten caravans etc. They are up to eyes in debt and getting divorced. House will be sold. At a guess we think around 500-600k. Our current situation is complicated too. Brother owns house and I own land with a cottage on but it is still classed as one property as cottage is an annexe. It doesn't bother us. Very close and tight knit family. The property as a whole is worth just over 1.2 million. We have no mortgage or borrowing on the property. We would go in together to buy the house next door... do it up and either sell house without the land or keep it all and do holiday lets (very desirable location) BUT... although we own property with no mortgage we have no other money as such! Just our jobs with income. Myself, brother and sister in law all self employed and only my husband is employed. Average monthly income between us is around 10k a month. (5k per couple) How likely/sensible is it to borrow against our existing property to buy the other house? Hoping project would take 12 months and then either sell or rent. Obviously this is something we would get proper advise etc int but having never done anything like it before just wondering if it is actually a possibility?

I got good free mortgage advice from L & C Mortgages, they're an online mortgage brokerage firm favoured by mnetters.

They have access to a lot of mortgage products across the market. L&C also has an online mortgage calculator so you can input the figures to see what you're eligible for.

I assume you're all buying as tenants in common. Please also seek legal advice from a good property lawyer.

https://www.landc.co.uk/

It would be as tenants in common. Would get all advise etc, just in the initial stages of 'could it be done' as we have no deposits to go down, just our existing property. Even if it could be done SHOULD it be done?!

I'd feel weird about borrowing against a mortgage free home in case things went wrong. How secure in your jobs, finances & health are you all? What are your ages and have you thought about solutions to worse case scenarios such as illness, unemployment, death, divorce & bankruptcy etc?

Well yes. That's part of it. At the moment we all live a good mortgage free life. No savings as such but all work is fairly secure. All healthy and age between 44-55. If things did go wrong we would simply sell the other property to pay back mortgage.

Are you saying you have no savings at all to put down for a deposit?

Edited to say I see you have no savings. How are you going to pay to renovate the property?

Would you not need a deposit of some sort & money for stamp duty?

Seems a no brainier. Make sure you talk to next door before they market it with an agent and they can knock the fees off which will make it look more attractive to them.

just be aware of the extra stamp duty and the extra council tax cost (you’ll be paying three lots, maybe four if your paying on your annex).
get it all water tight with ownership rights etc in case of an unexpected fall out.

We would do most of it ourselves. Brother owns a small building company and is skilled plumber. Most of the work involved is finishing extension and decorating. Removing all the caravans and junk etc. Garden. We could afford materials etc with what we have. And if when we look at the property decide it may need more spent we would incorporate that into the borrowing.

We did this by getting a mortgage for the full price of 2nd house on our own house, didn't have to have a deposit. But, we needed money for stamp duty and solicitors.

That is what we are not sure on. If borrowing against our existing property then would we need a deposit? Need to look lots more into it but just getting a feel for if a viable option

That's what we would have to do. Good to know it can be done. Did you have to use a specialist mortgage company?

EDIT: sorry, posted before I saw your post about your brother being a builder. But I'd still allow for a considerable contingency fund with regards to the renovations.
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Impossible to say without knowing some details, such as the extent of the renovations. Are we talking a new kitchen and some polyfilla, or gutting, rewiring, new floors throughout etc?

I suspect the latter, in which case you're probably looking at six figures. (Reno coats have gone up hugely since covid.) Plus the hassle of managing it between you (and agreeing on all decisions!) when you've all got jobs already. Can you get your builder to accompany you on a viewing, for a rough idea of costs?

I'd be tempted to try to get the land as a separate deal, if you could try one more time, and leave the house project to another buyer, since you're worried about the financial liability.

we just had a mortgage broker and it was them who suggested doing it this way. it can definitely be done.

I think it depends on a number of factors & there may be tax implications. Best to talk to a broker

Yes you could potentially raise a mortgage on your own property as a deposit.
you’re all still quite young and it sounds like a great investment! I would go for it.
id also consider dividing the estate at some point, if only in name, as it could get complicated when it comes to inheritance, care money etc.

When I’d paid the mortgage on my house I remortgage it to buy two BTL . I now have three mortgage free properties. It’s not for the faint hearted or risk adverse but it’s the sort of thing you need to do.

if you could let the house you can include rental income in your calculations.

We asked them yesterday for the land and a big fat no. The other option would be hope that new buyers would sell us the land or rent it, but due to location the land is a good asset for equestrian use and will be a selling point. Again lands need lots of work,,, fencing, tress etc. The property itself tbh not sure. We haven't been in and only going by what the outside is like. They have been living in it, and so assume it's not too bad. At a guess, nothing structural and just decorationg, kitchen carpets etc. Plus the extension to finish. Brother is a builder and owns small building company and so if we look will have a knowledgeable idea of what would be involved. It would only be material costs (he obvs gets trade prices) as labour would be covered.

I wouldn’t risk that happening with the land. The person buying it is likely to want it for the land and with a plan - admittedly I’m coming at this from somewhere, where you simply cannot get land!
At least this way you control what happens with it, even if you sell the house after.

In that case, I would say ... get yourself an amazing super-spreadsheet and update it with figures after every step:

• costs needed to actually buy house, such as stamp duty, deposit, mortgage fee, estate agent fee (if necessary), surveys, deeds storage fee (?), all that stuff (land transfer? I seem to recall there's a lot of annoying hidden extras)

• extra solicitors' fees for drawing up legal arrangement for co-ownership, or however you decide to do it

• demolition and/or disposal of old junk on property, there may be council fees for disposing of something big like a caravan

• land expenses which you mentioned

• rebuilding and renovation materials, including other trades' wages as presumably your brother wouldn't do the whole job himself, plus he can't work for free for weeks on end

• new appliances? boiler? Roof???

