I had a great question in the other day from one of my subscribers to youtube who was asking pretty much ‘how does one finance a title split?’, so I thought it would be a good idea just to do a very quick video on title splits.
I have done a title split, and although I wouldn’t consider myself an expert, I’m very, very happy to share my experiences.
Well, the property in question was a house that I turned into two flats, now it was a bit strange because the house was actually in a terrace of flats and each of the flats were sort of created as pairs and this house should have been created as a pair of flats but it turned out that when the terrace was being built the owner of the house had actually approached the developer and said “I’d like to buy both flats but don’t make them separate, leave them connected, I’m going to use them as a house”.
And so, when I bought the property in order to make them into a flat there wasn’t that much to do in terms of structure work, I had to put a new wall in along a hallway and then put in a separate front door for the upstairs flat. But it was a little bit strange because the previous owner had actually been living there with a kitchen on the first floor and a kitchen on the ground floor.
Anyway, the work in that respect was relatively easy other than, the two things which took up most time were these:
Firstly, dealing with the utilities because each flat had to have separate utilities, I couldn’t just split at the meter. They had to have separate meters and they had to have separate services coming in from the street, which, particularly in the case of the electricity was quite a big deal having to get in touch with the local electricity provider and get them to bring the electricity in from the street for the extra unit.
The other thing which was quite a big project and took a lot of resolving was soundproofing because with building regulations, and I should say by the way, that I needed to get planning consent to turn this house into two flats, and I needed building regulation consent, to get the building consent, regulation consent to get that signed off by the local building control officer, required soundproofing between the two flats.
And we had choices.
The way we could do it was either to soundproof from the upper flat and to basically lift the floor and to basically soundproof under the floor, but that would have meant lifting radiators, lifting skirtings. Or the alternative to that would be to lower the ceiling of the ground floor flat and to put the soundproofing in above the ceiling between the two flats, and we opted for the latter. Now that was quite a big job and that was probably the major cost of doing the conversion.
So, once the properties were created, what then? Because I owned both flats they came with their own freehold, so I kept both of the flats to rent out and I financed using the freehold as an envelope and I financed against the freehold.
To be honest, the value which the valuer put on the property was identical, really, to what you would value the property as if you were valuing it as two individual flats. That didn’t surprise me, I thought that was the way it was going to work anyway, so that made it very straightforward.
Coming back to the question which my viewer sent in, they were asking about the possibility of splitting a house into two flats and should they then have two separate leasehold interests as well as the freehold and should they then have mortgages on each flat, in other words, should they mortgage each of the leasehold interests in order to raise finance.
I’m not an expert on this and I’m certainly not a lawyer, but my understanding on this is that you cannot create the two leasehold interests for your own benefit.
So, what does that mean?
What that means is if you want to finance the properties and so you take out, you create within the freeholders, I’m assuming you own the freehold, if it’s a house like a terraced house and you spilt the upstairs into one flat and the downstairs into another flat, you’d have to freehold. You could then put a leasehold, a long leasehold onto each of the flats. But if you’re doing that purely to be able to refinance you can’t technically do that, you can’t have both of those leaseholds in your name as the owner of both properties.
So how do people get around this?
I’m not saying you should do this by the way and it’s probably okay, but I’m not a lawyer so you need to take your own advice but what you could do if, for example, you have a business partner or a life partner or a significant other you could sell one of the flats to them, so that the lease is to their benefit and not to your benefit, or you could even set up a limited company because the limited company, assuming, for example, the freeholds in your name, the limited company is a separate entity to yourself so that limited company could own one of the leaseholds and you could own the other leasehold. If you already own the property in a limited company and the limited company already owns the freehold then you could do the reverse. You could potentially sell one of the flats to yourself so that one of the flats is owned by the limited company and the other flat is owned by you so it’s separate entities. But you couldn’t create both leasehold interests in your name, or if you own it in a limited company both in the name of the limited company if that makes sense.
Having said all of that, as I said, I financed the freeholds wrapped around both flats and for me, that was by far the most straightforward way of doing it. As of yet, I haven’t even created new leaseholds on those flats, I’ve kept them both as rental units and I’ve kept them both for myself and I’ve just financed the freehold, and I was able to finance the same as I would have financed if I’d split the title anyway.
So I hope that all makes sense and it’s not too confusing. The long and the short answer is I’m not sure that you could actually do what you’re suggesting in your question to me but you could probably finance the freehold anyway, or you could just make sure that one of the flats is owned by a different entity to the entity that currently owns the property.
I hope you found this video useful and informative, and if you did then please come over to my website thepropertyteacher.co.uk where you’ll find loads more great property-related resources including free special reports to download and my best-selling series of e-books which includes The Successful Property Renovators Workshop, 63 Common Defects In Investment Property And How To Spot Them, and if you’re just starting out in property or you want to grow your portfolio you may be particularly interested in The Successful Property Investors Strategy Workshop in which I’ll take you through exactly how I started and built my property portfolio starting literally with none of my own money, and how I built a portfolio of £2 million worth of property in just four years, that was starting from scratch.
I’ll take you through everything that I did right so that you can copy me and do the same, and I’ll also show you everything that I did wrong so that you can avoid the mistakes that I made and so that you can progress in property and be far more successful, far more quickly than I ever was.
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And until next time.
Here’s to Successful Property Investing.
Peter
Peter Jones
(ex) Chartered Surveyor, author and property investor
https://thepropertyteacher.co.uk
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