House renovation.

[Pow-Lo]

Anyone ever bought a derelict (or something that needs a lot of work) at auction, made it habitable and shifted it on for a profit? Mrs P has this desire to have a go and needs to get it out of her system. She’s extremely good at DIY and project management, I’m good with a paint brush but crap at everything else.

Apart from the obvious considerations, like keeping within budget, avoiding personalising the property, etc are there any major pitfalls?

 

[Jaws]

are there any major pitfalls?

You mean apart from the obvious one, working with the other half ?

Seriously, providing you get decent trades people involved and do not 'buy silly', it is hard to make a lose !

 

[johnboy]

If buying at auction READ THE LEGAL PACK! you may be paying out way more than you first thought.

 

[Cougar377]

Watch reruns of "Homes under the Hammer".

 

[jeffa]

Very easy to lose money unless you know what you are doing, Unscrupulous Trades people can run rings around the unweary.
A derelict building or something that needs lots of work is not DIY for the unexperienced.
Be careful, many have turned into a money pit

 

[Squag1]

An inspection by a recommended professional would hopefully avoid the money pit.

I had a job on a 2 story over basement which the bosses friend bought.
Dry rot went all the way from the valley gutter between the 2 main rooves down to the floor in the basement behind the plaster.

I checked the chimneys, it was funny in a way.... I got the builder to light a smokey fire in the basement- there was an oilfired cooker going in - well smoke came pouring out the flue so I put a slate over the pot and smoke came out all the other flues. So we put in a stainless steel liner for the cooker.

It would have made for an interest court case later if someone had been gassed.

 

[Pow-Lo]

If buying at auction READ THE LEGAL PACK! you may be paying out way more than you first thought.

Didn't know this, good advice

Very easy to lose money unless you know what you are doing, Unscrupulous Trades people can run rings around the unweary.
A derelict building or something that needs lots of work is not DIY for the unexperienced.
Be careful, many have turned into a money pit

Mrs P does have half an idea what she's doing. As I said in the OP, she's very good at DIY and I'm not blowing smoke up her derriere. Whilst anyone (except me) can decorate, she's just finished renovating our stairs and up-cycling some shitty Ikea drawers for one of the apple bedrooms. She laid the laminate floor in one of our other houses.

I know some good tradesmen so whilst the risk of getting ripped off remains, it's less likely. Mrs P is pretty switched on to prices for work. She's told a tiler to do one for wanting to charge £100/sq.m for tiling a wall and a builder to sod off for quoting £1,850 to build a 5 sq.m stud partition wall and shifting the door and frame into it.

I am in no way claiming we're experts; we're not.

Oh, and we're considering keeping anything we might buy to rent out. Just tossing ideas around at the moment, instead of just tossing

 

[johnboy]

If your intention is to rent out then I believe the perceived wisdom is to use basic levels of trim IE bog standard light switches/fittings, off the shelf bathrooms and kitchens and do not stray from this as your costs will spiral and there are ceiling limits as to what certain houses in certain streets will rent for. Then a good letting agent if such a thing exists.

 

[ogr1]

Sounds like a logistical nightmare, based
on a desire.

 

[Pow-Lo]

Sounds like a logistical nightmare, based
on a desire.

There's a number of reasons why it could be a nightmare. However, if we buy right and follow the golden rules (see @johnboy 's advice) and what Beaker (@andyBeaker) will provide later, then that should mitigate the risks considerably.

If your intention is to rent out then I believe the perceived wisdom is to use basic levels of trim IE bog standard light switches/fittings, off the shelf bathrooms and kitchens and do not stray from this as your costs will spiral and there are ceiling limits as to what certain houses in certain streets will rent for. Then a good letting agent if such a thing exists.

Even if buying to sell on, I think the same advice stand re buying bog standard still applies. I understand the aesthetic appeal of flashy taps twenty times the price of bog standard but, as far as I'm aware, it's like adding options to a car - you don't get your money back. At the same time, if renovating a multi-million pound derelict in Knightsbridge, I guess the flashy taps would be expected by potential buyers, but I'm not in a position to dip into that market!