• will you incur expenses if changing the use of the property to a holiday let? Council tax etc? This may complicate your mortgage loan terms as well

a deposit is purely to ensure that there is sufficient equity in the property securing the loan to best protect the lender. Therefore, as you are borrowing against your existing home, in principle you would not need to pay a cash deposit of your own provided the size of the loan still leaves "sufficient" equity in your home to give the lender that comfort.

however, you say you have no cash so you may come unstuck anyway depending on whether the lender allows the loan amount to include SDLT costs (at the additional rate of course) and money to finish the works. Not all lenders would countenance that as that is expenditure that is not reflected in the value of the property and so is added risk for the lender. They may instead require you to take "development" finance rather than your preferred (simple) equity release loan. Development finance often includes releasing the funds in stages. As you have no money of your own, you wouldn't be able to pay the purchase cost to start with, as you wouldn't get all the money at the outset.

Also take professional advice on the tax consequences. As your intention is to buy to sell (having finished the work) over a short time period, and your brother is a builders there is strong potential you would be viewed as property developers rather than property investors. Profits would thus be subject to income tax (developer) rather than capital gains tax (investor).

one strategy is to BRRR- buy, refurbish, refinance & rent, You would borrow the 25% deposit/SDLT/fees/money to renovate from remortgaging your own property to buy the other property with a mortgage. You need to understand your exit strategy, or how much uplift could you get in value by renovating it, then doing a title split to separate the land you want to keep? You could then remortgage the new property based on its uplifted value on a BTL or furnished holiday let mortgage (different mortgage types) up to 75% of the new value to pay off your own mortgage again - you’d need to crunch the numbers to see if that works & you could get an all money out deal - that’s the unicorn. Then you own two assets going up in value & have extra land for yourself. Alternatively your exit strategy would be to buy, You’d do it up & title split land you want to keep, take the profits pay back mortgage of your own property & hopefully have some leftover.
If you Holliday let it that’s running a new business with implications around tax, cleaning costs, etc.

I’m a property investor with holiday let’s & BTL’s.
You need to crunch the numbers. At £600k I don’t think it’s a good BTL option. As a holiday let maybe - you’d need to consider occupancy (is it a desirable area people want to visit? Would it be seasonal, void periods, what you could achieve on nightly rates, specialist mortgage that would allow holidays lets tend to be more expensive than BTL mortgages. I’d be inclined to buy it, renovate & sell for a profit but keeping the land you want in a title split.

Honestly OP this sounds extremely difficult.

1. Your existing property is complex from an ownership perspective. That’s going to put some lenders off.
2. Two households buying a BtL renovation project together has a high chance of conflict. And again, some lenders will balk.
3. On a £600k second home the stamp duty will be £50k. That’s money you’ll never get back - a cost, not an investment. Can you afford to spend that money with no return?
4. Three of the four of you are self employed. Again, a risk factor for lenders and for you.
5. You say you have no real cash savings. From that it sounds like you have little wiggle room in your monthly budget - because if you had spare money you would have built up some savings by now. Starting a big renovation project with no spare cashflow is asking for trouble.
6. You have no idea of the costs of the renovation. You’ve never even been inside the house. If the house is genuinely neglected there’s a very high chance of structural issues. If you need to spend £250k on the renovation (not out of the question) can you do that?
7. You say you could get the labour costs for free because your brother is a builder. But that’s not really true. If he’s working on this project for six months, that’s six months he’s not earning any income. So the cost to him is six months of forgone earnings.
8. Is he really going to do this for free and still split the proceeds 50/50? That seems unfair to him. If he’s doing most of the work he’ll presumably want to charge you and your husband for that somehow.
9. When, as seems very likely, the project goes wrong and you fall out with your brother and SiL, is that going to have a big impact on your life? Is it worth the risk?

IMO, this has disaster written all over it.

If the land is worth it to you for your horses, then look into the fine details. If you don't desperately need the land, I'd talk to an IFA about financial possibilities, but I'd probably walk away. Most landlords (without a massive property portfolio) are selling up due to changes in the law. If the rental income is only going to make £5-10k a year, it isn't worth all the challenges and financial risks that now come with being a landlord.

In terms of buying it to do up and sell, you'll pay a massive amount of additional stamp duty, as it will be a second property. You'll then pay capital gains tax when you sell it. You need to work out whether these costs, plus building costs and the likelihood of finding a buyer etc are worth it to you.

Some brilliant points here and food for thought. Obviously it will be viewed before purchase and any big structural jobs we would walk away. Talking to another neighbour who has a bit more intel on the situation, it has been valued at 600k current state and if up together a potential of 800-850k. A holiday let could be an option... very desirable area with many lets in the are already all at 100% capacity all year round. I would prefer to sell at the end of it though. It would be a good year/18 month project as brother would only work on it evenings, weekends and odd days off. Lots to think about.

Do you have enough savings after paying (say a 20% deposit on the property) to do the renovation or are you talking about borrowing for the house, and then again for the works ? If borrowing for both your probably living in la la land ;)

Wait, I just read you don't even have a deposit ? What if house values will fall over the next 18 months too...