More and more people are embracing the idea of turning a house into flats. The demand for flats is particularly high in London, and by splitting a single property into multiple units you can make the most of your rental income and also profits upon selling the property.

But where does the process begin? Here’s our guide to converting a house into flats.

Research the property market

You need to know if there is demand for flats in the neighbourhood you are considering. This simple question is something many landlords neglect to ask when investing in a house to convert to flats. If you choose the wrong location, you could easily end up losing money.

Before you even begin the process of turning a house into flats, you need to ensure there will be a market for your new rental properties. It takes a little time to conduct this research but there is no better way to ensure the flats you create are actually going to be something people want in your chosen location.

When it comes to renting out flats, certain neighbourhoods are in much higher demand than others. Taking the time to research the local housing market is a fundamental step to maximise your rental profits. Locations with higher demand command a higher rent.

Do your homework and make enquiries into the current market. Local estate agents can offer some insights into the places that are selling quickly, the ones that aren’t, and any emerging hotspots in the locale. If four-bedroom properties are struggling to find buyers, but single bed flats are moving fast, conversion may be the perfect option.

Planning implications

Once you have found the right area and the right house, you’ll need to get in touch with the local authority’s planning department. You’re going to need planning permission to make this conversion, and if you’re given the all-clear then you’ll have to apply for Building Regulations before the works can begin.

If you haven’t bought the house you intend to split into flats yet, make an enquiry with the local planning department before you do. In some neighbourhoods, there could be certain regulations such as minimum flat size, insulation for energy efficiency and comfort, soundproofing between adjoining flats, fire safety and more. Another factor that may play a part is the availability of parking.

In addition to contacting the local authority and Building Control, it is important to consult a solicitor to check if there might be any legal barriers that could obstruct your renovation plans. If you will be taking out a mortgage to buy the house, your lender will need to be involved in the plans as well. Some banks are prepared to accommodate landlords with loans aimed at helping with the development, while others are quite resistant to allowing mortgage holders to convert houses into flats.

At this point, you’ve done your research to confirm that there is demand for flats in the neighbourhood in question. You have also checked with the local authority to ensure your plans comply with the relevant regulations and an estate agent has helped you ascertain whether the property in question is a good candidate for a flat conversion. A strong partnership with a good estate agent is the best approach to attract quality tenants and meet the needs of your future residents. As you make your plans, be mindful of the following points:

  • Flat size: What size flats are popular in the neighbourhood – are one-bedroom flats prominent or are there more families who need flats with two or more bedrooms? What is the area’s average flat size and are your plans likely to compete?
  • Flat design: What type of layout is likely to work best for your target renters? How will the floor plan look? What type of floor plan will make the best use of the space?
  • Accessibility: Each flat needs a private entryway. If there are any gardens involved, they will also need access to these. Consider the proximity of parking when planning how residents will access their flats – some helpful extras like secure bicycle storage or wheelchair ramps could make a big difference.
  • Services for every flat: Each flat will need its own electric, gas and water connections. Service providers are very busy and installation time varies greatly, so be sure to contact the services before you start the conversion. Delays to the services could mean the completion time of your project gets pushed back.
  • Look into the big-ticket items: Every flat must have a private kitchen and a minimum of one bathroom. This means you will probably need to undertake some major renovations to have the necessary plumbing installed. Also, existing kitchens and bathrooms often need to be updated.

You should also note that each flat will require its own boiler, and a unique central heating system should be in place for every flat. Your estate agent can assist in determining where changes can be made, including where new boilers and heating systems need to be installed.

Tax implications

You will need to think about how converting a house into flats impacts your tax liability – make sure you check this thoroughly. If you are intending to sell the new flats rather than rent them, the amount of profit you make will have an impact on the amount of tax you owe. As things stand, you could take advantage of private residence exemption by living in one of the flats rather than renting/selling all of them, but this could change.

Every case is unique when it comes to converting a house into flats but, generally speaking, tax authorities will factor in the money you spend on purchasing the property and making the conversion. You will need to get an understanding of how your trading profit will be taxed and whether you will be liable for capital gains tax. It is extremely important to get quality advice from a tax adviser or chartered accountant to get a clear picture of what your tax liability will be.

Project Costs

The costs involved with this work will vary greatly from one property to the next. Things like the size of the property, the new design, the condition of the house and the number of flats you’re converting to will all play a part. As a rough guide, expect to pay ~£25,000 for a basic conversion, including putting up new walls, installing bathrooms and adding the necessary central heating systems. You will need to contact the utilities companies to ensure each address has its own meters for gas, electricity and water.

When budgeting for the project, there are many things to consider. These include:

  • Getting planning approval from the planning department
  • Getting Building Regulation approval
  • Fitting new bathrooms and kitchens
  • Installing new gas, electric and water meters
  • Development finance
  • Soundproofing and tests
  • Separate heating systems, including boilers
  • Creating new private entrances
  • Decorating the new flats

Finance

You will need to get consent from your lender before you can begin a project to convert a house into flats. If you are planning to convert a house you already own, chances are the mortgage was granted on the basis that the property would be a single dwelling. Any proposed changes to their security must be disclosed to them – if you attempt to make the conversion without your lender’s permission you will be in breach of the terms of your mortgage. This could potentially give your lender the right to repossess the property.

