Thinking outside the box: where can your deposit come from?

In this current market, we really have a big split in the situation of our clients. On one hand we seem to have plenty with cash available to purchase property and then refinance once works are completed. On the other, however, we have so many people trying to get into the property market but struggling to find the deposit funds.

Before I get to the options, one thing that comes up often is how much money you need to prove and whether credit cards can be used.

You need to be able to show the lender where the deposit is coming from (and it needs to be in your bank account!), as well as any refurbishment costs. This will need to match your schedule of works, and a valuer needs to agree that they schedule and cost match the works needed in the property. For example, if there’s clear evidence of damp then the solution needs to be covered off in your schedule.

How can you use credit cards within this? 

I hear property mentors often speak about using credit cards to pay for refurbishments so that you can refinance and pay it back without putting your own money in but to be honest it doesn’t always work that way! Lenders will want to know that you have the funds to carry out the refurbishment – if you’re not able to finish it then they will be the ones left with it and that’s not what they want!

As with lots of things though, it does come down to experience. If you’ve done it a few times before and got off your bridge successfully then they are more likely to be more flexible with where your money is coming from and we may be able to agree it.

Here’s some ideas for where your funds can come from 

Savings 

This is the easiest one, but often the one that gets used up first! If you’re serious about getting into property then you really do need to think about how you can save money from your day to day expenses to creat funds for it. Especially for your first project when the lender wants to see you’re using your own funds. Look at a budget planner, find a savings account that encourages monthly savings and go from there. There may be some sacrifices that need to be made!!

Refinance of your residential or other property

Refinancing your residential property can be seen as risky by some, but you are moving the equity from one property to another. With residential mortgages back up to higher loan to values and lenders now using bonus and commission again this may be a good time to look at this option.

Remember that your home may be at risk if you do not keep up repayments on it, so look at the overall picture. It’s an idea to explore though.

Gifts

Often when investors are looking for investor funds, family and friends are first on the list. It’s an easier sell, but comes with more pressure! Gifts from family are easier to use for your first few projects (before you build up some experience) and it counts as your own money!

Joint ventures 

This is an alternative where you are relying on the experience of someone else. It means your JV partner has more security over their funds and equally you have more support on the project. You are able to split the shareholding to reflect the funds and experience of all applicants too, so it’s flexible.

One thing to remember is that generally all applicants to the mortgage will need to sign a personal guarantee to be jointly and severally responsible for the loan, so ensure that your JV partner is happy with that set up.

Company loans 

Something we are seeing more of, is where clients have a (non- property) company which is profitable and they want to use these funds to put into property. It is a tax efficient way of doing things, but ensure to check with your accountant. You may have utilised a BBL in the company too, so you will be able to use that. Most lenders will allow you to use company loans as long as they are interest bearing.

Angel investments

Once you’ve built up a track record of projects – usually one or two similar sized projects – you can move on to using other people’s funds!

Loans are an option where you run out of your own money, when you factor in the overall costs. Most lenders will now be able to use investor loans where there is a loan agreement in place and no charge on the security property. There needs to be a clear replacement method and any interest payments need to be taken into account so bear that in mind.

With the right strategy you will be able to recycle some of your funds, so you’re not starting from scratch with each project – although ‘no money left’ deals are hard to come across at the moment!

As always, let us know if you want to run anything past us!

 

 

The Avon Road purchase story continues……

As some of you may remember, I bought a property in February to develop into flats.

My previous blog took you to completion, this is the continuation of the project.

The property was a 5 bed detached house with a 1 bed single storey annex attached on a great corner plot.  We We able to negotiate a 2 week delay between exchange and completion so we could get a head start on the very sparse refurbishment on both parts of the property.

By the time we completed on 19th February the Annex was finished.  Some of the house was started, but would need another 2/3 weeks to get that ready for letting out.

The priority was to get tenants in as quick as possible.  We need to add funds to the pot to cover the mortgage as well as planning fees and associated costs.  We used Open Rent as 3 company Directors are local so we could manage the process ourselves.  We put the property on before completion to minimise the time the property would sit empty; it really worked as the annex tenants moved in on the Sunday after completion – we also rented them the garage, so £850 per month on a standard AST.

