Which finance is best suited to my property investment strategy?

When it comes to investing in property, there are a number of routes you can go down. It all depends on your goal.

This isn’t just your financial goal, but also the type of property business you want to build, your experience in the industry and how much of your time you can dedicate to make it a success.

As a property investor or developer, it's common to use a variety of finance solutions throughout your journey. In most cases you'll need short-term finance to get you off the ground, which is then followed by refinancing onto a long-term solution or a sale of the property.

In this blog, we’ll look at the different ways you can build a property portfolio and the common types of finance used by investors and developers for each property investment strategy.

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Strategy 1: Buy and hold

Buy and hold is purchasing a property to rent out and build long-term wealth, known as a buy-to-let.

By buying a property to rent out, you aim to make money in two different ways:

• The monthly rental income in excess of costs
• The growth in the capital value of the property over time

There are lots of different buy-to-let varieties to do, but they all share the same basic model: regular income, with the potential of gaining value over time.

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Buy and hold can include a number of strategies:

• Professional single lets: renting out a property as a single unit to a working individual or family.
• HMOs: renting out a property room-by-room to multiple non-related occupants.
• Traditional student lets: A type of HMO but with different characteristics and rules based on the student market.
• Single lets to tenants on benefits: renting your property to tenants who have their housing paid for by the local authority.
• Holiday lets: a property that's rented out short-term to holidaymakers.

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What finance is typically used for buy and hold?

• A buy-to-let mortgage

A BTL mortgage is required if you are purchasing a property to rent to the public. It has different rates to residential mortgages and is specifically designed for a rental property.

• HMO mortgage

If you’re renting your property to a number of unrelated occupants, a HMO mortgage is required. It’s similar to a BTL mortgage, but is tailored purely for a HMO property and usually has rates that are higher than BTL.

• Second charge mortgage

Also known as a second charge loan, a second charge mortgage is used as security against the borrowers’ property and commonly used to raise capital instead of re-mortgaging. Many property investors use a second charge mortgage to borrow against an existing property to raise the capital needed for a deposit on a BTL property.  They would take a second charge out alongside a BTL Mortgage.

> Find out more about second charge mortgages

• Bridging finance

Short-term finance often used by investors to purchase a property quickly, carry out renovation work, or break the property chain. It’s generally the most flexible and fastest type of finance you can get which makes it appealing to investors that need to act fast.

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Strategy 2: Buy and sell

Buy and sell means purchasing a property to sell on and make a profit. There’s no steady income or long-term capital growth, only the profit you make when selling the property.

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Buy and sell can include the following strategies:

• Buying a property that needs refurbishment work which you later sell for a profit, also known as ‘flipping’.
• Buying a property and converting it from one use to another (e.g commercial to residential) and selling it for a profit.
• Buying land to build a development on, such as a block of flats, that you sell for a profit once completed.

The key to a successful flip is to buy the property at the right price and keep the refurbishment or development costs within budget.

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What finance is typically used for buy and sell projects?

• Bridging finance

Bridging finance is commonly used to quickly secure a property, generate cash flow or fund light works while long-term finance is put in place.

Bridging finance is generally only suitable for small-scale development projects. For significant refurbishment or building work, property development finance is often the better solution.

• Property development finance

Property development finance is commonly used to finance large-scale construction projects. It is a short to medium-term loan used to support the development of a project. Once the building work is done and the project is complete, the finance is paid off by either the sale of the development or replaced with a long-term funding option.

• Development exit finance

Development exit finance is a type of bridging loan used to repay the outstanding finance on a property development once the project is complete.

It is commonly used if the existing development finance is coming to an end and the sale of the property has not completed in time. In this case, the development exit finance will be used to repay the finance currently in place or to release capital from the property so that the developer can move on to their next project.

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At Ramsay & White, we specialise in securing finance for first-time and experienced developers and investors.

Finance up to 100%  of purchase price or work costs | 70% LTGDV | Terms from 1 month to 5 years | Market-leading rates