Finance costs tend to be the greatest expense for any investor and those looking to hold and rent a property will need to think carefully about finance to be on the right path towards guaranteeing a profit. Any increase in the value of a property following a refurbishment can be potentially drawn out using finance – and if the increase in value is greater than the costs of the work by a sufficient margin, then an investor can claw back the costs of these works.
So let’s have a think about finance and other related costs. In the past, many investors have come up against a brick wall when trying to get buy to let finance for a refurbishment project if their preferred lender deemed a property “unlettable”. Nowadays though, things are slightly different.
Today, most lenders are open to the possibility of refurbishment and many have introduced “light refurbishment” buy to let packages (or similar) to allow investors to borrow ultimately against the improved value of a property. Initially, this loan would be restricted to the lenders usual loan-to-value ratio of the lower of either the purchase price or the value, and of course, it is the responsibility of the investor to make sure the property makes a profit.
As I’ve said many times over, this can be achieved with thorough research and hopefully good judgment, and as I mentioned last week, by looking closely at values and the potential cost of any work that needs to be completed. In a very practical sense, the investor must make sure the project comes in “on – or even under – budget”.
This raises some important questions.
Do you need, want or intend to do some or all of the works yourself? If so, by implication the properties you will be considering will have to be close to home. What’s more, if you do intend to do the work yourself, have you considered if it’s actually going to pay for you to be so heavily involved?
It can be tempting to “muck in” to save costs, but sometimes you need to realistically assess if the jobs would be done quicker (and to a higher standard) than if you were to leave them in the hands of professionals. After all, speed is a very important factor when using finance, and with the interest clocking up daily, you need to work out if cutting costs in this way would be in your best interest.
This also applies to buying a property for cash. In this case you should still make a notional allowance for interest during the holding period to reflect the opportunity cost of your funds. In the same way, I believe you should also allow (or charge) for your own time, because failing to do this actually distorts the final figures and may not give a true representation of the final profit.
On the other hand, if you are happy to take a more hands-off role, then you could be more flexible about where you buy. Many of my refurbishment projects have been 150 miles away from where I live, but I have been able to find, and rely upon, a trustworthy project manager who makes sure all works are done on time and in budget. By doing this it has allowed me time to look for my next deal rather than worrying needlessly about the details of the project at hand.
In my opinion, if you want to put some time into your refurbishment project, finding the right team of contractors and someone to manage them is time well spent!
Once all refurbishment works are complete and if you choose to keep the property to hold and let out, you may wish to consider refinancing. If you have done your sums correctly, the value will have hopefully increased by a good margin over the costs of the project, and you could then think about drawing out enough extra equity to pay for the refurbishment costs. In an ideal world (and assuming you are serious about investing in property and building a portfolio), hopefully there will even be a “surplus” that could go towards the deposit of another property or refurb project. After all, let’ not forget that drawing equity out as a loan does not attract tax as it’s not income, and until there’s a sale, there’s no chargeable capital gain.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, Author & Property Investor
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