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Financing your buy Let us assume you have decided 'Buy to let' is for you. You may have seen promotional material for courses that say they will show you how to do it without any cash of your own. Here we will explain how that is done, but also other ways that you can get into 'buy to let'. This article is written for a wide audience and is not intended necessarily to represent the best financial advice to you, this is for you to decide or if you choose seek help elsewhere. Something for nothing Lets start with a look at how you get something for nothing, always a big sales feature of the courses and subscription services. There are many routes that you can take to achieve this, so we will explore some:- The secret of route one, is in valuation, and the fact that lenders will advance a percentage of valuation and this is not necessarily connected with what you pay. So how is this achieved, well at the simplest level you find someone with a place they want to sell, but will not sell, and you agree a price with them that reflects this and the state it is in. Rather than paying them at that point you get an option to buy, as a contract, and as part of this the cost of you improving the property is the deposit. They cannot lose, if you don't buy they have got the property decorated or improved and it has not cost them anything. You then do the minimum you need to improve the valuation, decoration, tidying garden, and talking to those who produce valuations about how else you could improve it at minimal cost. Having done this you then apply for a mortgage as a percentage of its new improved value, which if you have got it right ends up being a mortgage for more than you have to pay on the option. Those involved in property development expect to make at least 20% plus their costs, so if you can keep down the costs you can see 20% and more in some cases, is available as the deposit. Route two is with new builds where, a developer may be sufficiently keen to sell that he is prepared to give you a discount, but rather than taking the discount you agree a cash back deal, or a gifted deposit. Not uncommon, and once the estate is completely sold and builders rubble etc is eliminated prices often then shoot up, so that your equity is balanced. If you look at an 85% buy to let mortgage, then anything over 15% discount, which lenders will take as your deposit, and you not only have a house but a cash sum as well. Route three is the early stages of a new development where you can buy 'off plan' this means you make a commitment to buy at a very early stage, and time then elapses between that point and the full developments occurring. Often you can get a discount for being in early as it encourages others in, and helps the developer organize funding. As prices rise as the building takes place, partly due to price rises generally but also as less are available, you in effect have an option at a very attractive rate. In some cases you will have chosen locations or plots that others will want and be keen to pay you for, and often these premiums can mount up, as you swap to another plot. Route four is the distressed sale or bargain, either where a person has not kept up their mortgage payments and the house is about to be repossessed, or where a divorce is happening, or for one of a hundred or so other reasons houses become available at substantial discounts, but often involves a quick decision and being in the right place at the right time. Of course far easier to do if you have cash available and a mortgage deal already sewn up. Route five is chain breaking. You find a group of people all wanting to move but all held up for a single house to sell. You then talk to each of the people in the chain, and get them all to agree to pay you a fee if you break the chain. Having got the agreements you can buy the house that is not selling, using the payments as the deposit, and breaking the chain. Simpler to say than do, as you still have to get the house at the right price and getting a number of people to agree to anything is always difficult. Route six is where the property is already let in a number of units, and you can use timing and deposits. Let me explain this in a little more detail. If you were to complete on say day 4 of a month then all but the first four days of the months rents paid would be transferred to you as well as the deposits of tenants. While deposits have to be returned when tenants leave, you normally have a month to do so, and an incoming tenant usually also paid a deposit by then, so in practice it is money available to use. Let us suppose for illustration purposes that the rent is £1000 a month, then for each unit you are getting 26/30 times 1000 plus 1000 or £1867 per tenant, so if the development has 10 tenants over £18,000 towards the deposit. Probably not enough on its own but combine with some of the above or other ideas and it all helps. Using money a number of times The next concept that may interest you is the idea that the same money can be used more than once. You could buy with cash a building, do some work, and then take out a mortgage for more than the cost of the building and work, releasing all the money to use again. In practice you can get a mortgage at each stage so a small amount can support a larger purchase. Some people manage to do this quite fast, and are able to turn over a sum up to five times in a year, so by the end of each year they have acquired another five houses and had all their cash back. Using rising prices for multiple purchases You buy a house on a mortgage, as the property increases in value, more equity and a second or re-mortgage is possible. allowing a capital sum to be released to put