In most cases, you will need a specialist mortgage to convert a house into two or more flats. You will need to split the property legally, providing separate leases for each flat. The nature of the loan/loans you will need depends on the extent of the work to be carried out. It will also depend on whether or not you already have the funds to carry out the conversion and what your intentions are for the property once work is complete.

Funding for the work required

Development Finance

If extensive work is needed to convert the property, you may need to secure development finance. In this arrangement, a lender will allow you to borrow up to 65% of the property’s value. They will then lend the funds to carry out the work, usually 100% of the costs as long as they don’t exceed 75% of the gross development value (GDV). This money is usually released in instalments, with the prerequisite of regular valuations on the property.

There are high interest rates and fees associated with development finance. The fees include things like product fees, valuation fees and solicitors’ fees. They’re designed to be a short-term solution, usually between 12 and 24 months, and you repay the debt in full once you reach the end of the period. The interest can be paid off monthly or you can choose a roll-up interest option.

One benefit of the roll-up option is that you don’t have to be concerned with interest payments whilst you are carrying out work, only paying it when you remortgage or sell the property. However, the big disadvantage is that the amount you owe increases a little more each time the interest is added. That said, with development finance being a short-term arrangement, there shouldn’t be a long period for that interest to build up. When the work is complete, you will have to sell or remortgage the property to repay your debt.

Bridging Loans

A bridging loan is a fast option that can be used to pay off an existing mortgage on a property. They’re a good option if you’re converting a property you own and already have the money to fund the conversion work. They are very short-term – usually up to 12 months – and carry a high interest rate. They are best suited to less expensive projects that don’t require a development loan.

Some lenders will allow you to borrow up to 75% of a property’s current value, while some will consider lending on up to 75% of its potential value if you agree to sell within 90 or 180 days. Roll-up interest is also available for bridging loans, meaning you repay the loan plus interest in full when you remortgage or sell the new flats.

As with development finance, a bridging loan is a short-term solution and you will have to remortgage or sell once the work is complete.

Buy-to-Let mortgage

If you are carrying out a straightforward conversion, such as converting a house into two flats by simply adding a single wall, you may qualify for a specialist buy-to-let mortgage. This would save you the hassle of having to remortgage once the work is complete. It may also save you the inconvenience of having to create separate leases, and is likely to be a cheaper finance option than development finance or a bridging loan.

You will only qualify for a specialist buy-to-let mortgage if you intend to rent out all the flats once the conversion is complete. You will not be permitted to live in one of the flats.

After completion of work

You will need to instruct your solicitor to arrange leases and title deeds for every flat upon completion of the work. This is if you plan to divide the flats into separate leasehold properties. You would almost always do this when converting a house unless you intend to remain the freeholder and rent the flats out instead of selling some (or all) as leasehold properties.

To sell

If you are selling the flats once the work is finished, you may not need to remortgage to pay off your loan – just be sure to discuss your exit strategy with the development or bridging lender upfront. Most lenders will be happy for you to sell the flats one-by-one, as long as you pay back part of your debt with each sale and stay within the agreed limits.

To rent out

To be able to let out the individual flats, you will need to remortgage each flat separately on a leasehold basis upon completing the work. With no plans to live in any of the flats, you would take out a buy-to-let mortgage on each one, enabling you to retain ownership of the flats and rent them out.

It may be possible to retain the freehold for the entire property by obtaining a specialist buy-to-let mortgage. This would mean you wouldn’t have to assign leases to each flat – contact Think Plutus to discuss this in more detail.

To live in one of the flats

You will need a residential mortgage for the leasehold you plan on living in. For the other leasehold flats, you could either arrange separate buy-to-let mortgages and rent them out or sell them. The freehold title on the property is not affected in these arrangements – you simply create several long-term leases which you sell to others.

Be sure to have your solicitor sort out ownership of the freehold when you create the separate leasehold flats. The freehold and leases cannot be held in the same name, You can, however, own the freehold indirectly via a limited company and own the lease on your flat personally.

The legal bit

The solicitor dealing with your transactions will need to be informed of your plans to convert. This gives you an opportunity to ask them about any legal barriers (such as caveats in the deeds) that you may encounter once the property is in your ownership. Your solicitor will also be able to create the leases you need for the separate dwelling, which you will need if you plan to sell each flat individually.

How does converting a house into flats affect its value

The impact on a property’s value when you convert a house into flats depends primarily on your plans. If you plan on securing leasehold mortgages on each individual flat, regardless of whether or not you live in one, the dwellings will usually carry a higher total value than the single freehold property would.

If your plan is to retain the freehold and rent out all the new flats, rather than selling them as leasehold, there will probably be an increase in the value of the freehold, but perhaps not as high as the total value of multiple leaseholds. The reason is that any prospective buyer of the freehold may want to take out a separate lease on each flat to give them flexibility for selling later on.

Splitting a house into flats can be a great way to turn a profit, but not all houses are the right fit. Work with your estate agent to find a good candidate for the transformation – they can help you identify the neighbourhoods with the most potential. If you are planning a conversion project and need advice on getting started, contact Think Plutus today. As expert mortgage advisers, we have worked with many people of all experience levels undertaking similar projects. We will be happy to offer our expertise to help you get the ball rolling.

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