Apartment with sitting tenant

young_investor_2021

Grumpy_chap said:

young_investor_2021 said:

I'm planning to buy a property for letting, and my main focus is to maximize the yield. I saw an apartment with ~140 years left on lease, which has a sitting tenant that started the tenancy 2 months ago. I don't plan on taking a mortgage. The yield works out around 5.7% (after subtracting the ground rent, service charge and agent management fees). My questions to the community are the following:

1. Is it safe to buy with a sitting tenant? I'm wondering if the owner had some problems and wanted to sell right after the tenancy started.

2. After reading about leasehold, I've heard the agreement may have restrictions (e.g. asking permission for renovation or bringing pets). However the owners seem to not want to share the lease before an offer was agreed.

3. Would you advise the yield is acceptable? (The location is rather close to the city centre) Am I missing any higher profit strategies and risking to lock my money in?

This "sitting tenant who started 2 months ago" really needs to be understood.  If the current owner of the flat long lease (LL) was planning to sell, and had vacant possession as recently as October, then deciding to let and then sell would be an unusual course of action.  If the LL was not planning to sell, then you need to understand why this change of approach has arisen so quickly and that may not be easy to establish.  Events happen that can force a change in strategy, so it is not always a bad thing, just not something that I would see as planned.

Answering the questions:
1. YES - this happens quite often.  You need to do extra due diligence.  Sitting tenant often impacts the market value of the property.

2.  You want it before the offer is agreed.  The vendor does not need to provide it.  Submit an offer and, if it is agreed, the details will be forthcoming.  Withdraw if they are not provided or do not provide the surety you require.

3.  Yield just shy of 6% after fees is extraordinary - are you sure the maths are correct?  No-one can say whether a 5.7% yield for your investment is acceptable as that is something only you can say - what would your alternative investment strategies provide by way of return versus risk?

Other factors to consider, and it sounds like you are a first-time-buyer, is that having the rental property may impact on first-time-buyer schemes if / when you come to buy your own property to live in.  

If you are buying this flat with the intention to let for a bit and then move in as your primary residence, be aware that gaining vacant possession when you decide that is something you require may not be a quick process.

Thank you for this hint. I will definitely ask the owners and agents lots of questions and, after the offer is accepted, I will verify facts about the tenants myself.

Indeed, as someone who had not clue about renting, I did not consider the income tax. All things considered, the true yield is in the range 3%-3.6%. This is quite disappointing, given that it's the highest yield I saw after looking at many properties. Is this a common yield for renting in England, or am I looking in the wrong area?

young_investor_2021

canaldumidi said:

1) yes, assuming you have seen and checked  the tenancy agreement, all the tenant vetting documents,  the tenant set-up documents (gas, gov leaflet etc etc), rent schedule, deposit docs, etc. Take nothing for granted.

2) it's usual for the lease tbe made available during conveyancing. Some sellers willbe helpful andprovide it earlier, or if the Land Ragistry has a copy you can apply for it on Form OS2 - GOV.UK for £7 by post

3) using cash means no mortgage nterest tooffset against ax. Have you done a full budget? Your costs willbe much greater than you have listed.

As others have said, you iherit the existing tenance. The tenant does not need to sign a new one with you, and why should they.

Don't forget to comply with the Landlord & Tenant Act 1985 S3..

Post 7: New landlords (1):advice & information :see links in next post

Post 8: New landlords (2): Essential links for further information

Post 9: Letting agents: how should a landlord select or sack?

Thank you, I have done a full budget now. I considered: ground rent, service charge, agent fees, income tax, landlord's insurance, based on 10 months a year. I did not consider routine annual, repairs, or the initial set-up, as I have no way of figuring the exact cost. In any case, even without those, the yield now stands at 3%-3.6%, which is quite disappointing in my view and makes me re-think the whole strategy. In your experience using a mortgage gives a better yield? (considering the tax exemption)

Pixie5740

young_investor_2021 said:

canaldumidi said:

1) yes, assuming you have seen and checked  the tenancy agreement, all the tenant vetting documents,  the tenant set-up documents (gas, gov leaflet etc etc), rent schedule, deposit docs, etc. Take nothing for granted.

2) it's usual for the lease tbe made available during conveyancing. Some sellers willbe helpful andprovide it earlier, or if the Land Ragistry has a copy you can apply for it on Form OS2 - GOV.UK for £7 by post

3) using cash means no mortgage nterest tooffset against ax. Have you done a full budget? Your costs willbe much greater than you have listed.

