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Diversify or die? Not necessarily

Ying Tan - Buy to Let Club
|
25th May 2018
ying tan
"Keen to build their portfolios whilst avoiding the problems affecting the mainstream sector, some are looking to commercial properties."

It’s something we hear across all sectors of business. If you want to succeed you need to be willing to diversify. Relying solely on one type of business is a dangerous path as a downturn in that area could hit your profits hard.

And the same applies to landlords, it seems. Since 2015 the buy to let sector has faced challenging times and, keen to build their portfolios whilst avoiding the problems affecting the mainstream sector, some are looking to commercial properties.

The reasoning behind this is clear, of course. Commercial properties (and mixed use) are exempt from the 3% surcharge other buy to lets and second homes are subject to. Furthermore of course, with commercial properties landlords are able to continue to offset mortgage interest against profits – something which will not be allowed at all in the residential market by 2020.

In order to capitalise on this landlords have a choice. They can opt for a commercial property and then apply for planning permission to change the use of the building and convert into flats, so as to remain in the residential market but avoid the extra charge. Or they can opt for a complete commercial property and take diversification all the way.

Both options should come with some warnings however. Firstly, if your client is opting for a commercial property with plans to change the use of the building via planning permission it’s important you warn them that permission may not be granted. As such they must be aware they may be left with a commercial property on their hands after all.

Those clients who are actually planning on running a commercial property should also be aware of what that involves. It takes an understanding of businesses that traditional landlords may not have and identifying the right type of business can be difficult. A takeaway, for example, may offer a decent yield – compared to other options – but it might not be as stable or secure and could go bust, resulting in void periods.

Research is absolutely key – both to ensure your client’s investment is a success and to appease lender requirements. Diversification can be a smart step in business, but it’s not always the answer for everyone.

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