The main house was a problem though as the drive was in front of the garage so has no parking at all.  Again, we advertised on Open Rent, but although we had plenty of interest at both £1500 and £1750 pm none of them passed the references.  That causes problems for our insurance so we couldn’t proceed.

Then a lady whose house had burnt down a few weeks earlier approached us.  She was currently staying in a hotel with their 2 children and sick mother, which was not ideal.  She had been asked by her insurance company to fins somewhere for 3-6 months while her home was renovated.  We pursued this, and were particularly interested as under COVID rules tenants can be difficult to move on.  This could potentially cause delays when we are ready to start the development so a tenant with a clear exit route was a winner.

We got in contact with the insurance company and negotiated a fully furnished price BUT that obviously meant it needed to be fully furnished – we only had 4 days (including a weekend)! The rent offered was £3650 per month for a minimum of 3 months.  Ideally we need more than 3 months, but it was important not to lose sight of the development prize and we were aware of the clear benefits this provided.  Any income towards the costs and mortgage are a bonus.  We have a mortgage with no ERCs so as soon as planning is approved and the tenants have moved out we can get on with the next stage.

My vlog, previously published, gives a bit more excitement than the written word – that said it was a manic few days.  The tenant was a dream as she really wanted as much upcycled goods as possible. I gained a lot of trust from how she dealt with the situation; we gave her a £200 budget for all bedding, kitchen utensils and soft stuff – she came in at £235.  Total spend, including 4 new mattresses, was £2168.

They moved in on the Monday evening.  As the monthly amount was under a serviced standard price, we insisted on 3 months up front; as they are totally incompetent, they tenant moved out of their hotel by 10am and the payment came through at 5.30pm. I can’t think of anything so stressful for the family .  The whole process wouldn’t have been achieved without the 4 Directors working so well together, and this really has shown me that I am business with a great group of people.

Food for thought…. Loss adjustors are always in need of accommodation.  As long as your mortgage provider is happy, it can be a lucrative income.  It would be worth finding contacts in the areas you invest to see if the timing works.  It is important to check the figures though, they want fully furnished and bills included, so it may not be worth it over a year’s contract.

Your partnership, work ethic and values are key to a profitable and stress free working partnership.  Everyone will have something to bring to the party and it is important to be mindful of that.  All of us have busy full time jobs, so effective and smart working is paramount.

The last few days of this property were genuinely hard work. I was able to build up such an open relationship with the tenant and found out she was a very community based person.  My close friend had lost her Mum days before they were due to move and whilst helping her pack (on the Saturday before the tenant moved in), I noticed a lot of disability equipment that was no longer needed. I spoke with the tenant and she was able to give all of it to her local elderly charity, which they desperately needed.  So a really positive end to it all.

A bit of excitement for the closing straights of lockdown.  Now to get the planning in next week and I will update you on that as we progress.

Enjoy your weekend.

 

Cash Vs. investor or bridging borrowing  – which is king..??

Happy Friday everyone.   I hope you are all digging deep, it seems a lot tougher nearing the end.

As we work with so many property investors, the question of whether they should use cash or bridging to fund a project often comes up… so I thought this week’s blog would give both sides of the coin.

Your Own Cash

It’s easy to say it’s cheaper as you aren’t charged interest or fees – and at the moment when bank interest rates are so low it is tempting, but tying up cash stops it being used for something else, which will give a return. You could use your cash to fund two or three rather than just one project if you used bridging finance too.  It’s really important to always look at all options and what the net cost actually is. It all depends on how many projects you are planning on completing at once, and whether you have contingency funds if your project runs over time or cost. If you want to grow quickly then having cash available for the right project is important.

If you are buying solely with cash then another consideration should also be to use a solicitor that is used to working with lenders solicitors. If the legal work has only been looked at as a cash purchase then it can make it difficult when refinancing.  There is more work involved when someone is placing a charge on the property, and this can then cause delays at the refinance stage of its not been dealt with initially.

Using Other People’s funds

This really does keep your cash available for a profitable opportunity, and is the lowest cost borrowing option if you can access it at a reasonable rate given that there are no arrangement fees, exit fees and lender solicitor fees. Considerations would be:

  • Is there enough profit in the deal to ensure that your investors are repaid within the timescales you have agreed, and what’s your back up option?
  • You will usually need to borrow the full amount for the full time period, so your interest payment needs to be calculated ok this basis.
  • If you are using it with bridging, Lenders need to ensure the right people are on the application, so you need to have some experience to bring to the project before the lender will be happy for you to use investor funds.

