Today’s holiday short comes from Omar, who asks: Mortgage providers generally want people to have an income of above £25k, and rental income does not count towards that minimum income requirement. So how do full time property investors, with no job other than investing in property, attain a mortgage?
If you have any plans to go full-time in property and live of the rental income, then you should probably check this episode out.
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Transcription of the show
Hello, and welcome to another episode of The Property Voice podcast. My name is Richard Brown and as always, it’s a pleasure to have you join me on the show again today.
Today’s holiday short comes from Omar, who asks: Mortgage providers generally want people to have an income of above £25k, and rental income does not count towards that minimum income requirement. So how do full time property investors, with no job other than investing in property, attain a mortgage?
If you have any plans to go full-time in property and live of the rental income, then this episode is essential listening.
Let’s hear Omar’s story and see how I responded to the topic of getting mortgages as a full-time property investor now then…
Property Chatter
This comes from Omar…
Hi,
I'm new to property investing, I'm based in south west London and I'm looking to buy my first investment property very soon.
But I have a couple of questions that I'm struggling to find answers to, and hopefully someone on this forum will be able to help.
- Mortgage providers generally want people to have an income of above £25k, and rental income does not count towards that minimum income requirement. So how do full time property investors, with no job other than investing in property, attain a mortgage? Because their only source of income will be from rent.
- Also I've read that mortgage providers prefer people to have a few mortgaged buy to let properties, but not too many. So again, how do full time property investors attain a mortgage when mortgage companies don't lend to people with a large amount of past or present mortgages?
Many thanks,
Omar
Richard’s Response
Hi Omar
You make an observation that many fail to consider...it's more a question about portfolio growth planning than anything else.
I hear a lot of people say that they 'want to go full-time into property', when they are unaware of some of the little traps and potential 'gotchas' that can crop up. Access to lending potentially falls into this category as you have identified.
There are (at least) three ways that someone can generate money, which simplistically speaking are: income from employment, investment income and capital gains. Most mainstream lenders in the BTL space do indeed require a minimum level of income from employment (including self-employment) and as you say will often ignore capital gains, investment income and definitely cash generated from debt, say if remortgaging…but perhaps more on the last point another time.
So, the most practical way to plan to gain access to as wide a lending market as possible is to ensure that you generate sufficient employment income (usually £25k+) to be able to put a tick in the box with most lenders' income requirement. Most people that go 'full-time in property' will therefore have a mixture of income from employment, whether full-time or part-time, employed or self-employed and outside of renting property directly. So, planning the migration comes into play.
Then, as I mentioned, lenders are looking for income from employment...so aim to create or maintain some employment income to sit alongside the rental profits. Examples outside property include working part-time or becoming self-employed for at least two years first. Examples within property include property trading profits, income as a letting agent / property manager or delivering other property-related services, such as project management, deal sourcing, etc., all of which would be simpler to ring-fence and account for into a separate legal entity, such as a limited company. Beware though, as dividends are usually classified as investment income by many lenders, so you may need to pay a salary and it would then also be classed as self-employment, so you usually would need 1-2 years accounts and have to pay employer’s national insurance too. There is a price attached to getting continued lending sadly.
Some full-time investors deliberately set out to have multiple income streams. So, they could do the odd flip or two for trading profits, do some kind of fee-based works, such as consultancy, training, mentoring, or run other service-based business, such as the deal sourcing mentioned earlier. Finally, some have separate businesses set up, such as a non-property trading business, or collect royalties from their published intellectual property, such as through a book. A pension, share investing dividend income from a portfolio or other investment interest can all add to the mix…even if it also adds to the complexity!
Finally, all is not lost if you do not have employment income, as there are some specialist lenders that understand that being a full-time landlord is 'proper job' too, so they will lend to you based on your rental profits. However, due to changes in law, policy and tax treatment, they are a smaller number and will often set higher affordability criteria if you invest in your own name. However, many larger portfolio landlords have decided to invest through a company structure and there are several commercial lenders that operate in this sector.
A word on caps on properties. Some lenders have caps, so it might come into play, but spread the lending around a bit is my recommendation. You should have no major issues in getting lending on up to 50 properties and even beyond that there are other solutions, which you can worry about once you get to that level!
Before I wrap up, whilst planning for the future is a good thing to do, making a start of any kind is still the best step to take. We usually figure these things out as we go and make changes accordingly. But, without starting, we would not have a problem to fix later on and it doesn't make much difference with your first one or two properties anyway...oh, and we generally get rewarded for fixing problems
Finally, I would suggest that you speak to a decent whole of market mortgage broker AND a good tax adviser too...although keep in mind that often what works best from a tax point of view works worst from a lending point of view...and vice versa!
Best
Richard
So, that’s my next holiday short…another one is coming up next week.
As a reminder, the show notes can be found over at www.thepropertyvoice.net. Or, if you want to talk about anything from today’s show, or just talk property investing more generally, email me at podcast@thepropertyvoice.net, I would be happy to hear from you!
Once again, all I want to say is thank you very much for listening once again this week and until next time on The Property Voice Podcast…it’s ciao-ciao.