Funding Your Property Investment | PVP S1E09

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The Property Voice Podcast - Series 1: Episode 9 Funding Your Property Investment 

Show me the money! Investing in property requires some money make no mistake about that. However, who said that money has to be your own money? Join us in this week’s episode where we rattle through at least 8 different sources of funding for our investments…and only one of these is fully using our own money. We take you through the options and then deep dive into some of the most common ones to set you on your way.

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Resources mentioned

• Property Investor Toolkit – here is the book link on amazon.co.uk & amazon.com in case you would like to get yourself a copy to accompany this series
• Your Voice – CPPP10 review in iTunes

• Shout Out – BTL mortgage calculators - not just one but three! I am sharing the calculators available from Property Tribes, Property 118 & MoneyFacts

Today’s must do’s

1. Review the table to discover the 8 main types of funding your property investment
2. Subscribe to & review the show in iTunes…and while you are at it please help us to spread the word by telling all your friends too!
3. Send in your property stories, questions or moans to podcast@thepropertyvoice.net and we will try and feature YOU on the show too!
4. If you would like to, grab yourself a copy of the book: Property Investor Toolkit (link in Resources above)

Get talking!

• Join in the discussion, either here in the comments section below, or anywhere else on the Blog
• Start a conversation on Twitter with us @PropertyVoiceUK or on our Facebook page

Transcription of the show

Hello and welcome to another edition of The Property Voice Podcast, my name is Richard Brown and as always it is a pleasure to have you join us. Now, if you have been following the episodes in sequence it will not have escaped your notice that so far we have been aligning the topics to the sections in my book: Property Investor Toolkit. However, I have noticed that an extra couple of topics would be useful to include in the first series that were not included in the book…well not as separate sections at least. The first of these we shall go through today and then another one next week – so fresh content just for you awaits and rewards your loyalty for sticking with us this long! OK, Casa – how are you today and what’s happening?

Casa: Hi Richard, I am right on the money thanks! I did see someone make a comment in a forum that they were not so sure about my contribution to the show; so, I suppose I am feeling a little down in the data dumps about that to be honest with you. Never mind, I heard a quote recently that if you are not being criticised, then you are probably not trying…so try I will lol.

Briefly, then we can look forward to lots of great content related to money and funding our property investments. Richard, you are about to share with us the main ways of funding your property investments in Property Chatter. Then, in Your Voice we have a short and sweet listener review. Finally, 3 for the price of 1 resources in the Shout Out to look forward to as well. Not bad is it? Lots of Brucie Bonuses in this bonus episode to the first series.

So, back to you Richard – do you still have your pebbles and buckets after last week’s show?

Property Chatter

Today’s topic is: Funding your Property Investment

Thanks for your concern Casa – yes, I do still have my pebbles and buckets thanks…I thought they were very illustrative for what is an audio format after all. We shall have to see what the listeners made of it before passing any final judgement…are you still with us out there?

Ahhh, so it seems that someone has had a go at our lovely Casa have they? Don’t worry Casa…I have heard plenty of high praise about you over the course of this series…but that all said we would love to hear from our listeners…Who likes Casa then; do we have anyone prepared to defend her honour out there? Speak up and byte back if you are…

OK, so back to the topic in hand…we have some serious content to get through this week and it is another topic related to money…funding our property investments…so here goes.

To invest in property, we will need some investment funds…most of the time at least. In today’s episode, I plan to give an overview of the main methods of funding an investment property. However, as this is such a large topic, I may return to the subject in a later series – today therefore should be seen as an overview on the subject.

Investment property has come a long way; until 1996 there was no such thing as a BTL mortgage. Most investment property was bought using cash or commercial financing from banks. Commercial finance was generally not widely available and so the idea of BTL was not readily available to the man on the street.

In 1996, the term buy-to-let was coined as a marketing term by ARLA (association of residential letting agents) as a specific description of financing properties to rent out. This initiative, along with the abolishment of the Rent Act gave birth to what is now known as buy to let, with individuals owing property and renting it out. Since then, the private rented sector has grown steadily from less than 10% of all properties to nearly 20% today. The biggest loser so to speak was the social housing sector as public funding was gradually reduced. More recently, homeownership levels have started to slide, having grown to a peak of around 70% before the last housing crash in 2008. With MMR in the residential market and less investment available in the social rented sector, BTL has taken up most of the slack with individual private landlords accounting for the large majority of properties in the PRS. 70% are classified as amateur by the NLA.

So, the coming together of finance products and a shortage of supply gave birth to a whole industry…sometimes attracting controversy but that debate is for another day. Today is all about how we can get involved in property investing and what the options to fund our investments are.

Let’s start by looking at the main options when it comes to funding your property investment.

The main sources in funding your property investment:

Funding source	Key Benefits	Main Limitations
Cash	You decide alone, no restrictions on how invested, bargaining power through speed	Limited in amount, no leverage benefit, not tax efficient
Friends & Family	Friendly lender, flexible, fast	Potential damage to relationship, still limited in amount, risk transfer to them if you get it wrong
BTL Mortgage	Conventional established option, plenty of lenders (lots of funds available), cheap	Restrictions on LTV, lender criteria, unsuitable for several cases
Commercial Finance	Well established, large pool of lenders, suited to commercially-orientated projects	Restrictions on LTV, lender criteria, usually limited to experienced investors
Bridging / Auction Finance	Fast, more relaxed criteria, well suited to short-term projects	Expensive (?), Lender legal people involved – more time and fees, can be brutal if things go wrong
New / Disruptive Lenders (e.g. P2P, Crowd Funding)	Emerging lender pool, potential to fit right risk reward projects to suitable investors, digital age & sharing economy = online applications	Still very much bank-criteria driven, limited experience & funding, not that differentiated from mainstream yet
Private Finance (Incl. JVs)	Potentially more personal, fast & flexible, non-bank / credit terms (sometimes)	Cost, finding partners & negotiating individually, terms and conditions can be onerous
Creative Finance Strategies (e.g. R2R, LO, etc.)	Low / no own funds required, maximum leverage, credit record irrelevant	Unregulated area = risks all round, finding suitable funding sources, complex to explain & gain acceptance