Bridging Finance 

So after all that, why would you use bridging finance? The biggest advantage is the security; of having a mortgageable property that a bank will lend on, and a lender’s solicitor having seen the legals and being happy with the property. There is never a guaranteed exit to a term mortgage but it does help.

As we touched on before, it frees up your capital to look at multiple properties, or it can allow you to look at bigger projects with bigger profits. If your total spend becomes a 25% deposit (and maybe refurbishment costs) suddenly your budget is much bigger.

There are ways to mitigate costs too, especially when you’re looking at keeping the property:

  • If you are borrowing the refurb costs as well as the acquisition, then you will obtain the refurb costs in arrears as you spend them. This reduces the interest payable by about 40% and therefore can balance out the arrangement fees, exit fees and legal costs.
  • There are some bridge to term mortgage options, where there is a reduction in arrangement fees, valuation costs and/or legals when you use both products with the same lender. This can mean that you’re not paying out as much, and may therefore mean it’s a lower cost option to private investor funds for example.

As always, it does depend on your circumstances and the project you are looking at so please feel free to give us a call and chat it through.

Focus on HMOs: Do you need a hybrid valuation and why you want a specialist lender

So here we are at Friday again – for many of us the Friday we have been waiting for! We’ve also had a solid budget this week, with an extension to the stamp duty relief which is great news.  With all this, as well as a clear roadmap out of lockdown, it does seem like there is some vibrancy to the market this week.

I’d like to talk about HMOs this week.  It’s a hot topic at the moment and we have had many enquiries asking about how to value properties and what rates we can do.  These conversations don’t always go the way clients expect though, so I thought I’d explain it in a bit more detail.  As you know we are big believers in looking at the bigger picture and not chasing low rates so this should help explain why.

Do you need a Hybrid valuation or will a bricks and mortar work?

Before we go on to hybrid and bricks and mortar methods, I just want to mention commercial valuations.  The words ‘commercial valuation’ are used a lot in the property world, and not always correctly.  The lender decides on the type of valuation we use, so we can’t request what to have; and no, it doesn’t always mean a yield based valuation!  We would only be able to use a commercial valuation for HMOs where it is 7 bedrooms or more.  There will always be a ceiling price for a property in an area based on the location, size, condition and demand and that needs to be taken into account when looking at the yield calculation.  It’s really important that as investors you do the same to be as accurate as you can.

Hybrid valuations are also something which I don’t believe are explained very well a lot of the time!  It is something that some lenders allow, but it is up to the valuer to decide what that means and what the figure would be.  I have written a blog on it here, but what I wanted to talk about today is whether it is important to you and your property.

I am a big advocate of using a hybrid valuation, but there are only a few lenders who truly use it, and it is more expensive.  So do you need it? 

If you have spent a significant amount on your refurbishment, and the total cost (refurbishment and purchase price) is significantly higher than the bricks and mortar comparables then it is worth exploring, but if not then it may not be.  I have had examples recently in Suffolk and Kent where the bricks and mortar value is significantly higher than the hybrid calculation, but areas in and around Manchester, for example, have lent themselves to a hybrid model.  It allows you to pull out what you have spent on the property when that figure is more than the bricks an mortar.  We do sometimes see the elusive ‘no money left’ situation sometimes, but that is rare, especially at the moment.  When we have seen it is where the client has done really well negotiating on the purchase price and they have made the extra money before they have even started works – you can only get this back out on a refinance through.

So why would you want to use a specialist lender?

There are so many benefits to using a true specialist lender.  Their rates will be higher than the ‘specialist side of vanilla’ lenders, but as you know we are big believers of looking at the bigger picture:

  • They work with property investors regularly, so they understand that your income may be low due to carrying forward losses.  There is generally no minimum income requirements as long as the situation makes sense
  • The required documents that you need to provide are simple and straightforward.  There is no new list once the initial requirements have been satisfied!
  • We are able to speak to the underwriter directly, so if there are any issues then they are usually quickly resolved with a phone call.  We have a good relationship with our lenders so are able to pre-empt any potential issues a lot of the time and have a good idea of what will work and what won’t.
  • They are far more open to investor funds, which is a big deal at the moment.  I have mentioned previously that there is plenty of money within the property world, with private investors looking for better returns than they can in bank savings.  There are also plenty of bounce back loans within the property investor community, and both of these options aren’t acceptable to many less specialist lenders.  Even having a BBL in your account could present a problem, so if you want to take advantage of these funds then you need to know where to go.
  • You have far more choice of how to structure your limited company in terms of SIC codes, number of directors/shareholders and group structures.  Often less specialist lenders have restrictions around this that can cause issues with the way your company is set up.

