Updated 23rd June 2016
There are a number of reasons why a landlord may decide to renovate a property for subsequent letting to tenants:
- renovation is likely to increase the rental value of the let property, thus increasing the landlord’s income;
- renovation is also likely to increase the capital value of the property, thus raising the price if it is sold or increasing its value as an asset against which borrowing may be made;
- if you are looking for a buy to let property one in need of renovation is likely to be found at a cheaper price; and
- if you are buying a property that has been empty for a number of years, there are a number of government incentives that may help with the cost of a landlord’s renovations.
Generally speaking, renovating a property is no small matter – it is not something that is likely to be undertaken lightly. Renovation may be time consuming and may involve considerable expense.
To renovate … or not?
As with any major building works, therefore, careful planning and a consideration of all the implications of the proposed project are likely to pay dividends.
One of the very first questions may be whether you actually need to embark on renovation work at all. If the present layout of the property does not make optimum use of the space available, the number of rooms or the basic amenities, it may be possible to make rearrangements that fall far short of the time and expense of radical renovation work.
Your buy to let business is only making money when you are able to let the property to tenants. For the landlord, therefore, time might quite literally mean money. How long are you prepared to forego rental income whilst your property is being renovated?
When it comes to renovation work, there may be a temptation to bite off more than you can chew by overestimating your own skills as architect, engineer, builder, electrician, plumber or carpenter. In other words, there is likely to be a whole host of skills required for successful renovations. A realistic view of what you are able to do yourself and what you need to contract others to do for you is important.
Part of your planning process is also likely to include the preparation of a detailed and accurate budget.
- the cost of renovating the property typically depends on:
- the initial state of the building;
- how extensive a renovation you want – and can afford;
- the price of materials to be used; and
- the cost of the labour involved.
The total amount of your budget, therefore, depends on your particular needs and circumstances, although whatever you are intending to expend, tight control over the purse strings is likely to be an important consideration.
You should also budget for an extra 10% on top for any unexpected costs.
Although there are no absolute rules, you may be able to get some idea of what your money – whether it is a £5,000 budget or £40,000 – is likely to get you by visiting the Channel 4 website for a series of programmes on budgeting for your home make-over.
Rules and regulations
Unless only very minor modifications are intended, your building work is likely to need planning permission, granted by the planning department of your local authority or council. It is the owner of the property who is ultimately responsible for gaining this permission.
It may be confusing knowing whether your renovation project requires planning permission. There is a helpful, interactive set of guidelines maintained on the Department for Communities and Local Government website where there is a comprehensive “planning portal”. These may be used to walk you through the permission needed for various modifications, whether to a detached, semi-detached or terraced house.
Bear in mind that an application for planning permission:
- may take some time to obtain;
- may require your submission of detailed plans and proposals;
- and is something for which you need to pay. An early application is recommended.
The same planning portal details the building control inspections and approvals you need to secure as your building works progress. To ensure that you gain the required certification that the works meet the approved building standards you may use the services of your local authority’s Building Control department or engage your own Approved Inspector.
The Building Regulations are extremely detailed and cover no fewer than 14 different areas of construction – from fire safety to drainage, glazing and electricity. The regulations are updated periodically
For major works, it is usual to gain Building Regulation approval in advance by submitting detailed plans (showing how you intend to meet the standards required), together with the relevant fee. As work progresses, inspections are made to ensure that the declared standards have been met.
If the proposed renovation is less complicated – and something you intend to complete on a do-it-yourself basis, for example – you may choose to omit the need for detailed plans and secure a Building Notice. As work progresses a Building Inspector then visits the site to ensure that all works meet the required regulations.
Compliance with Building Regulations is an important consideration since the local authority may require you to take down any work and re-build if you have failed to meet the required standards.
From the moment the approved building works commence or the moment you acquire an empty property for renovation, you might want to pay particular attention to the adequacy of your insurance cover.
Typically, the landlord insurance on which you may rely once the property is tenanted may not offer the degree of protection likely to be required whilst building works are in progress – in insurance terms the reason is simple: the risks to which an occupied property may be exposed are different to those on which major work is in progress. With respect to the latter:
- an empty property – but especially one that is undergoing renovation – ends to be a magnet for vandals and thieves; and
- there is a risk that even the most carefully planned and executed building works result in non-structural damage to some other part of your property.
Different forms of building insurance contain different terms, but typically if there is no one living in the property for more than a month or so, standard landlord insurance may lapse and specialist empty property renovation cover is likely to be required instead.
It is worth taking into account that this type of insurance is a niche product and you may therefore wish to consult a specialist provider, such as ourselves at Cover4LetProperty.
Reduced VAT implications
According to the Department for Communities and Local Government, there are currently over than 635,000 empty homes in England and about a third of those have been empty for longer than 6 months.
Given such a waste of a precious and essential social resource, the government is concerned to encourage n increase in the supply of local housing by bringing empty homes back into use.
Indeed, in support of its policy objectives the government has distributed to local authorities and councils more than £2 billion in the past five years. Many councils, in turn, are able to make grants and loans to individuals – including landlords – who renovate empty homes in order to make them available for long-term residential use.
A further incentive is provided directly by central government through the availability of discounts on the 20% rate of VAT normally payable on building works.
VAT discounts are administered by HM Revenue & Customs and details of the scheme may be found on the relevant website.
Essentially, the scheme allows work intended to bring back into permanent use homes that have been empty for two years or longer a reduced rate of VAT at 5% (instead of the normal 20%). The discount is available for landlords who are buying empty property to let. In order to qualify for the discount, it is important to remember that:
- the property in question has been empty for a period longer than two years before the renovations start;
- the discount is available only if the work is being done by a builder, or any other tradesman, formally contracted by the property owner to do the work;
- not all contractors may be aware of the discount, so it is important to ask them to discount VAT in any invoices they issue; and
- On completion of the works, the building is going to be used only for residential purposes.
Even further discounts, to zero rated VAT, are available if the property has been empty for 10 years or longer – although this discount is applicable only if the property is intended for occupation either by yourself or your family.
Renovating a property may make especially good sense for a landlord who is likely to see increased rental income or an increase in the capital value of the property as a result. The potential availability of grants, loans and VAT discounts on the renovation of homes that were previously standing empty may offer further financial incentive.
Of course, there are a number of considerations to take into account before embarking on any renovation project and failure to appreciate all of the ramifications and implications may result in costly building works or other loss or damage to your property.