29TH OCTOBER 2020
Short-term finance can help you capitalise on opportunities, but you need a clear exit strategy, says Ben Lloyd, head of affiliates at Roma Finance.
Sometimes the most attractive returns come from the least attractive properties. Those that involve risk but offer landlords potentially high yields.
In the right area and with the right know-how, savvy investors can turn even the ugliest property ducklings into profit-making investment swans.
But only if you can find the right funding solution.
Beyond buy-to-let
Depending on the state of the property you want to buy, a traditional buy-to let mortgage may not be an option.
Mortgage lenders usually want to the property to already be in a lettable state, with at least a working kitchen and bathroom. Although some specialist lenders offer refurbishment buy-to-let mortgages, most have been pulled from the market during 2020.
Buy-to-let product numbers have plummeted, as lenders look to manage risk and balance volumes, particularly for landlords with smaller deposits. At the beginning of March, there were 2,897 buy-to-let mortgage available to landlords but, by August, this had fallen to just 1,660 (Moneyfacts).
It’s not just a problem of fewer deals. Bigger deposits are required, rates are higher, criteria tighter, and providers less able to be flexible where a case falls out of policy.
The upshot for property investors is a less accessible buy-to-let sector and, if the property needs work, you’ll struggle.
But there is another way.
Funding solutions
Luckily, there are funding options designed to help landlords to buy property and fund any necessary refurbishments.
Bridging loans: These short-term finance products provide you with quick access to funding to buy an investment property and get it ready to let. They suit a wide range of circumstances, not just refurbishment, and can be taken over a term from one to 24 months.
Bridging finance is available from a diverse range of providers, some of which assess what they will lend based on the property’s value, and others, such as Roma Finance, that focus on your finances, skills and experience, or a mix.
Development finance: If the property you want to buy needs more significant refurbishment work, you’re edging into development finance territory. There are no industry-wide definitions for this but, as a rule of thumb, if a property isn’t watertight, it probably requires development finance. It’s still easy to access but loans are calculated using the potential value – or Gross Development Value – rather than the purchase price.
Commercial finance: If the property is to be let to a business rather than a residential tenant, commercial finance options are available, often through the same providers of bridging and development finance loans.
Know your exit strategy
There are plenty of options, but one rule applies to them all. If you take a short-term finance solution to purchase an investment property, an exit strategy is essential.
You have two choices at the end of the term – repay the borrowing or refinance.
If you’re buying the property as a long-term investment, repaying the loan (by selling the property or using other funds) is unlikely, so refinance options need to be considered.
These are your options:
Author: Ryan Bembridge