The savvy landlord is always looking for ways to increase the value of their rental properties and refurbishing an out-dated or rundown property is a popular way of injecting value into a property quickly. But what’s involved and how can you refurbish if you haven’t got a huge amount of capital to invest? Development expert, Paul Keddy, explains.
What’s meant by “refurbishment”?
Refurbishment refers to any works needed to update a property, from decorating to minor structural changes. They are much smaller projects than property developments.
Why do people refurbish?
Generally, landlords refurbish to modernise a property to increase monthly rental yield or resale value. The term refurbishment can range from giving everything a fresh coat of paint and fixing minor snags, fitting a new kitchen or bathroom, or to larger-scale refurbishment such as adding an extension. Sometimes, lenders will insist refurbishment is done to bring a property up to rentable standards, usually to raise an Energy Performance Certificate (EPC) rating. Ultimately, and importantly, you want the increased return (through rent or sale) to cover the works done, plus profit.
Light vs. Heavy Refurbishment
There are two types of refurbishment, light and heavy. The level of work the property requires and the projected time it will take to complete will affect the type of loan your broker will source for you (more on that later).
Light Refurbishment: This generally refers to decorating and minor improvements, for example, fitting a new kitchen/bathroom. These are aesthetic rather than structural changes to a property. The refurbishment work should typically complete within six months.
Heavy Refurbishment: In contrast to light refurbishment, heavy refurbishment usually involves structural changes which may require planning permission or building regulations. This type of refurbishment is likely to take over six months to complete.
What are your plans for the property?
As I mentioned earlier, there are usually two reasons why landlords take out a refurbishment loan. Either, they are looking to add value to a long term investment (i.e. they are going to rent the property out), or they are looking to add immediate value and then resell the property.
Lenders need to know what your plans are for the property upfront - are you going to rent it out or sell it after you have completed the refurbishment? Your broker will want to know this at the beginning of the process, so they can find you the correct lender and rates for the subsequent mortgage (if required).
How does financing work on refurbishment projects?
Traditionally, refurbishment loans are a type of bridging finance. Money is released to you to fund the refurbishment work, based on the purchase price and projected value of the property post-refurbishment. Once the works are completed within the short term, pre-agreed time period, the loan must be repaid. Once both the work and the reinspection are complete, either a conventional buy to let mortgage term can begin or the property can be resold. This type of finance is available for both residential buy to let and commercial properties.
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What do I need to get a refurbishment loan?
Unlike most mortgages, which purely look at your financial ability to make the mortgage repayments, refurbishment lenders will often look for experience in the process. If this is your first time refurbishing a property with the intention of either renting or selling it after, they will look at your “CV” of experience in the decorating or building trade. Do you know what’s involved and therefore have accurate expectations of the cost and time it takes to do the works required? Their confidence in your ability will affect what is available to you, so this is important to consider if you’re thinking about taking on your first project.
Refurbishment for Residential Buy to Let
In addition to your refurbishment experience, buy to let lenders are primarily interested in the property’s expected rental return, per calendar month, and whether it’ll be enough to cover your mortgage repayments. They will do their risk assessments based on your financial credentials and not your proposed tenants. In this regard it is usually a relatively straight forward process, depending on your credit history etc.
How much can I borrow?
It will vary depending on your circumstances and the proposal for the property. For light refurbishment residential BTL loans, you can expect rates from 0.55% per month for the bridging section of the finance, followed by rates from 3.25% per month for the buy to let section of the mortgage.
Generally, you can borrow up to 75% of the purchase price. However, some lenders have a lower LTV, and some lenders can advance a certain percentage of the refurb costs, so do give us a call to talk through your options.
Refurbishment for Commercial Buy to Let
Commercial lenders tend to do more thorough due diligence than with residential buy to let applications. While the lender will look at your financial behaviours, they will also require accounts for the business planning to take tenancy in the property. The lender will likely be looking for an established and stable business and will want to know the length of lease offered to the tenant, as these factors will affect the lender’s perceived risk.
How much can I borrow?
It is worth bearing in mind that commercial rates are generally higher than residential BTL. As with all loans, how much you can borrow will vary according to your financial circumstances and credit history.
With Commercial refurbishment, you’re likely to see rates from 0.83% per month for a short term, light refurbishment loan.
Once the refurbishment is complete, you will need to take out a standard commercial mortgage. Due to the complex nature of commercial investments, any commercial mortgage required after the refurbishment will be arranged on an individual basis. An experienced mortgage broker is best placed to help you find the right deal.
What fees should I be aware of?
Lenders typically charge a fee for arranging the loan. Expect to pay around 1.5% to 2% of the loan amount.
Some lenders charge an exit fee from bridging loans - which is why using an experienced mortgage broker who understands the different lender charges can help to find you the best deal. Exit fees are applied at the end of the loan, either as a percentage of the loan value or sometimes the gross development value, which can significantly push up the project costs.
During the application process, lenders will instruct a surveyor to value the property both before and post refurbishment works. The valuation fee will depend on the size of the project.
The broker fee is the amount a broker will charge you for finding a suitable lender, negotiating a price and getting a suitable, formal loan offer. All brokers charge differently, but at Mortgages for Business, we typically charge between 0.5-1% of the loan amount depending upon the complexity of the case. Usually, we only charge a fee if we are successful in getting the client a formal loan offer. We may also charge an administration fee, but we will always tell you exactly what you can expect to pay up-front.
If you’re considering investing in a property which needs refurbishment, whether residential or commercial and would like more advice about the processes involved and what might be best for your situation, do not hesitate to contact me, Paul Keddy. With over 35 years’ experience in the financial services industry, I specialise in Property Development Finance, Commercial Mortgages, and complex Buy to Let finance. I will be happy to help you with any queries that you may have.
Article updated: 11/08/2020