Too good to be true?

THE QUESTION

I am about to view a two-bed apartment, which has a low asking price and an impressive yield.  What are the pitfalls to watch out for?  Is it hard to raise finance for this kind of purchase as a buy-to-let (BTL)?

This is one of a row of flats that are above commercial properties, mostly shops (this on is actually above a kebab shop).  There is pub next door.  The purchase price reflects the location and is cheap for a two-bed in the area (south coast).  It is liveable and has a working kitchen and bathroom; it just needs updating and refurbing.

It is priced very competitively but I suspect I could pick it up even cheaper.  Would this be a challenge for financing with a view to the Buy-Refurb-Refinance model?

THE ANSWER

It always pays to look at it from the lenders point of view.  For every mortgage they always have an eye on the worst case scenario i.e. you don't pay and they have to repossess.  How easy will it be for them to get their money back bearing in mind they will only look at it as a main residence sale?

Their perception is fewer people would choose to live in a flat above a shop than in a residential block - so they will almost certainly reduce their perception of its value.

Now add in that living above a kebab shop means that cooking smells from the shop drift upwards, which they will have to deal with the whole time the shop is open - that will put more people off.

Also it is probably open late into the evening and possibly well after midnight.  People tend to go for late night kebabs when they are beered-up - so now you have noisy anti-social behaviour as well; this gets rid of a load more potential buyers.

Also consider it isn't just the shop directly below, If there are similar shops adjacent to it, the problem is magnified still further. So the pub next door is exactly that. Good positioning by the kebab shop owner, they can fall out of the pub straight into his kebab shop, but a nightmare for lenders and even more reason not to lend. - that's another swathe of would be buyers put off.

Putt it all together and you can see why so few lenders would be willing to lend on flats like this - and those that do ramp up their rates to offset the increased risk they are taking.

Of course, it is cheap and the rental yield is high.  The owner virtually cannot give it away.

The investors who buy this are typically cash rich and don't need mortgages.  They know the rental demand is strong (somewhat perversely) and it is a great way to park some of their cash for a well above average yield for the area.  If you’re planning to pursue this deal, it’s one you’ll probably need to finance yourself.

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