My partner and I would like to quit our jobs and buy a property to convert into hostel that we would work in full time.
We've identified a great property in a great location that would make an excellent hostel just outside London. I've reviewed our finances and I'm going to include some important numbers. I hope someone more familiar with buying property in the UK could give us advice on whether it is possible to buy this property and how to proceed based on our figures and UK tax and property law. We are only looking to buy a property not lease it.
We both work in London and earn £40K each. We have an existing property which is our main residential home worth £400k which has £200K of equity.
The property we have identified is a large detached property on its own land - ideal for a hostel but pricey at £600K.
Ideally we want to keep our existing home and just rent it out while we live in the hostel itself. We even have a friend who would be willing to rent it from us for a figure that would just cover the mortgage and maintenance while we move out further to run our hostel and live in it.
Now going into more detail about our finances. If our existing property is worth £400,000 value, I think we would have to take out a 'buy to let' mortgage and retain at least £100k of equity as 25% deposit. That would release a further £100,000 of capital which after taxes can be used as a down payment on the new property.
With the £100,000 released, £90,000 of that could be a 15% down payment on a £600,000 property. I think we would also need £38,000 as stamp duty as this is an 'additional/buy to let property'. Thats obviously very expensive. Alternatively if we sold the existing property we would have to pay only £20,000 as stamp duty on the new property but we would lose our existing home.
Additionally, as our joint income is £80K, we might only be lent 4.5x that value so only a £360K mortgage loan which on top of £90K deposit only gives us a budget of £450K. That’s £150K short of the funds we need. As a result we may have to take out a business loan of £150K which I suppose could be secured against both properties but Im again unsure how a bank would view us taking out a loan to fill a mortgage hole. We have almost perfect credit rating and I know we could probably borrow £100k between us unsecured but its not an ideal option. We’re then using personal loans to fund a business and again im not sure if a lender would allow us to borrow money to fund a business.
Since it seems we will have to walk into this project from day one as a business, probably with loans then we are looking at whether we could buy the new property through a limited company. However very few mortgage lenders lend on those deals and we as directors would have to agree to be personally liable for the debt.
Pretty much all the finances look bad with the new stamp duty and lack of mortgage interest tax relief. I don’t think its cost effective to keep both properties.
We could just sell up and buy the new property with the £200K capital but that means we're losing our existing home. My partner might also not be willing to jump into this if we have to lose our main home.
We've used a 'Hostel profitability' calculator so we know how many beds, price and occupancy levels we'd need to create a viable business. Our numbers look very good so Im not hesitant to take out a business loan but again, I don’t know how easy this would be. Aside from our home we'd also be giving up our main jobs and salary in the process so it’s a big financial and personal risk. It just feels unfortunate that we may need to fully give up our old property rather than just rent it out while it pays itself off. The whole buy to let down payment, stamp duty and the higher interest rates also don't make things financially easier.
We're not exactly broke ex-travellers dreaming of opening an expensive hostel in central London. We have capital and decent salaries. We have a business plan. We have a location and suitable property in mind. Its just that everything I have researched points to painful financial hurdles. Surely there some financial support and benefits we are missing? We essentially have £250K start up capital if we went all in and want to create a business. Is there any business support or tax relief we can take advantage of or can any one else suggest any ways in which we could affordably secure this new property, ideally without having to risk everything including losing our existing home?
Here are our key numbers again:
1. £80k joint income
2. £400K current property value
3. £200k equity in current property
4. £600k is the price of the property we'd like to purchase
5. We have possibly access to another £50K in savings/family loans
6. We would ideally like to keep both properties.
I’ll continue to do my research but I would be very keen for some advice from anyone in the know who has been through this journey especially around how accessible bank support is for anyone starting a new business. We were hoping to do all this with just savings and a regular mortgage but the tax and financial hurdles seem too high without risking everything we have.