If you’ve been in property a while you’ll remember the balmy days of 100% mortgages and 24 hour remortgages. Things are tougher today and property investors need to be innovative to continue to invest in property and not end up with your capital trapped in bricks and mortar.
Many investors now think the only way to invest in property is to have saved up a substantial wad of cash to put down the 25% deposits required by most buy-to-let (BTL) lenders.
That’s not true – and a smart investor can actually increase their profits, rather than barely get by – if they know how.
Before the credit crunch you could get 85% loan-to-value (LTV), you could get a same day remortgage and you could buy below-market-value and remortgage at true value.
Now things have changed. These mortgages no longer exist and ‘no money down’ strategies are usually the result of hiding how the property is being financed from the lender – in other words, fraudulent.
It’s now much harder to get your initial deposit out of the deal, so the ability to buy BMV, remortgage against a higher value and move on to the next deal can’t be done using purely mortgage strategies (at least, not legally). Lenders want a 25% deposit of what you paid, regardless of the true value of the property and won’t consider a remortgage until you’ve owned it for at least six months. Even then you’re going to struggle to persuade any mortgage lender that the house you bought for £150K is now worth £250K.
Even if you can remortgage successfully at the true value, it will take six months to get your money out. The speed at which you can build your property portfolio is severely limited.
You can carry out a similar process to pre-credit crunch – legally – using bridging finance.
If the words ‘bridging finance’ have caused you to break out in a sweat, bear with me. The cost of bridging finance may be higher than a mortgage BUT the corresponding profits will outstrip anything you can legally achieve using traditional BTL mortgages (or even JVs as you’ll be sharing your profits).
Used effectively bridging finance is a great way to secure deals without using too much of your own cash. You’ll need some, but if you’re smart you can leverage that and get it out quickly to move on to the next deal.
It is not as complex as it sounds when you break the process down into stages:
A purchase price is agreed with the vendor.
Bridging finance is agreed in principle after the lender has been shown the deal.
Contracts are exchanged, but with a delayed completion. A deposit is normally required to exchange (10% is standard but it can be lower); this is the investor’s cash.
There is a clause in the contact which allows works to be carried out on the property between exchange and completion.
The investor carries out the works, the cost of the works is also funded by the investor.
The property is surveyed but valued on its new post refurb value NOT the purchase price.
The investor completes on the property taking out the bridging finance. It is at this point that that some, even all, of the deposit and refurb cash the investor put in is returned.
The property is sold on the open market at its full value or let and refinanced after 6 months with a traditional BTL product.
If the investor is an experienced landlord of more than 12 months standing, it may be possible to refinance more quickly by using commercial lenders who don’t invoke a six month ownership rule. This can significantly lower the cost of bridging finance.
This is just one of the strategies that can generate profit without trapping your capital. There are others and I teach all these on the three-day Ninja Investor Programme – or you can get a taster of the kind of learning you’ll get by attending the one-day Property Investors Masterclass