As always, if there is anything you want to chat through then give us a call.  Enjoy your weekend – the evenings are lighter and things are definitely on the up!

 

Could you use investor funds or a bounce back loan for your next deal?

It’s blog time again! We are feeling more optimistic that we may be nearing the end of this lockdown, and some warmer weather definitely helps!

This week I thought I would cover investor funds and bounce back loans; there does seem to be an air of money floating around within the property world at the moment and I can see why. Bank savings rates are at an all time low, even lower than the previous all time low! We have seen a 400% increase in bank savings in the past year; a combination of being unable to spend money and an uncertainty of what’s to come means that lots of people have got more money than they usually have. We’ve also seen so many people take out bounce back loans for their property companies, as they have been affected by Covid.

So how can you take advantage of this as an investor?

There are many ways. Bounce back loans are a simple way of increasing the funds you have for your next property purchase. There has been many changes over the last year of how lenders view these loans, but on the whole they are now acceptable to be used for your deposit or refurbishment costs. What the lender doesn’t want to see is that you are stretched and have only got the bounce back loan funds available, but as part of your funds available that is fine. It’s also very important that you don’t have any outstanding payment holidays on your portfolio.

I have to caveat this by saying that each lender has their own risk appetite and therefore there are some lenders who won’t be comfortable with clients that have taken a bounce back loan, or they can have taken it but can’t use it for this property. This is mainly more high street or as we like to call the ‘vanilla side of specialist’ lenders. What this means is that you may need to use alternatives lenders, or bridging finance (which you may need anyway) to be able to use this money. Please speak to us about your scenario and we can talk you through the options.

What about investor funds? 

It’s unsurprising that there are so many people wanting to invest in to property at the moment, with so few alternatives. It also offers investors a short term option when they are indirectly investing, or an opportunity to use smaller amounts of money to dip their toe in. The returns are far higher than many other options, and the risk may be more comfortable to them than investing themselves.

As an property investor, using other people’s money is a quick way to grow your portfolio. It’s something that lenders are becoming more comfortable with as it becomes more popular.

It is so important to look at a few things before using investor money:

  • Do your due diligence, this is so important. You are entering into a financial commitment with someone so you need to be comfortable with them and where the money has come from.
  • Have a clear plan with a number of exit strategies. You need to know that you can repay the loan within the timescales. Make sure your investor knows what your plan is, and gauge how they would be if it runs over the time. You need to build trust with investors by delivering on your commitments
  • Have you demonstrated that you can deliver on your promises with a previous project? You need some experience to show your investors, as well as your lender than you are capable.

As with bounce back loans, some lenders are not happy with using investor funds. What we usually see, however, is where you would use these funds for the purchase or refurbishment and then the investor will be repaid on refinance or sale. Bridging lenders are on the whole happy with investor money, as long as you are putting in some cash and have some experience.

Please let us know if you have any questions, we’re happy to run through any deals or scenarios you have. Have a great weekend, and happy property hunting!

Case study: Don’t be afraid of an ugly property if the yield is good

We’re here at Friday again, nearly 3 weeks through however long this lockdown is going to last! I hope you’ve had a good week, we’ve been trying to find some happiness and laughter in each day to keep us going. We’ve also got a new American president this week, which has got to be a sign of a brighter future ahead.

This week I want to talk about ugly properties… in particular ugly blocks of flats.

I was approached by a client of ours late last year with a collection of four blocks of flats (32 units in total). The unit value is low (approximately £20,000), condition of the flats weren’t great, it had outside staircases (not balcony) and was let to tenants on housing benefit. Sounds like a great buy I hear you say!! Our client was drawn to the amazing 21% gross yield and gave us the task of finding a solution.

