Pay as you grow

Trying to finance a property investment can be a minefield as there are many complex products, everyone’s needs are different and there is no simple ‘one size fits all’ solution. Most people are planning for long term security and retirement and most will want to invest as little of their own money as possible.

Do’s:

Do calculate the worst case scenario and budget accordingly. Many people don’t allow for all the costs that may be incurred over and above a deposit. Additional costs may include stamp duty, legal costs (allow £500 - £800), lenders fees (allow £450), surveyors fees (allow £350 - £1,200), furnishing and/or refurbishment costs.

Do make sure your property can generate rental values of around 125% of the mortgage payments to ensure you don’t have to subsidise it by covering inevitable void periods, service charges, letting agent commissions and any maintenance/repair costs. You are most likely to have to support a property in the first few years of ownership - a new property could carry a negative cash flow for up to seven years.

Do avoid taking out a bank loan to raise funds needed. Common methods of funding a property are through existing savings or investments, equity release on an existing property or additional borrowing. Raising a deposit from equity release on your home or another investment property is usually the cheapest way of borrowing.

Do get tax breaks by re-mortgaging and offsetting the cost of the interest against the income of the property even if you have enough cash to cover the cost of the average 15% to 20% deposit required for a buy to let mortgage. The larger the loan the lower the tax bill.

Do consider leveraging the capital growth of your first property to purchase a second property and so on to build a property portfolio. Smaller portfolios are more exposed to the effects of rental voids than larger ones.

Do consider putting them on a single mortgage if you are buying more than one property - most lenders will allow you to buy up to four or five properties and will lend sums of up to £500,000 - £1m, providing you can put down the appropriate deposit.

Do make sure your credit status is in as good a shape as possible. In theory a mortgage is secured on the income and capital value of the property, therefore the income and credit status of the landlord should not be relevant. In practice, however, it does matter – the higher the risk the higher the interest rate.

Do review your financial position at least once a year to assess how interest rates have moved, ensure adequate levels of insurance are in place for each property, rents are meeting your mortgage needs etc.

Do make sure you can achieve a 20% profit margin if you are investing in a property to refurbish and sell-on rather than buying to let - otherwise reconsider if this is the best way of utilising your capital.

Do assume a 70/70 financing facility if you are planning to undertake extensive renovation to a property – you can borrow up to 70% of purchase costs and up to 70% of refurbishment costs.

Do look at what deals specialist brokers can negotiate for you when looking to finance an overseas property. For example, in the USA, the minimum Overseas Investor deposit requirement is 20% but it can be up to 35%. Through a specialist broker it is possible to get deals that only require a 5% deposit before building, with no other payment needed until completion, which would represent a significant saving as other routes usually require substantial stage payments.

Do get advice from both a UK and a US tax advisor as there are complex tax implications of buying and renting a property in the USA.

Do make sure you are aware of the costs and taxes that are involved in the process of purchasing and running of overseas properties. For example, in the USA, in addition to mortgage application fees you would also need to allow for mortgage tax stamps, appraisal valuation fees, house inspection fees, title fees (an insurance policy that protects a lender’s or owner’s interest in the property from other claims of ownership), property tax (depends on the value of the property), Homeowner Association fees, pest control and lawn and pool care if applicable. Alternatively in Spain you should expect to pay additional costs of around 10% of the purchase price of the property. If the property is new, the price may also be subjected to IVA (VAT) at the rate of 7%.

Do ensure all community charges have been made if you are buying a property in Spain that is managed by a community, as the debt will become yours if the previous owner has not paid them!

Don’t:

Don’t believe the myth that you can fund a property investment with little or no money. It is important to make sure you have sufficient funds.

Don’t over extend yourself and purchase too many properties too quickly or buy too many properties in the same development, which could be a recipe for disaster if you suddenly hit rental void periods. It is important to ensure you can fund each property.

Don’t take out a 100% mortgage unless you can afford to subsidise the property from other income. It is unlikely the rental income will cover the mortgage payments unless you have put down a minimum of a 15% deposit. 

Don’t be tempted by the lowest mortgage rate. Mortgages are complex and you should look at the bigger picture and make sure you research the best mortgage to meet all your needs and personal circumstances. 

Don’t be tempted to take out a property developer’s mortgage without getting advice from a specialist broker, because although it may be the easiest option as it may not meet your best interests.

Don’t panic if you can’t charge the optimum rental value straight away. When buying new build properties, it’s possible that a number of properties will be completed at the same time, providing more competition and temporarily driving rents down. Experienced property investors are prepared to wait for around six months before being able to charge a higher rent and it becomes a landlords market again.

Don’t make the mistake of assuming that once you have purchased a property or a number of properties that you can then forget about them. It is important to make sure your portfolio is reviewed at least once a year to assess any capital growth, if your portfolio is still meeting your entrance and exit plans and how the market is performing. For example, it may be advisable to sell and purchase in a different location to ensure you are maximising your assets.

Don’t assume that the purchasing and financing process is the same as in the UK when buying property abroad. For example, in Spain various licences are required for new build properties and the developers will expect you to complete and provide payment when these licences are granted rather than when the property is 100% finished. Make sure you are aware of how much funding is required and when. It may be advisable to use an English speaking broker based in the area in which you are buying, to take you through what’s involved and to help reduce currency exchange risks, open a foreign bank account and local regulations and conditions.

Don’t be afraid to look at overseas mortgage providers if purchasing a property in another country. Better deals can usually be found from local banks e.g. if you are investing in Spain, while you can arrange a good mortgage deal in euros from the UK, nine times out of ten you’ll get a better rate from a local provider.

Back to News