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Benefits of Bridging to Purchase Your Next Deal

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What are the benefits of using bridging over cash to purchase your next deal?

The Valuation

Your bridging lender will instruct a valuation and the surveyor will have your schedule of work, so you have a professional opinion on your now and after-works figures.

The surveyor will also pick up if there’s anything that the lender doesn’t like – for example its location, neighbors, or nearby commercial units.

 

The Legal Process

Although you will need your own solicitor to purchase property cash, they are not the lender’s solicitor and therefore won’t be able to get their take on any unusual legal issues. It is much more tricky to resolve lease issues for example after you have purchased a property. Using a bridge means we have access to a lender’s solicitor and know that the property is mortgageable.

 

It Frees Up Your Money

You can look to take on multiple projects if all your money isn’t tied up on one, which it may be if you are funding the deposit and refurbishment yourself.

You also have the option of borrowing your refurbishment costs, which on bigger projects can mean you are putting in as little as 30% of the purchase price and the purchase costs.

 

It Doesn’t Cost Twice As Much

The preconception is that bridging is expensive, but there are lots of ways we can reduce the overall cost if you need a bridge and an exit with the same lender.

Lenders can reduce arrangement fees, valuation costs, and legal fees if you use them for both, and Baya will only charge an admin fee for the refinance if we have arranged the bridge.

What do you need to know about care provider leases for HMOs?

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They used to be an issue with lenders but we now have many options!

So what do you need to watch out for?

Experience

The preconception is often that you need plenty of experience in this sector but that is not the case!

You only need to have had one BTL for one year to be eligible for an HMO with a care provider lease in place.

Type of property

Each care provider needs a specific type of property, whether it is the number of bedrooms, amount of communal space, etc. It’s a balance between making sure that it is not so bespoke you can’t do anything with it if this doesn’t work out without spending further money if for any reason it doesn’t go through.

Area

Again, this will be dictated by the type of tenants. Location is so important to your care provider, so make sure you find this out before you start sourcing your property. Distance to local amenities, transport links, and particular things that need to be close (or not!) are vital to your provider.

The Lease

Ask for a copy of one of the care providers’ draft leases in advance. Lenders will need to approve them, so it is important that you give us a copy of this to get it approved, in principle, before the transaction starts. A recent case needed some amendments which the care provider agreed to, but this may not always be the case. This is really important as the fund is dependent on it.

What are the benefits?

  • Less uncertainty of tenant turnover.
  • No void periods or non-payment.
  • The contract usually includes all bills.
  • No referencing or upfront costs.
  • Property is handed back as you left it.

 

How Can I maximise my HMO valuation?

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As an investor, you are generally trying to pull as much out of each deal to allow you to move on to the next one. Getting the right valuation for your HMO is key to this!

There are a few ways lenders value HMO’s, so here is a simple explanation for them all:

Bricks and Mortar Valuation

Most lenders will value an HMO up to 6 bedrooms as an empty house regardless of how much you have changed the layout. The comparables they will use are for similar-sized properties in the local area.

In order to achieve more than this, you need to work with a couple of specific lenders who have other options but all lenders will value on a bricks and mortar basis where the existing layout has been kept; for example where the only change has been converting a lounge into a bedroom and perhaps adding an en-suite.

Commercial or Investment Valuation

This is valuing based on yield. The lender will use a net market (not actual) rent, using local comparables.

Most specialist lenders will use this method where the property has Sui Genaris planning, and some will also use it where Article 4 applies.

There are a couple of lenders in the market that will also consider this where you have a larger HMO and C4 planning where the internal layout has been significantly changed so that it would be more likely to be resold as an HMO rather than a house. There would also need to be a good demand for both room rentals and the resale of an HMO.

What’s the commercial valuation calcuation?

Annual market rent – 20%

Average yield

This is an approximate calculation and figures can vary but it’s a good guide.

HMO Hybrid Valuation

Where your property does not fit into the previous definitions, there are a few lenders that have an alternative. There are other lenders who say they do and don’t so you do need to be careful!

It is up to the surveyor to decide if the internal layout is significantly different from a house and whether it would be more likely to sell as an HMO. This would typically be where the property has all double bedrooms with en-suite, the kitchen has multiple cookers, sinks, etc. and the living space is comparatively small. There needs to be a demand for resale as an HMO too.

