Converting Commercial to Residental (Pro’s and con’s)
This is becoiming increasingly common, as landlords look to protect themselves from government policies which have been reducing profit margins.There are some good solid reasons for doing this.
I list the main 7 below.
- Yields are typically a lot higher (as generally you are dealing with much bigger units).
- Planning permission will often not be required and when it is, due to national planning policy being favourable in this regard, there is more of it being granted.
- SDLT on a ‘second’ home should not be payable, as non-residential and mixed use are exempty from this.
- Competiion from other inverstors may not be as fierce as in the residential market, however as this becomes more popular this benefit will subside over time.
- No chain…..many such properties are not involved in long chains, making such purchases usually a lot quicker and with no risk of a ‘chain collapse’.
- Vat (currently 20%) can also be avoided if you issue the seller with a 1614D form.
- Another good benefit, is VAT is reduced from 20% to 5% when you convert commercial to residential.
Unfortunately, as with all things in life, there are some not so good sides!
Here are the 7 downsides.
- You will have spend more money on professional fees, you will have costs on achitects (even if you don’t need planning it’s good to have one on board) and you will probably have to get more detailed specialist searches ie abestos reports.
- Whilst the converstion is taking place you will probably need to carry the costs of business rates, you should always check what rate is payable with VOA website.
- You will need to think carefully about the location, tenant demand and making sure the conversion meets the local markets requirements.
- You will also need to consider how is the building to be managed, bigger buildings needs more routine management.
- You will also need to consider who will find the tenants on an ongoing basis and deal with all tenant issues once tenants start to occupy the building.
- Conversions can become money pits, especially when you consider there will be a lot more unforseen situations… have a healthy contingency in place!
- The finance required will be different to a normal purchase, this will be a lot more costly than a residential purchase and depending on what product you take there maybe hefty penalities if you don’t repay in the required time.
As always happy investing.