Many property investors spend more time negotiating the best property price and then fail to understand the fundamentals of funding. John Howard, a.k.a. “The Property Expert”, has written a book entitled “Property Investment and Development for Newcomers” in which he covers many subjects such as how to fund deals.
In a perfect world we would all have cash in the bank available for immediate investment but this is not always possible and sometimes sharing debt/risk is a more sensible approach. Before we take a look at the options available, John Howard has an interesting quote in his book:-
“There are numerous options open to you, and I honestly believe that if the deal is good enough, then somebody will put up the money for you.”
Financial backers
Even though John Howard has been extremely successful in his property investment career, he still regularly uses financial backers. John provides his expertise in property investment while the financial backers provide the funding. As part of the deal, the backer would receive their money back first and then the net profits will be split, usually 50/50, with the financial backer. There are many reasons why financial backers are useful:-
• Funds are very often available at short notice
• Interest rates can be competitive compared to commercial rates
• Limited legal paperwork
You will notice in various chapters of John Howard’s book that he likes to create long-term relationships with those he deals with. As a consequence, there are numerous financial backers that he has dealt with for more than 30 years on a net profit sharing arrangement. If you see a property, and the figures stack up, there is every chance that one of your long-term financial backers will be interested.
One useful piece of advice from John Howard:-
“With any new backer, I always suggest starting off with a very small deal that you definitely know you can over-deliver on. You will quickly gain their trust, confidence, and respect for doing so.”
Bank funding
It would be wrong to suggest that traditional bank funding is not an option for property investors but there are various issues to be aware of:-
• Costs incurred may be up to 2% of the loan
• Early redemption can lead to similar fees
• You will need to cover additional bank expenses such as property valuations/legal fees
• The bank will take first charge on the property
• Bank lending may take up to 6 weeks and beyond to secure
Many property investors are concerned about lending more than 50% of a property’s value from the bank. This could have a serious impact on their cash flow, reduce profits and ultimately put them at the beck and call of their bank. We know from recessions in the past that banks can very quickly call in loans when their own finances are struggling. It doesn’t take a genius to realise this would be the worst time to sell your properties!
While John Howard’s book is extremely interesting and informative, many investors have also made great use of his one-day seminars. Learn everything you need to know about starting a career in property investment and redevelopment. Bank funding is certainly an option but there are far more creative paths you can take once you begin to understand how funding works and how relatively small tweaks can save you a fortune.
Specialist banks
Property experts like John Howard have been there, done it and lived through numerous recessions and economic challenges. As a consequence of the US mortgage crisis of 2008, which led to a worldwide recession, many traditional UK banks withdrew from the buy to let property market. This left a vacuum which was very quickly filled by specialist banks which are nimbler and more flexible than their traditional counterparts.
The buy to let mortgage sector is huge today and there is intense competition amongst lenders. So, if for some reason you are unable to secure traditional mortgage finance, the specialist banking sector is certainly one to try. It will depend upon your financial situation but you may pay a slightly higher interest rate but this could be compensated by a higher LTV. It is becoming more and more evident that there is a big difference between the traditional mortgage market and specialist lenders.
Bridging finance
While traditionally bridging finance is seen as relatively expensive, it can often be a very useful means to an end. If example you have acquired a property and are looking to fund redevelopment, short-term bridging finance could be perfect. It will all relate to the figures, the cost of finance, cost of redevelopment and the uplift in property valuation. When the redevelopment is finished it should be possible to take out a traditional mortgage (on a higher property value) and repay the bridging finance.
If for example the cost of building work was around £50,000 (including bridging finance interest) but it led to an uplift of £100,000 in the value of a property, it is certainly worth considering. One note of caution from John Howard:-
“I’m certainly not against using bridging finance to purchase a property. Just remember that the interest will be a lot higher, so pay the money back as soon as possible. Otherwise, you’ll make a lot less profit.”
Other topics
In John Howard’s book “Property Investment and Development for Newcomers” he also covers other funding related subjects such as:-
• Person guarantees – virtually impossible to avoid in the modern era
• Building societies – using this traditional form of finance for your benefit
• Buy-to-let mortgages – a useful form of finance for private landlords
• Mortgage brokers – a good one is worth their weight in gold
• Private loans – often competitive means of raising finance
• Family loans – a difficult subject, mixing business with family
• Inheritance – property investment can provide long-term security
In reality, there is no one size fits all when it comes to property funding and different forms of finance. Bridging finance may be suitable for redevelopment then refinancing, specialist banks will offer finance to those with challenging credit histories and then we have the traditional banks, building societies and private loan arrangements. However, for many property investors a financial backer is a very useful way to mitigate the downside but maximise the upside.
You should be flexible with regards to sources of finance, open to new ideas and structure funding in a manner which dovetails with your specific requirements.