Should buy to let landlords be investing in semi-commercial property? Here, we examine the benefits and tax advantages and share our top tips for financing this property type.
Semi-commercial property is an increasingly attractive option for buy to let landlords looking to diversify their portfolios and boost their rental profits. With dual income streams and tax benefits, semi-commercial investment is a great alternative for many property investors to standard residential buy to lets.
We’re covering:
- What semi-commercial property is
- The top benefits of investing in semi-commercial property
- How to finance semi-commercial property
What is semi-commercial property?
A semi-commercial, or ‘mixed-use’, property comprises both residential and commercial elements. A good example would be a shop with a flat above or a pub with self-contained living accommodation. Due to the combination of these elements, these properties typically require finance from a commercial mortgage lender.
What are the top three benefits of investing in semi-commercial property?
- Lower Stamp Duty Rates: Semi-commercial properties are exempt from the 5% Stamp Duty surcharge, which significantly reduces purchase costs.
- Multiple income streams: with separate tenants in the commercial and residential units, investors benefit from dual income streams. This gives you greater rental stability and protection against void periods.
- Higher yields: mixed-use properties typically generate higher rental yields than standard buy to lets. As commercial leases offer longer terms and higher yields, combined with rental income from the residential element, it’s a great opportunity to significantly boost rental profits.
What are the tax advantages of investing in semi-commercial properties?
As well as the Stamp Duty surcharge saving, semi-commercial properties offer other tax benefits, such as:
- Capital allowances: You may be able to claim tax deductions on certain fixtures or fittings within the commercial part of the property. This can reduce your tax bill, as you can write off the cost of these items over time
- Mortgage interest relief: For semi-commercial properties, interest is typically deductible as a business expense
- VAT considerations: If the property is VAT-registered, you may be able to reclaim VAT on some expenses, which can reduce costs
How can I finance a semi-commercial property?
Mortgages for semi-commercial property are more complex than standard buy to let mortgages. The commercial and residential elements make the process more complicated, as lenders underwrite the income, lease terms, and tenants differently. Therefore, you’ll typically need to work with a commercial or highly specialist buy to let lender. Our experts can guide you through how lenders assess semi-commercial applications
Due to the growing popularity of semi-commercial property investment, many new lenders are entering this space. Consequently, there are plenty of competitive semi-commercial rate options to explore. However, pricing for semi-commercial loans is still more expensive than standard buy to let rates.
The key criteria when applying for a semi-commercial mortgage are:
- A minimum 25% deposit
- Letting experience: most lenders require you to have at least one year's experience in property investment. There are some options for first-time landlords, but the rates will be much higher
- Commercial tenancy agreement: most lenders require a tenancy agreement for the commercial unit at the point of application
- Read our full guide to financing semi-commercial properties here.
What are the risks of investing in semi-commercial property?
Despite all the benefits on offer, before investing in semi-commercial property, you should consider:
- The tenant types and lease structures: Commercial tenants will often sign longer leases, which can give you greater security, but finding replacements can take time. Look for a property in an area with good footfall, which will attract strong demand from both commercial and residential tenants
- Location: As well as good footfall, make sure the location is good for business. Not only will a lender become wary if there are several vacant commercial units in the surrounding area, but it could also make it more difficult to attract commercial tenants
- Property maintenance: Semi-commercial properties require more upkeep and, in some cases, specific insurance needs. These can increase your monthly costs, so it’s essential to bear this in mind before you invest
Is semi-commercial right for you?
In summary, semi-commercial property investment is great for:
- Experienced buy to let landlords looking to diversify their portfolios
- Landlords looking for higher rental yields and long-term rental stability
- Landlords ready to take on the added maintenance that comes with managing mixed-use properties
Semi-commercial properties offer a range of benefits, including dual income streams, tax efficiency, and strong yield potential.
How Can Working with a Mortgage Broker Help?
If you've found a semi-commercial property to invest in or would like to learn more about the mortgage application process, please get in touch.
We can discuss your finance options and answer any questions you may have. Call us on 0345 345 6788 or submit an enquiry here.
