Converting a commercial property into a residential buy to let property can be lucrative, but do you know what's involved in a project of this type? Consultant Broker, Paul Keddy, explains how to finance small commercial to residential conversions and what you’ll need to do to get things off the ground…
What type of commercial property are we talking about?
This blog focuses on smaller commercial units that are likely to already have residential dwellings above or that are situated in a highly residential area where the demand for residential property is high; this includes small retail units or offices that you might find on a high street.
What permissions will I need to convert a commercial unit into residential dwellings?
Change of Use
You will need to get a change of use granted via the local authority to convert a commercial property into a residential one.
If you’re converting a commercial unit into any kind of residence, you will likely be changing the interior layout quite a lot. This being the case, you will need to get your plans approved by the local planning authority, to make sure that they adhere to residential planning regulations. The regulations that will be applied will depend on whether you are planning for one residential dwelling or multiple self-contained dwellings. As with any type of development, if you’re extending the property in any way you are likely to need planning permission for this too.
In some cases, the planned changes may be permitted under ‘Permitted Development’, and therefore do not require planning permission. However, the regulation varies in each local authority, so you will need to check with your relevant planning office first. You can do a light check using the government’s planning interactive planning portal, here.
Please keep in mind that you will require all the necessary planning permissions before you make a finance application to a lender, as they will want to see all this information as part of the application.
How do I finance a commercial to residential conversion?
The type of finance you will need to convert a commercial unit into residential is a ‘heavy refurbishment bridging loan’. It’s classed as ‘heavy refurbishment’, due to the need for planning permission, structural alterations and change of use, whereas ‘light refurbishment’ refers only to non-structural changes, such as general decorating and fitting of kitchens and bathrooms.
Before you apply for your bridging loan, you will need to decide what you’re going to do with the property after the works are complete, as the bridging lender will want to know your “exit”. If you plan to sell it, the lender will need to be comfortable that the end sales price will cover the loan repayment. If you’re planning to keep the property and rent out the newly created residencies, we can secure a Decision in Principle (DIP) for a buy to let mortgage, which will enable you to pay off the bridging loan. The buy to let lender will also need to be satisfied that the rental income from the newly created properties is sufficient to cover the long term buy to let loan required.
With heavy refurbishments bridging loans, most lenders require a maximum 70% loan to value (LTV) on the purchase price of the property, with rates starting from 0.74%* per calendar month. You will need to prove to the lender that you have the funds available to complete the works required to refurbish the property, to secure the bridging loan for the purchase.
If you have more of a deposit, bringing the LTV down to 55%, we have access to lenders who will even consider funding some of the work required too, with rates starting from 0.54%* per month. In these cases, the loan will be calculated taking the purchase price and the cost of the works into account.
The bridging finance application process
When you’ve found a lender and bridging loan product that suits your requirements, we would expect you to receive credit backed terms within 24 hours of an initial enquiry. If you’re happy with these terms, the formal application can be made, documentation proving adequate income can be submitted, the valuation can be instructed, and the underwriting can begin.
Once the valuation is complete (trusting that all the values are accepted), we would expect a formal loan offer and the subsequent legal work to be completed within a month. However, this timescale does depend on the complexity of the case and the searches required. While we would expect most cases with bridging finance to take 3-4 weeks, some will take longer so bear this in mind during your planning.
What experience do I need to convert a commercial unit into residential buy to lets?
Lenders do tend to prefer applicants who have previous experience with similar refurbishment or development projects, however, they may consider first-time developers if you have an experienced builder working with you on the project.
What about larger commercial conversions?
Converting larger commercial developments, such as office blocks, requires more specialist, development finance that will likely fall to a commercial lender, which incurs different rates. This is something our commercial team can help you with, so please do get in touch for advice on development finance.
If you have any questions about the finance involved in converting a small commercial unit into a residential property or want to know more about what lenders criteria’s are for this type of investment, please do not hesitate to get in contact with me, Paul Keddy on 01732 471655 or email me firstname.lastname@example.org.
*Rates correct as at 12th November 2019.
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