As others have said, you iherit the existing tenance. The tenant does not need to sign a new one with you, and why should they.

Don't forget to comply with the Landlord & Tenant Act 1985 S3..

Post 7: New landlords (1):advice & information :see links in next post

Post 8: New landlords (2): Essential links for further information

Post 9: Letting agents: how should a landlord select or sack?

Thank you, I have done a full budget now. I considered: ground rent, service charge, agent fees, income tax, landlord's insurance, based on 10 months a year. I did not consider routine annual, repairs, or the initial set-up, as I have no way of figuring the exact cost. In any case, even without those, the yield now stands at 3%-3.6%, which is quite disappointing in my view and makes me re-think the whole strategy. In your experience using a mortgage gives a better yield? (considering the tax exemption)

No using a mortgage doesn’t give you a better yield. There isn’t a tax exemption, there is a tax credit for mortgage interest and if your a higher rate tax payer it’s not as good as when you used to be able to treat mortgage interest as an expense. Even when mortgage interest was an expense paying money to finance debt would cost you more than any tax saved. 

young_investor_2021

Apparently I cannot learn much about the tenants, the agent replied
” Personal info re the Tenants cannot be released due to GDPR. We confirm they have already undergone checks as per our terms of business with the landlord.”
Basically asking me to sign in the dark. Probably I can check the tenancy agreement and such, but can’t vet the tenants myself. Anyone can suggest what I could look for to get a better idea about the tenants?

user1977

young_investor_2021 said:

” Personal info re the Tenants cannot be released due to GDPR."

Utter nonsense. This sort of information can legitimately be released to potential buyers.

sammyjammy

I think you need to give up on this one and go away and do some further homework and due diligence, nobody can tell you what is a good yield for you or the area you are looking to buy in.

Pixie5740

user1977 said:

young_investor_2021 said:

” Personal info re the Tenants cannot be released due to GDPR."

Utter nonsense. This sort of information can legitimately be released to potential buyers.

I don’t think it is nonsense. The tenant’s personal information is protected by GDPR. the letting agent should be able to share the information with the landlord but the OP is not the landlord. The landlord should also be registered with the ICO. 

deannagone

If renting this house out was such a good deal, why would the present owners have put it up for sale?  There is a reason LL's are leaving the market generally.  

Is it the normal buying process or a modern auction?

user1977

Pixie5740 said:

user1977 said:

young_investor_2021 said:

” Personal info re the Tenants cannot be released due to GDPR."

Utter nonsense. This sort of information can legitimately be released to potential buyers.

I don’t think it is nonsense. The tenant’s personal information is protected by GDPR. the letting agent should be able to share the information with the landlord but the OP is not the landlord. The landlord should also be registered with the ICO. 

It's a normal part of due diligence - you wouldn't, say, put the info up on the Rightmove listing, but you're allowed to disclose it once you have a preferred bidder. Think about corporate takeovers - personnel files may be confidential, but potential buyers are allowed access to see the salaries, disciplinary records, etc. Sometimes it's surrounded with confidentiality agreements for good measure.

Pixie5740

user1977 said:

Pixie5740 said:

user1977 said:

young_investor_2021 said:

” Personal info re the Tenants cannot be released due to GDPR."

Utter nonsense. This sort of information can legitimately be released to potential buyers.

I don’t think it is nonsense. The tenant’s personal information is protected by GDPR. the letting agent should be able to share the information with the landlord but the OP is not the landlord. The landlord should also be registered with the ICO. 

It's a normal part of due diligence - you wouldn't, say, put the info up on the Rightmove listing, but you're allowed to disclose it once you have a preferred bidder. Think about corporate takeovers - personnel files may be confidential, but potential buyers are allowed access to see the salaries, disciplinary records, etc. Sometimes it's surrounded with confidentiality agreements for good measure.

We’re not talking about corporate takeovers, we’re talking about a tenancy and I think it is highly unlikely that the tenants will have signed a contract that allows potential buyers to be given their personal information and given the questions the OP is asking I also find it unlikely that (s)he is registered with the ICO. In fact the letting agency could only share the tenant’s personal data with the actual landlord if at the time of requesting the information the letting agency makes it clear to the tenant that the data will be shared with the landlord.