From commercial property portfolios to buy-to-let, we asked the experts for some advice about property investment
What are the most common types of investment mortgage?
There are several types of mortgages open to property investors – Buy To Let (BTL), House of Multiple Occupation (HMO), Serviced Accommodation (SA, like Airbnb), Semi and Full Commercial.
BTL is probably the most commonly used and is mostly when you would rent out your property to a single person, couple or family and is characterised by having a single rental agreement (Assured Shorthold Tenancy – AST) for the entire property.
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HMO mortgage are when you have multiple unconnected and unrelated people living in and sharing a property, with each tenant having their own AST.
SA mortgages are where you are renting short term, effectively renting by the night, much as hotels do, or for a holiday (usually 7-14 day letting periods). So you have transient, rather than longer term tenants as you would with BTL or HMO mortgages.
Semi commercial mortgages are typically for mixed use properties, most commonly characterised by a shop with a flat above it.
Commercial mortgages are often for commercial properties but not exclusively so.
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How does a commercial mortgage differ from a standard mortgage?
The two biggest differences with commercial mortgages are the type of borrower and the type of property.
The borrower for a commercial mortgage is required to have already gained experience as a landlord, so they understand the realities of renting out properties to tenants. Twelve months landlord experience is likely to be the minimum requirement but it can be as much as 3 years with some commercial lenders. These lenders want to know that the borrower has tested out what being a landlord entails, is comfortable with it and intends to remain one. In reality, not everyone is cut out to be a landlord, so these lenders like you to have ‘earned your spurs’.
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The types of properties commercial lenders lend on are typically, but not exclusively, properties that are used commercially – so any shop, office, warehouse, factory or any property which has a business as the tenant can only have a commercial mortgage. It can be for a single property or multiple properties all on a single mortgage. A portfolio of tenanted residential properties would also be eligible for a commercial mortgage, even though the properties themselves are not commercial.
What type of individual is most likely to need a commercial mortgage?
Someone who has multiple properties (residential or commercial) that they wish to amalgamate onto a single mortgage.
It could be someone that owns a commercial property.
It could also be someone that runs their business out of a commercial property that they already own or seek to own.
What is the best way to grow a commercial property portfolio?
The simplest way is to have a large pot of available cash to put down the usual requirement of a 25 percent deposit enabling them to buy multiple properties – but that would exclude an awful lot of people who would find the lack of such a large pot of cash an insurmountable barrier.
A straightforward short cut to the above is to find properties with the potential to add value, do whatever is required to add that value, and then get a mortgage on the uplifted value, so that your cash left in the property is diminished to the greatest extent possible. For example, buy a property for £140,000, spend £40,000 refurbishing it, get the improved property re-valued at £240,000 and borrow a 75% mortgage of £180,000. On that face of it you would have none of your own cash left in the property but in reality you should have incurred costs such as Stamp Duty, Valuation Fees, Legal Fees.
That aside you would still have still recycled your deposit cash that you were required to put down to buy the property in the first place.
The ability to buy a property with a cash deposit, forcibly increase the value of the property over a short period of time, then refinance the property at an uplifted value is a time honoured way of using a single pot of cash multiple times to buy property after property and thus building your portfolios in a substantially shorter time period. Recycling your Cash effectively enables you to ‘punch above your weight’ in terms of the size and frequency that you are able to add properties to your growing portfolio.
Recycling Your Cash and the variety of ways to achieve it is something that I have been teaching property investors how to do for most of the past decade, since 2013 actually.
Why are banks increasingly reluctant to provide development finance?
Major banks have been unwilling to provide development finance on any meaningful scale since the Credit Crunch back in 2008. Prior to which they were massively committed to lending on property developments, lost an awful lot of money when the crash happened and have been too scarred by the experience ever since to re-enter the development lending market to any appreciable degree.
Nature abhors a vacuum so, in the space left by the major banks, another group of lenders (often referred to as challenger banks) took up the mantle of lending on property developments and have flourished in the post Credit Crunch period.
What is a bridging or short-term loan and why might I want one?
It is exactly what it appears to be, a short term loan to enable you to buy a property that you could not ordinarily buy using a more conventional mortgage.
Bridging loans work well in a variety of circumstances but it is important to differentiate how they are used by savvy property investors compared to their use in the residential market.
Most people’s understanding of a bridging loan is you have your home on the market to sell but before you can complete its sale, you find a fantastic property that is exactly what you want for your new home – but you cannot buy it because you still have to sell your current home. In this instance you use a bridging loan to buy the new property and repay it when you sell your old property.
In contrast, when you use bridging for an investment property, your motive to make a profit and that profit offsets the cost of the bridging loan. This ability to offset the cost distinguishes how it is used for a man residence purchase, where there is no profit element to offset, it is all cost. So, while bridging is effective when investing in property it is far less effective when used for your main residence.