Top tips

• You will need at least some money to invest in property…even if someone tells you about NMD deals.
• However, this money does not always have to be your own…concept of OPM. Caution: must disclose source of deposit to lenders to avoid mortgage fraud but most lenders will not allow borrowed funds as source of deposit and if so, definitely not secured on the property being purchased
• Some form of lending is preferable to get valuable leverage
• Lending sources are suited to certain types of project e.g. vanilla BTL is cash and BTL mortgage, conversions however may be suited to commercial lenders and private finance
• Advanced strategies are not for the feint-hearted…do your full due diligence first

Despite there being at least 8 alternative methods (with several sub-methods) to fund our investment property, by far the most common are BTL mortgages, commercial finance and bridging or auction finance from institutional investors.

Let’s take a deeper dive and look at these a little more closely shall we?

OK, so we shall now go through some of the principal aspects and characteristics of these 3 major sources for funding your property investment and understand when each one is going to be best served for our needs.

	BTL (1996)	CL	Bridge / Auction
LTV	50% - 80%	50% - 85% Values bricks & mortar & investment value	50% - 70% PP
Fees & charges	£1k - £3k Av £2k plus ERCs, valuation, admin etc.	c2% plus lender legal charges, valuation, admin, etc.	c2.5% plus lender legals, valuation, admin, etc.
Interest rates	2.5% - 4.5%	Often variable or linked to LIBOR, typical 4.5%	0.75% - 1.5% PCM
Repayment term	20 – 25 Years	5 – 25 years	3 – 24 mths
Repayment type	IO mostly & CR	CR mostly & IO	IO / Rolled Up / Int deduction Up Front
Criteria	£25k min non-prop inc – homeowner – good credit rating, limits on # properties	£25k inc but sometimes can include rental income for pro investors, own property (home or investment)	Far more about the property than the individual but they do also look at the individual, lenders vary, interested in exit plans
Property prefs	Standard homes in lettable condition	More choice & options but some lenders have their own criteria like no hi-rise, no flats above shops, etc.	Anything goes typically but lenders do vary in their criteria

Top tips

• Match the finance to the property and the intention e.g. long-term buy and hold with a standard property = BTL or auction purchase to sell on = bridging or doer-upper project to hold for longer-term = commercial finance with works costs funded
• The best deals are available by using a finance broker – not all mortgage brokers are equal however: residential / BTL / commercial & whole of market
• Brokers generally add value by matching the right borrower to the right lender for the project concerned – better a slightly higher rate and an approval rather than a best buy and a decline, long delays or revised terms during application process. A good broker will earn their fees and save you time & stress
• Valuers rule the world, closely followed by credit underwriters! Down valuations, valuer opinion, lack of comparables etc.

Lending sourcers present themselves more as experience grows, so as a new investor standard BTL mortgages are probably going to be our bread and butter. Then, as we grow we may start to see limits placed on us by the standard lenders, or we may start to get involved in more complex projects instead – enter commercial loans and mortgages. Then, if we plan to buy at speed such as via an auction, or capitalise on opportunities not suited to mainstream lenders, we will need to consider bridging finance to convert properties into more mainstream ones with our intervention.

Notice, therefore, how our lending options change based on our scale & experience, personal circumstances, investment strategy and propensity to tackle alternative projects beyond the norm.

I have not explored the other financing options in any great depth in today’s episode as I wanted to give more of an overview of the standard lending alternatives in this foundations series. More to follow in a subsequent series…

Hopefully that has helped to set down some clear understanding but as always further reading and insight will be required. Now to Your Voice.

Your Voice

Casa: Today we have a listener review to share from Cppp10, here is what Cppp10 had to say:

Very helpful! 5 stars

Richard Brown, the host, is very engaging and professional! The podcast is very structured with a lot of great information and insights. Well done!

Thank you for that great review Cppp10.

Back to you now Richard

Shout Out

First of all; my apologies to Julie from Chiswick – I will have to share the response to your question next week due to time constraints. I hope you can tune in next week instead for that.

Today’s Shout Out resource is bang on topic – a BTL mortgage calculator but not just one but three! I am sharing the calculators available from Property Tribes, Property 118 & MoneyFacts. Note that some of these calculators will be connected to independent mortgage brokers, so keep that in mind too. The best brokers will be those that specialise in the type of funding solution you require, so BTL mortgage brokers, commercial finance brokers and bridging finance brokers – sometimes, although rarely will a broker span all sectors but always ask them if they are a ‘whole of market’ broker in the area you are interested in…and don’t forget to seek out referrals and recommendations from others that have had a good experience using the type of finance you are also looking for.

OK, so we have been full of the money side of things for today once again…but so much about property investing is either enabled or facilitated by access to adequate and appropriate funding your property investment. I hope you have a flavour for this at a top level at least after today.

So, we are drawing towards the end of this first series of The Property Voice Podcast, so why don’t you tell us what subjects are top of your list and we will look to try and include them in a future series.

The show notes will be on our website with all the links and references mentioned earlier included, so check them out and maybe start a conversation. Thank you very much for listening once again; it takes some pulling together to create this show and so we hope you are getting lots out of listening.

But for now and until next time on The Property Voice Podcast…ciao-ciao