How to convert your commercial property to residential: Everything you need to know

More buyers today are looking into buy-to-let investments and ways they can convert commercial properties to residential with the help of a mortgage. Converting a commercial building into a residential use is more common than you think. But it poses some zoning and building code hurdles, so you need to understand what the building conversion entails.

In the right area, commercial properties are well suited for several residential housing options. If there are surrounding amenities and the building quality is good, this could make for a strong residential investment. However, there are certain things to consider before turning commercial property to residential.


Can You Convert a Commercial Property to Residential?

Commercial property can be converted into residential property only if zoning and housing laws permit it. Local councils have regulations that establish property distinctions. Usually they will distinguish specific areas for residential versus commercial land use. Property owners or buyers who are considering such a transition are advised to start by checking out the local laws on their local council’s website. Afterwards, you can schedule a meeting with a county clerk if you have further questions.

Apart from zoning laws, property owners and potential buyers need to ensure the commercial property is up to code before the switch to residential. Because commercial and residential properties are not built for the same purpose, they have to adhere to differing structural requirements. These can vary greatly.  From laws governing electrical and water lines to entry and exit points – there are many specificities. For this reason converting a commercial property to residential will depend on local laws as well as your ability to renovate the property to meet residential standards.


What are the resale yields of commercial to residential conversions?

When you assess the viability of commercial to residential conversion, you should consider the number of variables that will determine whether it is a prudent job to take or not. The location of project is one important aspect, as well as the district of the local buy to let market, so having in depth knowledge of both is key to making an informed decision.

Buildings designed for multiple occupancy generally provide higher yields, but you need to factor in all additional conversion costs to ensure that the numbers add up.


Do ‘permitted development’ commercial to residential conversions need planning permission?

One of the beauties of the current permitted development laws is that, as the title would suggest, planning permission is not necessary. However, some local authorities that are focused on the protection of the availability of office space, may still require it. For this reason, it’s important to check the facts surround the particular property with a planning consultant you’re proposing to develop before diving in.

Under recent PDRs changes from 2017, it’s possible to convert B1c (light industrial) to C3 (residential dwelling) without full planning permission.

B1c premises remain the most popular commercial-to-residential conversions because they are most commonly found in residential areas. There are other commercial-to-residential conversions as well. For example, conversions from class A1 and A2 may also be permitted without full planning permission. But the size of the premises should not exceed 150 square metres. 

Keep in mind that even if planning permission is not required, you are still obligated to seek ‘prior approval’ from your relevant local authority. The costs associated with this are minimal and should not exceed £200. 

In some cases, there are certain restrictions that apply.  The B1c to C3 conversion requires that prior approval is granted before October 2020 and development is completed within three years of the date it was received. In addition to this, it’s only the change of use that’s permitted, not the conversion itself. This means that if you need to knock down walls or add an extension, you could still need to obtain a planning permission.

Most frequently, if you want to change the style of windows, move doorways and apply cladding, you will need planning permission. During the development, you also must comply with maximum local acoustic levels since you are in a residential area.

Another important consideration of commercial-to-residential conversions is flood risk. If the property is at risk your permitted development rights may not translate into a prior approval which you must obtain from planners.

If you don’t want your commercial to residential conversion to experience delays, all of the above (and more) needs to be taken into consideration.


Financing commercial to residential conversion through mortgage

Most buyers or property owners turn to mortgage for financing their commercial to residential conversion.  If you are considering going down this road there is a set of criteria you must meet to be eligible.

It matters whether you are applying for commercial or residential mortgage. The difference is that commercial mortgages are primarily the building and the cash flow it produces qualifies the mortgage for funding not the borrower.

For this reason, residential mortgage lenders usually require the property to be in a certain state to approve financing.  They look at your employment status, your income, together with any spouses and/or partners to assess the situation. In some cases, a commercial mortgage would be the more appropriate type of finance to apply initially. Residential lenders would only consider the property to lend against, once the conversion is complete. 

In fact, many commercial lenders require a minimum of 25% as a deposit prior to the start of any conversion work. Even if it’s just a matter of refurbishment – once it’s completed, you need to be registered as owners of the property for six months before applying for a change in the mortgage type. Six months is the minimum period required before residential mortgage lenders will consider providing a suitable mortgage. 

The property could then be remortgaged and switched from a commercial mortgage to a residential mortgage. This would mean possibly lower interest rates as well as releasing capital from the current value of the property. Assuming the value of the property increases over that period, releasing this capital would help replenish the funds used to pay for any conversion work involved. 

A commercial mortgage lender would be able to release a commercial loan, providing an agreement in principle for the residential part of the process. This means both the buyer and the commercial lender will have an exit route from that part of the process. A commercial mortgage is thus well suited for the short term only, so the lender will want to know when and how the loan will be repaid. From the buyer’s point of view, the exit route to the residential loan is just as important. Rates for commercial loans are always higher and changing to a residential loan provides for a more affordable option. 

Finding a mortgage for a commercial property is not as simple as looking for a regular residential mortgage. This means it is even more important to seek expert advice from an impartial mortgage broker with experience in handling both commercial and residential mortgages. Having a plan to take you from start to finish from purchasing a commercial property, to finally transforming it into a residential property to live in or let is absolutely vital. 


How do ‘Permitted Development’ rights apply?

Legislation of this kind is regularly updated, so it’s important to keep yourself abreast of the amendments.  Keep in mind that a permitted development property only ‘permits’ for a change of use and not for the actually conversion itself. You have to apply separately for that. For that reason it’s not recommended to enter into a project until you’re absolutely sure that all permissions have been granted or you could covert purpose built residential property that no one is allowed to live in.

Commercial to residential conversions can be a lucrative investment if you are aware of the factors when making such plans.