Why might you want a bridging loan? Several reasons –
• Speed – Whenever you need to buy a property quickly and speed makes the difference between buying it or not. Bridging loan can be arranged in 14-28 days in many cases. Far quicker than most mortgage lenders can work and more akin to the speed of a cash purchase
• Auctions – Most auction houses only give you 28 days to complete the purchase and many mortgage lenders struggle to complete the processing in time to give your solicitor the opportunity to complete the purchase in a restricted timescale
• Repossessions – Banks often only accept offers for properties that they have had to repossess if the buyer can demonstrate the ability to complete the purchase within 28 days
• Smaller deposits – BTL mortgage typically require a 25% deposit because mortgage lenders always lend on the lower of the purchase price or value. If you can reach agreement with a seller to accept a below asking price offer then some bridging lenders will lend against the asking price, not the purchase price. This reduces the amount of deposit you need
• Unmortgageable – Mortgage lenders require the property to be ready to rent. So any property that is in poor condition will not be given a mortgage. Bridging lender will lend on a property regardless of the condition it is in, as long as it is clear that it can be improved to the point where it is mortgageable
What are the advantages of ‘alternative’ mortgages such as buy-to-let, offset and remortgage?
Main residence mortgages are given so that you can live in a property. Buy-to-let properties are specifically for properties that you intend to rent out rather than live in yourself.
Offset mortgages effectively have a savings account linked to your mortgage account and are offered by only a minority of mortgage lenders. As a ready source of available low cost funds that can be used time and time again, they can be a very useful asset for property investors, to cover refurb costs on a project, for example.
Here is how an offset mortgage works – whatever amount sits in the savings account earns no interest but it offsets interest on the equivalent amount of the mortgage. Let’s look at an example –
You have a mortgage of £150,000 and £30,000 savings sitting in the linked account. You only pay interest on £120,000 of the £150,000 mortgage. Whenever you draw money down from the savings account, you begin paying interest on that proportion of the savings account and continue to do so until you pay the money back into the savings account. This facility gives you a lot of flexibility to save money on your mortgage account when you have money in your savings account.
Remortgages happen mostly when your deal expires with your current lender and an alternative lender offers you preferential terms.
What skills should an investor learn in dealing with vendors?
Diplomacy, directness, politeness, patience, persistence are all great qualities for this purpose.
Finding out what their reason for wanting to sell their property is usually a good thing to do. Understanding what a vendor wants to achieve, why and in what timescale is helpful in deciding to make your offer to purchase.
Vendors want to see the sale progressing and are often wary that a buyer will be messing them about. In England and Wales accepted offers are not binding until contracts are exchanged, so vendors naturally worry that the buyer is going to pull out. They judge progress by the activity they see from the buyer’s side.
One key sign vendors look for is their property being surveyed, the quicker this is done in the process, the more confident they are that they buyer is serious. Another is contact from the buyer’s solicitor with their solicitor. So acting promptly and keeping the vendor fully informed will keep their confidence in the buyer high.
It pays to understand that everyone advertising their house for sale wants to sell it, and are prepared to wait for as long as it takes to get offers somewhere close to the price they are asking. A small minority of vendors don’t have the luxury of being able to wait indefinitely for that close to asking price offer to come along. Their need to sell is more urgent and can be triggered by a variety of reasons, job loss, job relocation, emigration, desire to live closer to family, divorce/separation, financial stress are all reasons for vendors wanting a quicker conclusion to the sale of their property.
Such vendors may have a more relaxed view of what is an acceptable price for their property, if it means they can get on with their life. Being able to help them get on with their life by buying their property could mean that you can create a win/win in so far as they get to sell their property and you get to buy it a little cheaper and both parties are happy with the outcome.
What are the advantages of ‘unmortgageable’ properties?
In a word, significant. If it is not possible get a mortgage then the only option to sell your property is to cash buyers and cash buyers operate in a way that transcends industries, countries and even cultures – cash buyers the world over like a bargain. So they hammer down the price they are prepared to pay.
How does this benefit you, especially if your bank account isn’t bulging with cash? Well, bridging finance which will lend regardless of the condition of the property means you can buy unmortgageable properties exactly like cash buyers do, fix them up and ether sell or refinance them at a significant profit.
This really is a massive opportunity for someone who is prepared to step outside the normal ways of buying investment property.
Where can I look for more information on property investment?
I have a YouTube channel that has plenty of free finance tips as well as mentee case study videos, at https://www.youtube.com/kevinwrightproperty
I have websites where you can access free written blogs, as well as paid-for content:
https://www.recycleyourcash.co.uk/
https://www.ninjainvestorprogramme.co.uk/
If it is finance brokering you want help with, here is our website for that
https://www.positivepropertyfinance.co.uk/
You can email me at:
Inspireme@thinkpositively.co.uk
Or call me on:
07889 526979