up the deposit on the next house, as these two go up you can repeat this and get another two and so on. (See the article on gearing to understand this better). Using idle equity If you have a house and have owned it for a while, you will have equity, i.e. its value now will be greater than when you bought it. This allows you to get a second mortgage, a loan, re-mortgage, often at a lower rate and sometimes allow you to have the same repayments, but throw up surplus funds you can use. Remember you are looking to raise a percentage of the value of a house not enough to buy a whole house. Let us suppose you have paid off your mortgage, and own your home, well if you were to re-mortgage it fully to 100%, then you could put 20% down and therefore have 80% mortgages on a further 5 houses of the same value as yours. Now if yours is a large home and you invest in flats you may be able to get 10, if in a cheaper part of the country a whole estate. All with wealth that you are not using at all currently. Of course you want to do it safely, and buy wise, but you are a cash buyer, no chain, and can get some really good deals. If you have equity and are not going to use it yourself, then look at what others would pay to be able to. Can you find a reliable and knowledgeable person who would pay the repayments on a loan or second mortgage for you, plus pay you for the privilege. Would this fee pay for your annual holiday or a large chunk of it, or fund a good Christmas season each year. You could insist they put all the money in a company and that you had a charge on the companies assets, that the principle director gave you a personal guarantee and a second company also provided a guarantee. Over the top maybe, but you don't want to have any risk of loosing out do you. If you cannot find a person then please tell us and we will put you in touch with just the right person. Idle equity can also be used directly to get free use of holiday accommodation every year, for a number of weeks a year, all at no cost at all to you. See the Holiday Property Club section of this web for details. (Section removed temporarily for updating). Credit Cards Credit cards we all know have very high interest rates, but do they? Look at the balance transfer promotions, sometimes very low, and often these are for the length of the balance. So lets suppose you got cards already and you took out say £20,000, now you hunt for the best deal, one recently had 0% on balance transfer for the life of the balance, so you transfer the balances, and get a £20,000 loan at 0%. Loans In every paper and many other publications you see adverts for loans. Now you may say the rates are too high compared with a mortgage rate, but consider all the options, how long do you want it and how many times can you use this money. If you can turn it over a lot of times and use it to get a lot of property, this may be worth looking at. To qualify for the best loans and sizable amounts you often need to be a home owner or mortgage payer, so you may have the chicken and egg problem, you can't get a house in your area because the deposit is too high, and you can't borrow the money because you are not a house owner. So what about buying a cheap house or flat in another part of the UK, deposits can be very small. Hey look you are now a house owner and everyone wants to lend you money, give you platinum credit cards etc. Friends, relatives, others If you know anyone who has savings, ask them how wealthy they are getting with it. Many companies for example think they are doing well if they can get just 2%. Now the next question is when do they need the cash back, not for 6 months, a year, longer, well what could you offer them as interest, and more importantly, what could you do with these funds in the time. Even if you are very poor, and your family is poor, between you, you can scratch together enough to get a house or flat, and from this you get started. Look also at groups, could you set one up, could you join an existing one. Retiring, or changing life style If you are retiring or changing your life style, rather then selling your current home could you let it out, and use the spare equity to buy a new home. As you are buying a home for yourself you will be looking at a 95% mortgage being available, so perhaps you also have some equity over to fund a couple more rental properties as well. Alternatively sell your home, as there is no capital gains tax on this profit, and use the cash for a number of deposits. Selling surplus items Many people have over the years collected a great deal of items that they no longer use, or even realize they have, and a good sort out will often throw up a list of items that would fetch a considerable sum. We all do the same, put away things that may be valuable, save it to look at and deal with another day. If we actually got around to selling these items we might just have enough to put down a deposit on another property or at least join a consortium with others to do this. Buy to let mortgages
Don't let the problem of releasing funds put you off, read the article on gearing to see how a little can grow into a lot.We hope that this article has given you material to make you think, and to realize that you have many alternative ways to fund property and we have not got around to looking at advances from a private pension fund, lump sums on retirement, inheritance, and a vast number of others. We also have only looked at being able to fund it completely, while many will look to be a part of a club, group or consortium, covered elsewhere on this website, where you need very little capital and can also include a small or larger regular payment to build a larger sum. |
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