So now you are an investment property buyer, you have your first one or two properties, and you want to start growing your portfolio. The key stumbling block for most investors is financing, they have insufficient private funds as deposits one future property purchases creating what appears to be an insurmountable barrier, but it does not need to be. There are several ways in which you can overcome this issue, such as remortgaging, mezzanine finance, and BMV properties, we will give a brief overview of each of these strategies for growing your portfolio.
Property Remortgaging. You can remortgage one or more of your existing properties to release equity. Most lenders will have a criteria that you need to have owned your property for at least 6 months, they will also require evidence that they are being managed profitably, e.g. with interest rental cover of at least 125%. Some lenders will impose restrictions on the number of properties, e.g. if you have more than 5 or 10 (varies by lender) they will not lend for additional properties. When this happens you need to obtain commercial finance, for this you will need more of a proven track record and you will find the LTVs offered generally lower, sometimes only 60% LTV.
Mezzanine finance. This is where you obtain secondary finance for your deposit, most lenders will not allow you to specifically borrow money to use for your deposit, but if you have “existing funds” in your accounts, that historically where obtained as loans, then it is possible to get round this issue. The mezzanine finance can be taken as a secured loan against an existing asset, e.g. equity in your initial buy-to-let property or any other asset you may have. Note however that you will be paying a higher interest rate for this finance which needs to be considered in the overall portfolio profitability.
BMV properties. This is where you purchase a property at below market value (see Simple2buy.co.uk), typically properties can be found at 10% to 20% or more below current values (September 2009). Once you find a BMV property that you would like to buy you can then use a purchase technique where the loan is based on valuation and not purchase price, in effect this reduces the deposit needed. For example if the buy-to-let mortgage requires 25% deposit, and you buy a property at 15% discount, you then only need 10% cash for your deposit. Sounds too good to be true? Every day such deals are being completed in the UK, the only issue is there are more buyers for BMV deals than there are properties available, especially at discounts of 20% or more.
Whatever ever your financial strategy there is one fundamental rule to apply, do not make false statements to lenders, it is against the law. Some investors may choose to do this, but one day it might catch up with them. If you are going to use a creative finance strategy (such as with BMV properties) you will need the support of a specialist financial services company to ensure all of the lender’s rules are complied with.
