Semi-Commercial Property Investment
As landlords are squeezed more and more by rising interest rates and tightening yields, many are turning to semi-commercial property as an attractive alternative.
Higher yielding property investments will always be popular, and understanding the opportunity to increase returns by investing in mixed-use property can pay serious dividends.
This guide will break down what mixed-use property is, why they’re growing in popularity, and how you can finance them.
What is a semi-commercial or mixed-use property?
Semi-commercial property is simply a property comprised of commercial and residential elements, for example, a retail unit or shop with a flat above it.
Although some have been split, these properties are usually on a single, freehold title, with the residential portion usually being leasehold and the commercial space remaining freehold.
Delving deeper into this, the commercial space can be comprised of any type of commercial space, with many used as offices, bars and restaurants.
One area of confusion around these buildings is how each property element is accessed. For example, where the residential element of the property uses the same access as the commercial space, the property is usually considered fully commercial from an investment perspective.
This is because it can only be let to a single tenant due to the fact that the sole access point through the commercial space makes separate lets infeasible.
Why are they growing in popularity?
The biggest appeal to the semi-commercial property is the excellent yields, typically sitting at 7.6% per annum. This is far in excess of the returns available from traditional single let buy to lets.
Secondly, splitting your rental income across two or more tenants rather than solely relying on a single tenant reduces the likelihood of a total void period. As it’s less likely that all tenants will either leave or fail to maintain their rental payments simultaneously, the income produced from these properties is more secure.
The commercial element of these properties is often let for a longer-term than residential property through a commercial lease. This has several benefits; firstly, the rental income is more robust and predictable than would be the case on a 6-12 month AST.
In addition, many of these leases pass responsibility for repairs, renewals and insuring of the commercial space to the tenant. These leases, known as fully repairing and insuring leases, remove the possibility of large, unexpected repair bills dropping on you at a bad time.
More robust income, with more reliable expenses, tend to be a winning combo in the eyes of most landlords!
Finally, the mixed-use property is exempt from the 3% stamp duty surcharge that applies to residential property investments. A significant saving, especially on properties in higher-value locations!
Are there any disadvantages to mixed-use property?
While these properties can be an excellent investment, there are a couple of disadvantages compared to traditional buy to let investment. Firstly, the market for semi-commercial property is less liquid than residential property.
This can make capital growth difficult to predict and mean that a bigger hit on price may be required should you ever need to sell quickly.
This makes a semi-commercial property more attractive to those targeting a strong yield over predictable capital appreciation.
Secondly, multiple tenants will naturally mean more people to manage, although this can be mitigated by using an experienced letting agent.
Finally, semi-commercial mortgages tend to have higher interest rates than those charged on residential property. We will cover more about semi-commercial mortgages below and break down how they work.
How do semi-commercial mortgages work?
As mentioned, these properties require semi-commercial mortgages, a type of commercial mortgage. As such, they tend to be offered by a specialist group of lenders, including high street banks, challenger banks and specialist commercial lenders.
These lenders usually offer a maximum of 75% loan to value (LTV). This is usually based on the bricks and mortar value rather than the investment value. The difference between these 2 figures should be carefully considered as it can’t be borrowed against and must be funded personally.
Aside from the high street banks, most other lenders are generally happy to offer interest-only or capital repayment, depending on the borrower’s preference.
Finally, the rates charged tend to start at around 4%, making them more expensive than equivalent buy to let mortgages. Paying a much higher rate can put a dent in the more generous yield, so calculating your net yield is a must.
More attractive properties, those in higher demand areas and those with robust leases to strong tenants will usually benefit from lower interest rates. Therefore if you’re struggling to get a reasonable interest rate, check whether the issue lies with you as an applicant or the property you’re considering.
If the issue is the property, then you may be able to revise your offer or consider moving on to another property.
If you take out any loan or mortgage if you default on the payment your home or property may be at risk. You must seek independent financial advice before taking out any loan or mortgage.
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