 

[slim63]

This is what I used to do for a living Paul

First off auctions are a nightmare & although bargains can be had you will find many houses for sale at them have only ever had a basic survey EG its standing & looks like it might stand for a while. As the old saying goes its cheap for a reason & a quick look is not likely to find the reason, try to get on friendly terms with local estate agents & see what is on their books & ffs get a full survey on anything you like the look of it can often be cheaper in the end

Houses with closing orders on them are really cheap but with most you will just be buying the shell so its not really a diy project, ex council houses are normally basically sound structurally & many have been improved in recent years then sold to the tenants

Price up the cost of everything you think might need before buying, don't just let a builder quote for windows as he will be adding a decent percentage on materials, all you need is for someone to put them in, somewhere like national plastics will make them for pennies & fitting is cheap EG a front door of our place was £800 ish supply & fit, the door itself was 280 & I fitted it in an hour, the same goes on most of the other trades (get trade cards if you can then you can supply your own materials without getting ripped off)

Make sure the basics are there & good on anything you buy, the biggest costs are usually plumbing & heating, electrics, roofing, plastering & windows, if you are renting out use trade quality products for bathroom, kitchen, lighting etc no point in putting in a 2k bathroom suite when a basic £120 one will work & maybe get wrecked just as quick in a rental

People like smooth painted walls & no paper & so do letting agents its also much easier to freshen up for a new tenant whenever you need to, try to get your own builders on side for any later repairs as letting agents will push to use their own people & take a nice little cut themselves

If buying to sell much of the same applies & always remember you make the profit when you buy

Anything specific you want to know just ask & I will help if I can

 

[andyBeaker]

It's not for the faint hearted!

Before you even start thinking about buying look at the non-avoidable costs very, very carefully. Stamp duty (second property level, no way round it if you want to sleep at night despite what some may say) council tax (yes, it's payable on an empty property, there may be a month or two free depending on your local council), capital gains tax and agents fees.

As said before you make your money on the way in, not the way out.

Personally I wouldn't buy at auction now - too many 'amateurs' mean that real bargains are rare, there is usually a reason why a property is being auctioned and it's usually not a good one, viewing opportunity is limited and in practice you need to buy without having a survey done; something I have only been brave enough to do once - while it worked out well I wouldn't recommend it!

Getting friendly with local estate agents is the best entry point in my experience. And, at the risk of being cynical, keeping an ear open for local deaths can present opportunities;property with elderly resident is usually in need of renovation and the beneficiaries might be happy to accept a low price for a quick easy sale. One of my best buys was achieved simply by dropping a polite and sympathetic note through the doorway of a local property where the lady had died enquiring if they wanted to talk about selling;'a good deal for all involved.


It is essential to find out the ceiling price for similar properties in the area and base your calculations on not exceeding that including a decent profit margin.

(Purchase price plus buying and selling costs ) minus (profit margin plus sale price) = renovation budget.

If you take the plunge you will (not 'might') run into problems with trades. With the best will in the world they are difficult to schedule and there is always a knock on effect if (when) someone doesn't turn up. And some trades are useless which causes another snowball effect. It's not the same as a plumber not turning up to do a job on your own home - Every day the property is empty it is costing you money and, sadly, may be a target for the local scrotes who enjoy ripping out new boilers (that is unfortunately a thriving industry).

I have a pal who runs a fairly big building company locally so we have good access to trades and if you can do that it can work really well.

There is money to be made, but in my personal opinion it is much harder now, particularly at the lower end of the market as there are so many 'amateurs' looking to make a quick buck and forcing prices up to uneconomical levels (which they often find out to be uneconomical the hard way). There is also the additional spectre of potential tax increases on this type of activity; wouldn't surprise me in the least.

I am not saying it can't be done, it absolutely can but it comes with a ton of hassle and surprises, mostly nasty.

