If shows like Grand Designs, Amazing Spaces, Homes Under the Hammer and Location, Location, Location send your heart racing and make your fingers twitch, you may well have caught the property development bug. It is treatable with a healthy housing deposit and frequent trips to your local B&Q, but there’s no hard and fast cure or a set prescription. There are, however, important precautions you should take before investing in property and self-medicating with DIY. Here we talk you through five things to be mindful of before committing to life as an amateur property developer. These are important regardless of your investment strategy – whether you’re buying to rent or you’re buying to sell for a profit.
1. Property ownership type
The title ‘property investor’ is a clue as to why most developers enter the housing market – it’s an investment to make money. It’s understandable, then, that as an aspiring developer you’re looking for ways to make your money go further; this might mean rolling up your sleeves and putting in some elbow grease when it comes to painting or minor repairs, and it might also mean exploring different property ownership models. We will briefly touch on three different ownership types, but this is by no means an extensive list. It’s highly advised that you consult with a reliable accountant and legal professional before making any investment decisions that could affect your financial health long term.
Choosing to invest in a property on your own means you’ll have full ownership and will be able to make decisions that suit you. It also means, though, that you’ll need to carry any risk yourself and will have to have a higher deposit saved to enter the housing market. If your financial situation allows it, and you feel well-informed, there is nothing to stop you from owning a property by yourself.
Investing together – joint tenancy or tenants in common
Shared ownership might be a means to an end to get onto the property ownership ladder sooner, but you should be clear with your investing partner about your goals. You should have open discussions about how much money you’d like invest in the sale, any necessary or superficial renovations, what risks you’re both willing to take, where your errors for margin are or the thresholds you’ll accept if the investment doesn’t go to plan, how long you plan to own the property, whether you’ll commit equal shares, and ultimately what profit you’d like to make. If you both aren’t on the same page to start with, you risk running into issues later when money is already on the table and emotions may be running high.
If you’ve found a like-minded investment partner, you’ll need to decide how you’d like to own the property together. Two typical ownership types are joint tenancy or tenants in common. This might be a more useful strategy if you are choosing to buy to live in the property for a certain length of time and then sell for a profit later. The key difference between the two lies in the ownership percentage and rights of survivorship.
Tenants in common
As tenants in common, each of you will own a specified share, which may be equal or split however you choose. If one of the owners died, the share of that person would not automatically go to the surviving owner.
Joint tenants each own the whole share of the property. If one of the owners died, the share of that person would automatically go to the surviving owner. If both owners died, the property would go to the youngest owner’s relatives, which can cause problems if there were different amounts invested by each owner. For this reason, this is a less common way of jointly owning property.
Special Purpose Vehicle (SPV)
A Special Purpose Vehicle (SPV) (or Special Purpose Entity) is a legal entity created for a specific and temporary objective. They can come in many different forms, such as a limited company, partnership or a sole tradership. In this context, SPVs are set up solely for holding property and can help isolate owners from risk. This is becoming an increasingly popular way for developers to invest in light of tax changes in the private housing market introduced in 2015; investors are no longer able to offset their mortgage interest against rent when calculating income tax.
SPVs, on the other hand, allow owners to offset all mortgage interest against the rent when calculating corporation tax instead. When applying for a mortgage, your lender will look at the type of SPV you have and decide if they want to loan money to that particular entity. Whether this option is right for you will depend on your longer term investment plans, you existing property portfolio if you have one and whether you are the sole investor or if you are jointly owning any of the properties. The property solicitors at Insight Law can help you determine whether SPVs are right for you and will limit tax liabilities in the way you intend.
2. Scope out the property boundaries
It may go without saying that it pays to know exactly what it is you’re buying and this is especially the case with an investment as large as property. What might not be so obvious, though, is that what look like boundary lines to you through tree or fence lines, for example, may not be what is officially recorded on the deeds. A quick way to gauge where the rough property boundaries are would be to check the title plan, which can be done by searching on the HM Land Registry website.
