Move up a gear with let-to-buy

One Kent car-parts distributor saw an opportunity to expand his business and has been reaping the dividends ever since, says Christopher Browne

If you want to start up a personal property portfolio, try a let-to-buy deal. The reverse of buying-to-let, it means that instead of selling your house when you move, you remortgage, refurbish and then let it out. Suddenly you are the proud owner of two homes and a first-time landlord, too.

The idea was certainly not lost on Kent businessman Gerald Jones when he pulled off a nifty deal recently. Only Jones did it with a commercial business unit instead of a four-bedroom home. A car parts and accessories distributor, he had been leasing a small warehouse and offices at a business park in Beckenham, Kent, for two years when it went up for sale.

"It was an offer that just came out of the blue," he says. "I had been renting for £11,000 a year, and one day the owner approached me and asked if I'd like to buy it plus some extra space for £115,000. As the business had been doing well, I snapped up the offer." Jones got a mortgage through Mortgages for Business and found his monthly instalments were lower than the rent he had been paying. Business prospered; the network of shops he supplied was growing, as was the band of traders doing business over-the-counter at his Beckenham unit. "It was a refreshing change from the early days when I was working from a back-street, lock-up garage," he says.

Then another unit - twice the size of the first - went up for sale. The asking price was £300,000. "It was a lot of money and I knew I would have to spend £100,000 to add another floor." So he did a refinancing package with his broker. This is similar to a remortgage - you pay off your old loan at the same time as getting a new and bigger one with a lower interest rate. Jones signed up for a 20-year mortgage at 75 per cent and only 1.75 per cent over base rate, his deposit part-funded by company profits. He used the extra £100,000 he raised to revamp the new premises with a large warehouse, spacious offices, a meeting room, reception and parking. Then he brokered a let-to-buy deal on his old premises - first visiting two commercial lettings agencies who confirmed that his old unit had a potential annual yield of £17,500 to £20,000 a year.

The next step was to find a tenant. Jones advertised in local newspapers and spread the word around the business community. A packaging company who had been searching for a new home inspected the unit and Jones assigned it a five-year lease with an annual rental income of £18,500. "It may not have been at the top of the market, but, thanks to rising property prices and demand, it was far more than the £11,000-a-year I had once been paying and more than covered my annual outgoings," he says.

Unlike buy-to-lets, which have short six-month to two-year leases, commercial lets can last as long as 25 years, with the average being 12 to 15 years. Jones says he signed up his own tenants to a brief five-year lease quite deliberately. "It means that if my business expands, in five years' time I can use the extra space if I need to. It also gives the packaging company an option to move to new premises if they want to."

London investment adviser Hammond Smith says: "Although doing a commercial let-to-buy takes longer than a domestic one, it can work just as well, if not better. You must time it properly, have a sound business plan and an excellent tenant, as the success of your investment rides on your lessee's performance and if he goes bust you'll face a nasty void [empty property] which will drain your cashflow and profits."

The Kent businessman, meanwhile, can see his new tenants from his private office."It's a great way to protect my investment and if it all works out, I may buy some more units. I'll certainly be watching those spaces," says Jones.