The reality is that when money is made it often happens on the back of a rising market rather than creating additional value. In essence it can be as profitable to buy a property and sit on it for a year and then sell it without doing anything.



And if the market takes a slump (and it does, and it will) you are screwed. No ifs and buts.

Eyes wide open from day 1!

 

[andyBeaker]

You mean apart from the obvious one, working with the other half ?

Seriously, providing you get decent trades people involved and do not 'buy silly', it is hard to make a lose !

It is very, very easy to make a loss!!

 

[Pow-Lo]

Great replies from Tony @slim63 and Andrew @andyBeaker, thank you

One area where I do have a possible small advantage is that my aunt is an estate agent.

Beaks, what's the rule of thumb with capital gains tax? Is it profit above a certain amount or any profit full stop? Is there any tax to pay on rent received if we go down the rental route?

 

[andyBeaker]

Great replies from Tony @slim63 and Andrew @andyBeaker, thank you

One area where I do have a possible small advantage is that my aunt is an estate agent.

Beaks, what's the rule of thumb with capital gains tax? Is it profit above a certain amount or any profit full stop? Is there any tax to pay on rent received if we go down the rental route?

Capital Gains Tax is payable on any net profit but you have a tax free allowance. Look at gov.uk.

Rental income is taxed as 'ordinary' income so in your case I am guessing the whole lot will be taxable as your allowances will already have been utilised. There are certain things you can set off for tax purposes, mainly maintenance (not renovation or improvement). As an aside, If you can get 5% gross return on your total investment by way of rental income at present you are doing very well.

As ever, professional guidance should be sought on tax matters...but to be honest in the scenario you portray it is pretty straightforward if you are happy to do a tax return every year .......which is no big deal online.

 

[sib8292]

We have lived in 4 houses during our 44 year marriage. All but the present one were uninhabitable when we bought them. The first had a stream running down the stairs when I first viewed it, it was raining, and dry rot. The second one required us to live in a caravan for 6 months - we got out of that and into the house a week before Christmas and it snowed a few days later. The third one was a repossession, all the rads had been removed and so had all the power points and light switches. I had to reinstate them all before we could get mortgage finance released. Friendly estate agent let us take a copy of the key so I could go in every night after work and at weekends to fit them, during the month between exchange and completion.

Overall it was a successful strategy - we made money and had better houses than those of friends who either bought places that had been done up to someone else's taste and standards, or new builds which even 25 years ago weren't amazing quality.

Slightly worryingly, having thought we'd got our house finished Mrs SIB announced over the weekend that she had just found a derelict house on the market locally, that we could buy and restore. Told her I wasn't keen, given that Armageddon is looming, which even she can't deny.

Buying at auction is tricky, because once the hammer comes down you have 28 days (usually) to complete the deal. So you need all your finance in place and to do that you need your costings for the renovation and to do that you need to spend some time working out what work is needed. If you aren't doing it yourself you need to make sure your contractors will be ready to start fairly soon after completion. You need your lawyers to check out the legal title and you need to have your survey done (if you think its worth it - we've never bothered with one, because we both come from building family backgrounds and were buying wrecks). So there is a lot of time and effort to be undertaken, and some cost to be incurred, all in the hope of being successful at auction, which will be totally wasted if you aren't.

Sealed bids are better - you aren't legally bound even if you are the successful bidder so you can renegotiate if things aren't as you thought they would be.

Also if the property is not your own home you will have CGT to pay when selling, assuming you make a profit. Given the economic situation, an increase in CGT rates is predictable, so its likely that net (in the pocket) profit isn't going to be anywhere near as good as in the past. Its not impossible that there will also be CGT on selling ones own home some time in the future, to help pay for the pandemic. There are political ramifications to that but all this government borrowing will have to be paid for eventually.

Lastly, I know several small builders who are finding it tricky this year with lockdowns etc and are looking at undertaking their own projects rather than working for others. If that pattern is common there is even more competition in the market.

 

[Pow-Lo]

Capital Gains Tax is payable on any net profit but you have a tax free allowance. Look at gov.uk.