If you are looking for specific information about exact boundary lines, such as who owns a fence, wall or hedge between two properties, you generally won’t find a record of this on the title plan unless a determined boundary has been registered with the HM Land Registry. If there isn’t a determined boundary, check to see if there is a boundary agreement in place. Not all boundary agreements will remain in effect once property is sold, so it is always worth consulting with an experienced property solicitor if you’re concerned. You could also engage a qualified surveyor, who is a member of the Royal Institution of Chartered Surveyors, to provide a boundary line certification. The existing owner may have a copy, but this is a report that would have to be ordered and paid for; this may still be a cheaper alternative than having to hire a surveyor to carry out a full inspection.
3. Research any existing conditions or restrictions on the property
Knowing the way you’re allowed to use the land you want to buy, and perhaps the rights others may have on the land, will be pertinent. There are two main property rights to address here: easements and covenants. An easement gives people who do not own the land a right to use it for some purpose. For example, public rights of way is a type of easement that allows people to pass along your land at any time they choose. There are three different ways an easement can be created:
- Express: created by Deed
- Implied: can only be created on the sale of part of the property
- Prescription: if 20 years of uninterrupted use can be proven
The existence of a right of way, and the width of the land that it applies to, may be registered. Your conveyancer can carry out thorough checks on the property title, look for references to a right of access in older deeds, and carry out an Index Map search that will reveal if an area of land if registered or not (prescriptive easements will be legally binding on unregistered land).
Other conditions that may apply to the use of the land or property are covenants, which can be positive or negative (restrictive). A positive covenant conveys an obligation for the owner to do something, such as paying into a maintenance fund or maintaining the garden. A negative, or restrictive, covenant prevents the owner from doing something, such as blocking access if there is a shared driveway or a restriction on the height of the building that can be erected on the land. Most covenants will carry through from previous owners, so it is important you understand any obligations being asked of you. You may be able to modify or discharge a covenant, but it is worth consulting a specialist property lawyer to know your options.
4. Pre-plan any planning permissions you’ll need
When you’re searching for the right property or piece of land to invest in, something you will need to consider is whether any build or renovation plans will need formal planning permission from your local authority. You may have a grand design in mind, but might not be able to execute this because of the plot history of planning permission refusals or appeals, or the design you have in mind may not meet certain guidelines. This can particularly be an issue for listed buildings or conservation areas, where differences between opinions of successive planning officers (if there have been refusals in the past) aren’t likely going to make much difference. It is better to know of any roadblocks you may come across first before committing to a sale.
A good place to start with your research would be online through your local planning authority. The level of details and publicly available documents can vary between each council, but your solicitor’s full searches will be able to root out any potential problems early; they can look through applications, appeals, officer reports, special notes, general correspondence and enforcement history. If there is no history of planning applications with the property or land you’d like to develop, then it is possible to make a planning application on land you do not own. Seeking planning permission early can weed out any uncertainty and help you more accurately determine the potential value of the development once any work is carried out. Once your application is submitted, you should have an answer within eight weeks.
5. Educate yourself on expenses and allowances
Renting out a property inherently means you’re going to receive an income. If you receive above the current tax-free personal allowance, which is set at £11,500, then you will have to pay tax on any profits above this amount. You can work out what your profits are by adding up all of your rental income and then deducting any allowable expenses.
Allowable expenses include anything that you need to spend money on for day-to-day expenses. Expenses made as part of home improvements, or the full amount of your mortgage repayments, are not be classified as allowable expenses.
You can treat the following charges as allowable expenses:
- letting agents’ fees
- legal fees for lets of a year or less, or for renewing a lease for less than 50 years
- accountants’ fees
- buildings and contents insurance
- interest on property loans
- maintenance and repairs to the property (but not improvements)
- utility bills, like gas, water and electricity
- rent, ground rent, service charges
- Council Tax
- services you pay for, like cleaning or gardening
- other direct costs of letting the property, like phone calls, stationery and advertising
Just how much tax you will need to pay on your rental income will depend on which type of rental property you have; there are different rules for residential properties, furnished holiday lettings and commercial properties.
Whether you’re new to the rental market as a landlord, or you’re experienced with multiple investment properties, speak to the property specialists at Insight Law. They can help you to protect your assets, ensure you’re getting a fair deal, and can provide ongoing landlord and tenant advice. Call the team today to discuss your property needs on 029 2009 3600 (Cardiff) or 0117 925 6257 (Bristol).
Posted by Ryan Price on
7 August 2019