There were a few complications:

  • Various levels of experience and income from the 4 directors
  • A shareholder who would normally be expected to be a director and couldn’t be due to other work commitments
  • A complicated lease structure in place for the blocks of flats
  • The flats are in a variety of conditions, some have recently been renovated but some do need updating throughout
  • The majority were tenanted, but not all
  • Client wanted to avoid the bridging route

We researched the area; the client was able to provide plenty of reasons why this area was a good investment in terms of future regeneration. On cases like these, it really is important to be transparent with your broker.  To get a good outcome we really need to know the case and the applicants – warts and all… as we are the ones that need to sell it to the lender.

It is really important to know your lender’s appetite; we do work hard at our lender relationships, as that allows us direct access to the people we need, rather than putting into the system and hoping for the best.

We engaged a lender who we know are ok with low value properties and whom we trust to do what they say. They were able to look at the appearance and give us a good steer that they would be able to lend (subject to valuers comments). What we weren’t sure about was what the valuation would be and what loan to value we could get to.  Our client really wanted 75%.

The clients were happy to proceed so we instructed the valuation.  Although a purchase, we emphasised the importance of the clients meeting the surveyor on site which I think is really worth it if you can. It gives them confidence in you as an investor and you can talk them through your valuation methodology.

The valuation came back with the market value as the purchase price. The vacant possession and 180 day value were much lower though. The valuation read well and agreed with the client that it was a good investment with a good yield. We then had to wait for the lender to let us know what they could do, and they came back with an offer at 75% of the market value and on a term product. Best case scenario! The clients were very pleased.

Legals are going through now and we are hoping to complete within the next month.

So, the moral of the story… let your brain make the decision and not your heart.  An investment property is not your family home and it’s all about the numbers, so you must take the emotion out of it.

I hope this inspires you to look at some properties that perhaps are outside of your comfort zone to see what yield you could achieve.

The avantages of a portfolio refinance 

So how are you all this last Friday of lockdown? I’m sure there will be mixed feelings across the country as we all come to terms with the new tiers we have been placed in. With that and all the Christmas news this week it’s a lot to digest.

This week has been a bit of a crazy one for Baya, last week of the month, in a month where everything seems to be taking extra time, so then everything becomes urgent. We are seeing a good volume of business though, which is great – long may it continue!

This week I’m talking about portfolio financing. This is something that I think gets a bit of a bad reputation as being expensive, but there are so many advantages and it isn’t as expensive as you think. The cost of limited company buy to let’s and HMOs, as well as personal buy to let’s where there is a portfolio in the background is creeping up; we are generally looking at about 3.5-4% for 75% loan to value on an individual loan for each house.  As a comparison, we can get under 4% for an equivalent loan with a bespoke portfolio refinance, so not really that high any more.

So why would you choose a portfolio loan? 

  • As your portfolio grows, the time it takes you to source and refinance each remortgage goes up. How long does it take you to refinance each property and what else could you be doing with this time? Looking at properties separately means providing documentation each time which can be very time consuming. Especially when they are spread out throughout the year.
  • Using one specialist lender for a whole portfolio means that we can often negotiate a lower rate. A few lenders are now looking to compete with high street rates, but with the speed of specialist. They are also generally happy with interest only at a higher loan to value too.
  • There is only one legal fee and arrangement fee. Completing the legal work in bulk is less costly, you will only need one appointment for legal advise and to sign the documents. This means you’ve only got to do it once in 5 years if you want to!
  • Building a track record with a lender is great when you want to buy more properties. When they can see your conduct it does make further lending easier and there is less required from you.
  • If you have some low value properties (under £75,000 generally) or low yielding properties that you can’t maximise the refinance on their own, putting them into a portfolio can help. They can rely on other higher value or yielding properties and lenders will often allow you to add on security which wouldn’t be suitable if it was on its own.

We can often use a desktop valuation rather than a visit from a surveyor. This is great at the moment; it means you don’t need to worry about booking appointments with tenants, but more importantly you don’t have the added worry of a person’s opinion as we are using only factual comparables. In this market I think that this is a huge advantage.

At a time where there are opportunities out there for cash buyers, a refinance to raise capital may seen appealing too. Perhaps an area you hadn’t thought about… ?

We are happy to take a look at your portfolio and see what the options are for you.