Rental income is taxed as 'ordinary' income so in your case I am guessing the whole lot will be taxable as your allowances will already have been utilised. There are certain things you can set off for tax purposes, mainly maintenance (not renovation or improvement). As an aside, If you can get 5% gross return on your total investment by way of rental income at present you are doing very well.

As ever, professional guidance should be sought on tax matters...but to be honest in the scenario you portray it is pretty straightforward if you are happy to do a tax return every year .......which is no big deal online.

I would take professional advice, for sure, but if the tax was likely to be what I consider prohibitive then I wouldn't bother.

I'm still pretty cross that we had to pay an additional £12k stamp duty on this place because we haven't sold our other house and those bastards at Kent council are charging us the full whack for council tax. I struggle with that one because they gave a 25% discount when I lived in Singapore.

 

[sib8292]

Beaks, what's the rule of thumb with capital gains tax? Is it profit above a certain amount or any profit full stop?

Just to add to what Andy said - in calculating CGT you start with gross profit, take off all allowable expenses, to arrive at net taxable profit. Each taxpayer has an annual CGT exempt allowance, this year its £12,300. So if you were to buy as joint owners and sold* this tax year the first £24,600 of profit would be tax free, assuming you hadn't crystallised any other capital gains in the tax year. After that rates (special for property sales) are 18% for basic rate taxpayers or 28% for higher rate taxpayers.

* sold as in exchanged contracts, rather than completion of the sale. So you create the liability to tax before you get the money to pay it!

 

[Pow-Lo]

We have lived in 4 houses during our 44 year marriage. All but the present one were uninhabitable when we bought them. The first had a stream running down the stairs when I first viewed it, it was raining, and dry rot. The second one required us to live in a caravan for 6 months - we got out of that and into the house a week before Christmas and it snowed a few days later. The third one was a repossession, all the rads had been removed and so had all the power points and light switches. I had to reinstate them all before we could get mortgage finance released. Friendly estate agent let us take a copy of the key so I could go in every night after work and at weekends to fit them, during the month between exchange and completion.

Overall it was a successful strategy - we made money and had better houses than those of friends who either bought places that had been done up to someone else's taste and standards, or new builds which even 25 years ago weren't amazing quality.

Slightly worryingly, having thought we'd got our house finished Mrs SIB announced over the weekend that she had just found a derelict house on the market locally, that we could buy and restore. Told her I wasn't keen, given that Armageddon is looming, which even she can't deny.

Buying at auction is tricky, because once the hammer comes down you have 28 days (usually) to complete the deal. So you need all your finance in place and to do that you need your costings for the renovation and to do that you need to spend some time working out what work is needed. If you aren't doing it yourself you need to make sure your contractors will be ready to start fairly soon after completion. You need your lawyers to check out the legal title and you need to have your survey done (if you think its worth it - we've never bothered with one, because we both come from building family backgrounds and were buying wrecks). So there is a lot of time and effort to be undertaken, and some cost to be incurred, all in the hope of being successful at auction, which will be totally wasted if you aren't.

Sealed bids are better - you aren't legally bound even if you are the successful bidder so you can renegotiate if things aren't as you thought they would be.

Also if the property is not your own home you will have CGT to pay when selling, assuming you make a profit. Given the economic situation, an increase in CGT rates is predictable, so its likely that net (in the pocket) profit isn't going to be anywhere near as good as in the past. Its not impossible that there will also be CGT on selling ones own home some time in the future, to help pay for the pandemic. There are political ramifications to that but all this government borrowing will have to be paid for eventually.

Lastly, I know several small builders who are finding it tricky this year with lockdowns etc and are looking at undertaking their own projects rather than working for others. If that pattern is common there is even more competition in the market.

"...Armageddon is looming, which even she can't deny."

 

[derek kelly]

Look around at local auctions for bathrooms & kitchens there are many bargains to be had but watch out for auction fees & vat, you could also go for ex display models.