Where to find Investment Finance
Let’s face it, finance is a HUGE part of property investment - all property deals involve finding money from somewhere. But, the truly amazing thing about property as an asset class, is that the money you use doesn’t have to come from you. Let me put that another way, you don’t need your own money to become a property investor, you can use other people’s money…officially referred to as OPM by most property investors!
Now, before I delve into anything to do with finance…let me just re-iterate, I am NOT a financial adviser and I am NOT giving you any direct advice about your own finances. I am purely outlining the top methods which I have experienced to finance property investment deals. The best way to finance your property deals is completely personal and ultimately, 100% up to YOU.
I started investing in property with a debt of £10,000 from paying for my property investment training, but within 18 months, I owned 4 properties and had left my full-time job forever. I didn’t save up furiously for years and then get into property. I jumped straight in and learnt how to invest as a professional, making the most of all of the finance options out there.
"Find the deals and the money will come!"
My first property mentor always told me "Find the deals and the money will come". Honestly, it sounds ludicrous, but I promise it genuinely does work that way. OPM is everywhere and surprisingly easy to find, so long as you have a deal which is going to make a good profit for both you and whoever provides the money. Being confident in your profit really is the key – you have to be certain your deal will stack up and produce enough profit to pay everything back…interest, fees, exit charges…you name it, you’ll have to pay for it!...and still have enough left over to pay yourself.
What I am talking about is the concept of GOOD debt. Sounds counter-intuitive right? I could talk about the concept of good debt and our self-limiting beliefs around debt and money all day…in fact, I might just write another blog on the topic!
In a nutshell, good debt is where the cost of borrowing the money is less than the profit you are making by putting that money to work. If you borrow £1000 at 1% per year interest and you invest it so that it is making you a 3% per year return…you are making 2% per year (i.e. £20) as profit from having borrowed that £1000. Ok, that might not sound like big money, but you get the gist, you are essentially getting paid by having the debt in place. The KEY is that you have a plan (and a couple of back up plans as well!) to pay back ALL the debt and fees within the required timescale.
Ok, so now we have covered the rules of good debt, I feel it’s safe to tell you my favourite ways to finance my property purchases and refurbishments…
A mortgage can fund anywhere up to 90% of your property purchase. That’s an insane amount of leverage! If you were buying £100,000 worth of stocks and shares, no one would offer to pay £90,000 of it and only ask for ~3% interest! But, if you buy a £100,000 house, a mortgage lender could offer you up to 90% of that as a mortgage for just a few percent interest each year. If you’re a bit baffled by any of the jargon surrounding mortgages (you are definitely not alone!), have a quick read of my blog A Jargon-Free Guide to Mortgages to clear up the confusion!
One of the very first things you should do when you decide to get out there and start investing in property is speak to mortgage broker. It might seem a bit counter-intuitive to get a mortgage broker involved before you actually have a mortgage to apply for, but trust me, it’s worth it. If you’d like a recommendation of a good mortgage broker, just pop me a message!
A mortgage broker will be able to tell you exactly what options are out there and what you may be eligible for. Mortgage lenders have complicated conditions and they might only lend to people with a certain income, or who own their own homes, so not everyone will have access to the same mortgages.
Your credit rating will also have a big impact on the rates which a lender might be able to offer you (if you don’t know your credit score, it’s worth signing up to www.mycreditfile.com or a similar site so you can check and start improving your score immediately!). You need to find out ASAP what your options are so that you are ready to take advantage of all the mortgage lending options out there.
Bridging or Development Finance
Bridging and development finance are structures in a very similar way to mortgages, but there are a couple of key differences.
Firstly, there are some situations where a traditional mortgage lender won’t lend. For example, if you are trying to take out a BTL (buy-to-let) mortgage, but the property in question doesn’t have a functioning kitchen or bathroom, then the house won’t be classed as “liveable” and so you won’t be able to get a mortgage on it. Also, if you intend to convert a property from a normal residential 3 bed into a 5 bed HMO, you won’t fit into the usual “BTL” or “HMO” style mortgages until after the works are complete.
The other key difference from mortgages, is that bridging or development finance will often lend towards the refurbishment/development costs as well as the property’s purchase value. This means that you could take out finance over 100% of what you need to pay to purchase a property, so you might not need to find another source of money for a deposit or a refurbishment.
A big advantage of bridging finance is also that it is normally very quick to set up (within about 4 weeks). The downside is that bridging and development finance is much more expensive than mortgages as the risk is perceived to be higher (costs as normally more like 1% per month, the equivalent of about 12% per year). For example, a normal BTL mortgage is based on the idea that for most of the time a tenant will live in the property and pay the rent. If that’s not possible because the property isn’t liveable or is undergoing large refurbishment works, then the lender is relying on just the landlord to pay the mortgage with no rental income, so they see it as a larger risk.
Loans and Credit Cards
I can practically see you squirming at the very thought of credit card and loan debt. But don’t panic, I am absolutely NOT advocating the idea of going out and racking up loads of debt without worrying about the consequences. It’s all about that good debt which I mentioned earlier.
So, let’s say you need £10,000 to do a refurbishment….could you look at some credit cards which offer purchases at 0% for 18 months and use that to buy your refurb materials? Could you take out a low-interest loan for home improvements? What about those credit cards which allow you to transfer your allowance straight into your bank account for 12-18 months for a one off 2% fee? If your project is going to be completed and re-mortgaged in 6-8 months then why not take advantage of some low interest borrowing along the way?
You should definitely only do what you feel comfortable with, but credit cards and loans can provide a very quick and often very cheap way to top up funds for purchases and refurbishments, so it’s worth keeping them in mind. Just make sure you're really confident on your figures before you dive in and give yourself plenty of contingency.
This is my absolute favourite way to finance property investment projects. Now, you might read private investors and immediately think crowd funding…but this is NOT the same as crowd funding. When I say private investors, I mean people you know personally and who generally wouldn’t call themselves “investors”.
The vast majority of my finance for buying new, run-down properties and refurbish them has come from friends and family who have money sat in a bank account and like the idea of getting a good interest rate return on it. It’s a win-win in every sense of the word. I have access to flexible finance without lots of additional admin/exit fees/completion fees and my investors have access to very low-effort investments which give them great returns.
You are probably thinking “Sure Abbie, easy for you to do, you must know loads of wealthy people who have that sort of money to spare”, but let me tell you, you’d be surprised who you already know who has money sat there doing nothing. When I started investing, I was 25. Most of my friends had barely started to take life seriously, let alone save up any big lump sums…or so I thought.
Once I put the feelers out there and started approaching people with my plans and possible property deals, money started coming out of the woodwork all over the place! Now of course, I didn’t just walk up to people and say “Excuse me, have you got £20k you’d like to invest in my brand new property business?”. Those would have been some very short conversations!
It took time, a serious amount of background research on what I was doing and a sophisticated way of presenting the opportunities to my would-be investors for them to trust me and my plans. But it is perfectly possible for anyone to do the same and it’s one of the most important things I go through with my coaching clients. If you can learn to find finance privately from friends and family, you will save yourself SO much in fees, not to mention form-filling time. And, you can create a truly flexible business that benefits you and those around you as well.
However you choose to fund your property projects, remember to make sure you have considered ALL of the fees when you are looking at any form of finance and plan at least 3 ways to pay it back, just in case something goes wrong with "plan A". Once more, I am NOT a financial adviser, but I hope this has helped give you a few ideas of where to look for finance for your next property investment deal. If you have any questions, I'd LOVE to hear from you, so feel free to pop me a message or comment on this blog.