For most of us we are probably going to start building our property portfolio by vanilla buy to lets and we are probably going to fund these using buy to let finance. Buy to let finance is great.
A typical buy to let mortgage is probably going to be a 75% loan to value mortgage. The bank is going to lend against the lower of the purchase price or the valuation.
So, it is possible to buy a property cheap, what we call BMV and we could argue what BMV means but let’s say we find a bargain property that we can buy cheap.
It may be a £100,000 property which we are buying for £80,000 which is self-evidently cheap, but unfortunately the bank is not going to lend against the £100,000 they are going to lend against the £80,000.
If it is a 75% loan to value mortgage, that raises the question of how are we going to pay the 25% which the bank is not going to pay? Most people assume that you have to save up the money and spend years saving from your salary and that can be a way of doing it which is not a bad way, but there can be quicker ways.
One thing that we might be able to do, as an example, is to borrow. You will not be able to borrow from a friend. Most, if not all, buy to let lenders are going to take a very dim view if you go to a friend and ask them to lend you the 25% deposit.
But if you go to a close relative if they have the money, for example, mother, father, maybe sister or brother, or grandparents, most banks will probably accept the deposit, so that is one possibility.
Another possibility is to think about your own assets, have you got equity in your own home. Sometimes when I say this potential or new investors get a little bit twitchy or a bit worried saying ‘my home is my security and I don’t want to use the equity of my home’.
But the way I look at it is that it is just moving equity from one property to another. You are not spending the money, so it is not disappearing, you are just moving equity from one property to another and it is a great way to get started.
When I got started, I used equity from my own home, if I had not used the equity of my own home, I would not be talking to you today. It can be a very powerful and useful asset, but you want to use it carefully. I am not saying be reckless with it, you have got to do your due diligence and make sure you spend the equity that you take out of your own home on the right type of property.
Here is a solution that gets around all of these problems. Believe it or not, although the bank would take a pretty dim view of you borrowing 25% from a friend, they probably would not have any objection to you borrowing 100% of the purchase price from a friend.
So, what I would do is I would borrow 100% of the purchase price from a friend, or relative, or an investment partner, whoever it happens to be and then I would refurbish the property, add value to the property, then after 6 months, as you have to wait six months because there is a thing called the 6 month rule, then I would refinance out.
If I have done my maths right and I have got the right property which I bought at the right price and added enough value then I should be able to refinance out 100% of the money which I used to purchase the property. In other words, I can pay back my friend, or investment partner or JV partner all of their money.
That is a potential solution to get around this problem of where does the 25% come from. I would say forget the 25%, go straight for the 100%. But make sure that you do your maths and your due diligence to make sure this deal actually stacks up, so that when it gets to the point of refinancing you really can get all your money back out.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, author and property investor
PS. By the way, I’ve rewritten and updated my best-selling e-book, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same.
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