When it comes to understanding the ways to ‘raise money for property investment’, there’s no doubt that raising capital is usually the biggest hurdle.
You will need cash – and lots of it – to either buy a rental property outright or to cover the purchase for a buy to let deposit, plus the associated property purchasing fees as well as refurbishment costs.
There are essentially five ways of raising money to get a foothold in the UK’s property investment sector, and they are:
- Save for a deposit. The easiest and most obvious way when it comes to funding a property investment is to save the money to do so. If you don’t have savings or an inheritance to invest, you’ll need to make lifestyle changes to save.
- Remortgage. If you own your home and it has risen in value, whether the market price has increased or you have carried out improvements, then you can withdraw the equity in the property tax-free by simply borrowing against your home’s new value.
You will need to consider that the amount you can take out will be capped by either your own income, that’s to say you are borrowing against your home, and also your investment property’s rental value if you are taking out a buy to let mortgage on your rental property investment.
One of the downsides to remortgaging means that you need to be aware of the potential of carrying more debt because the interest payments will be higher. This means that should your rental property make a loss every month, or just about break-even, then it’s unlikely that you will ride out problems such as having an empty rental property, also known as a void period, or if mortgage rates rise which could see you losing your investment property altogether.
- Selling up: You could also sell your home to generate the necessary funds to invest in a buy to let investment opportunity. You’ll need somewhere else to live so you will either be paying rent or living with family. However, a downside for selling a property is that you may need to pay capital gains tax.
- Cash in your pension: For those who are over 55, then there’s an opportunity to withdraw all or just part of your pension pot. There are new rules that dictate how you can access your pension and you are free to use the money as you want to, including investing in a buy to let property.
While many people are looking to invest in a property as a way to generate income in retirement, this route will need careful consideration and you should speak with a financial adviser beforehand.
You also need to appreciate that when investing in buy to let, there’s more work and risk involved in finding and keeping your tenants happy than simply receiving an annuity that will pay you an income every month.
There are also tax implications when withdrawing cash from a pension pot so expert advice is advisable.
- Team up: One of the best ways to raise the funds for an investment property is to team up with a friend or family member who may have the cash available. They may offer you a loan with a fixed interest rate attached and you could then split the profits from the buy to let property. Essentially, the arrangement will see your friend or relative putting up the cash and you doing the work for the investment to be a success. Alternatively, you could both put in an equal amount of money, share the work and share the financial rewards.
However, should teaming up to share the risk sound like an attractive opportunity, then it’s a good idea to draw up a ‘Declaration of Trust’ that states clearly how much is being invested, who is responsible for which tasks and what security may be involved. This document will be invaluable should things not work out and also if things do succeed.
Finding the finance for a property investment
There are other issues to consider when it comes to finding the finance for a property investment in the UK and one of these is your credit rating.
In recent years, the lending criteria for buy to let mortgage lenders have tightened and there’s no doubt that a clean credit file is a crucial part of the application process for those wanting to access a BTL mortgage.
Having a good credit history is also a good idea if your investment journey is to grow a property portfolio by using buy to let mortgages or other types of financing.
While we mention that the lending criteria has become tougher in recent years, this means you should appreciate that:
- Minimum income: You will need to earn at least £25,000 to access buy to let mortgage products from most lenders. Some will have a lower income threshold, or indeed no minimum income requirement but they may charge higher rates of interest.
- Property owning: If you already own buy to let properties with a mortgage, this will have an impact on the lender’s ability to lend to you. For example, if you have a buy to let property portfolio with at least 10 buy to let mortgages, then you may find lenders will be reluctant to loan money. You may find that the expert advice from a broker will help find a lender.
- Rental income: You will also need to prove how much your potential rental return is going to be because you will need to be receiving at least 125% of the mortgage payment.
- Insurance: Don’t forget that should you qualify for a buy to let mortgage, then you will be needing BTL building insurance.
Become a buy to let property investor
Essentially, when you become a buy to let property investor, you will need to understand that you are starting a business and it’s not only an asset that you will own but you will need to have a sound cash flow.
You will also need to budget for refurbishment work and understand that your taste in decoration should not trump that of having a plain interior design – think of every room having magnolia walls and good bathroom and kitchen design for tenants to move in.
For anybody who wants to understand ‘How to fund my property investment’, then the best process is to research thoroughly what potential lenders will be needing and then working to meet that criteria; this means speaking with a financial adviser or a buy to let mortgage broker and they can help point the way to potential lending opportunities and help you save the money needed to achieve your property investment dream.