How do surveyors come up with a hybrid figure?

They take the purchase price of the property (or market value where it was purchased under value) and add the cost of the conversion. This is based on an average cost so may not be exactly what you have spent.

Having a good valuer pack and a clear schedule of work is so important.

This is a guide and doesn’t always work perfectly, so if you would like to talk through your case and whether it’s worth trying to get that hybrid or commercial valuation then please give us a call!

What is going on with the stamp duty deadline and Jackie’s update

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I keep saying this – but I can’t believe it is Friday again!!

I am starting to venture out and its taking some getting used to… We had one night out for a very belated November birthday this week and I’ve needed a good few days to recover!

We are now at the stage when the last cases will get through for the higher SDLT discounts ending 30th June. 

For the £250k and under purchase prices, there are still a few months to go – but be wary, the conveyancing side is starting to bubble over. We are being asked by clients for solicitors details to take on cases when their own are simply too busy to help.

What’s the best way forward if you get a good opportunity?

I would suggest, if it’s available, going dual representative. This is where the solicitor acts for both the lender and yourself.  I wouldn’t be holding your breath for a speedy completion, but it may knock off a good few days/weeks, which could be vital.

It is also important that you make sure you have a solicitor in the bag BEFORE considering an auction timescale case.

I have recently exchanged on a Manchester property. I has all been a bit quick after a year with an option.  With the planning application taking so long, together with a change of tack due to a Housing Association now wanting the plot, things have not been straightforward.  Planning has had to be resubmitted due to the changes so its now going to take even longer!  When we were ready to proceed, the original solicitor simply couldn’t take the case for completion on the 18th June. That has caused a real headache.  Thankfully my go to solicitor (Phillip Adam) took the case after I begged him! Honestly it was a really kind deed, as I know he is as busy as anyone.

So why have I changed direction with my portfolio?

The reason for going for this property and plot was to expand my portfolio. I have had vanilla buy to lets for some considerable years and although they are lovely and safe, I wanted take a bit more risk to get the higher potential rewards.  I am selling one of my flats as the return on Manchester site is worth the cost of selling the flat.

It’s interesting that your pension pot doesn’t tend to go on the radar… until you realise that your years left to fill it suddenly get very short.  Having had a financially difficult divorce in my 40s, time was short if I wanted the option to retire at a reasonable age.  I try to keep a split between earnings, pension (very tax efficient to put money in from a company) and properties.

Enjoy your weekend and I hope you give yourself time to recover 😊

Holiday let’s: we can now use actual holiday let rental!

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Here we are at our Friday blog day again. I hope you’ve had a productive week!

As things start to open up we are starting to see more mortgage products appear in the market too. In the residential market this is most noticeable with the new 95% LTV products – a sign that confidence in is improving! And in the buy to let market we are seeing more options for holiday let’s. This year, with all the uncertainty around foreign travel, I think we will see an increase in demand for UK holidays. It will be interesting to see how that plays in the next few years – will we see more people falling in love with UK holidays and see their benefits?

This week I want to tell you about a new holiday let product we have available. For a while now we’ve not had great options for holiday let’s, but as things start to reopen and the chances of foreign holidays continue to look bleak lenders are spotting an opportunity.

Until now we have been able to lend up to 75% of the purchase price or current value  based on the 12 month AST rental figure. 

What this meant was the lender would only leverage it against a standard AST income, rather than the actual holiday figure, which may be higher.  Although you could use the property for holiday rental.

This can often work, but certain locations and property types don, and we’ve struggled with options for that until now.

A lender who used to be happy with holiday let’s (pre Covid) has now re-entered the market. There are some restrictions, the biggest being that the maximum loan to value is 70%; the rates, though, are lower in most scenarios to the options we previously had, so you may decide that 70% works.

The lender requires you to have a minimum income (between all applicants) and some previous experience. This can be with buy to let’s, it doesn’t mean you need to own a holiday let.

The big benefit is the income calculation. We are able to use 30 weeks income, at an average of the low, medium and high season rates. This can give a much higher maximum loan. 

Their minimum loan is £50,000, so covers all areas of England; the term can be from 2-30 years with interest only options available for the term. Rates start at 3.84% for a 2 year product at 70%.

As always, if you have any questions or scenarios you want to run through then please give us a call!

Enjoy your long weekend everyone.

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

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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!