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  • Mortgages & Finance

    Buy to Sell - Low value properties financing

    Just getting ready to start out and would like some advice on the finance elements.  I only have a small cash start-up amount of £25k.

    * Long Term objective is eventually BTL properties

    * Short Term objective is BTS - To begin to raise capital for subsequent BTL's. I would aim to flip 2 x properties per year (6 months each).  I would be working on the properties full time and not taking a wage (wage is covered).

    BTS:

    I am looking at low value properties (<£50k) that require a refurb to sell onwards.  I aim to flip within a 6 month time frame, and have currently factored all my costs around a 6 month tenure (Mortgage payments/council tax etc).  I have a few properties highlighted already, and have investigated costs etc and documented my forecasting.

    Finance:

    * I own a small property with my mother - has been re-mortgaged to release £10k equity

    * Partner owns the property we live in (in her name alone) - She would not be happy with re-mortgaging to release equity (at present) - This could change in the future but she is very old school.

    From experienced people who have worked in this market, what are the financing options for the initial purchase of the property? It seems the hardest part is to get the actual ball rolling whilst my knowledge is still in its infancy!  Finance would be taken on a personal level rather than as a LTD.  This would change in the future but at the moment would like to just get the ball rolling (unless acting within a LTD would give easier access to finance?).

    Second Property Mortgage - I have looked at the possibility of a second property mortgage (have factored into my costing the early repayment fee's etc).  Mortgage would be taken out in both myself and my partners names - My Mortgage adviser will be looking at what is available for us.

    Bridging Loans - I know very little on these.  As I understand they are short term loans with high interest payments, normally between 6-12 months.

    Any other forms of finance - ?

    As mentioned above, and advice would be greatly appreciated.  Would be fantastic if someone had been through the same situation and could give any pointers.

    Thanks

    Darren

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    Hi Darren,

    As previously stated in your other thread along these lines, a reputable mortgage broker is the best person to speak to about all of this.

    I am not a mortgage broker, so I can only answer in very general terms.

    Second Property Mortgage - I have looked at the possibility of a second property mortgage (have factored into my costing the early repayment fee's etc).  Mortgage would be taken out in both myself and my partners names - My Mortgage adviser will be looking at what is available for us.

    This is an increasingly popular way of releasing equity and is discussed here.

    Bridging Loans - I know very little on these.  As I understand they are short term loans with high interest payments, normally between 6-12 months.

    Bridging loans are generally only available to more experienced investors with a track record.  They are more expensive and more high risk.

    Any other forms of finance - ? 

    You can get unsecured lending up to £25K.   That would double your savings pot.  You could potentially look at buying low value/umortgageable properties for cash, adding value so that they are worth more than £50K, and then refinance on BTL mortgage to pull out as much of your cash as possible.  Use some of it to pay back the unsecured loan.

    The 10 best U.K. towns or cities to invest in for under £50k 

    Hopefully that gives some further insights into what might be possible?

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    Vanessa Warwick Landlord and Co-Founder of PropertyTribes.com **5 reasons to get your FREE portfolio review NOW**

    Thank you as always:


    Second Property Mortgage - This is an increasingly popular way of releasing equity and is discussed here.

    Thank you.  Will have a read through the information.


    Bridging Loans -  Bridging loans are generally only available to more experienced investors with a track record.  They are more expensive and more high risk.

    Yes - I thought this option would not be available


    Any other forms of finance - ?  You can get unsecured lending up to £25K.

    Something that had popped into my mind, but I had not looked into detail - Will definitely have a look at this option.

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    " I aim to flip within a 6 month time frame, and have currently factored all my costs around a 6 month tenure (Mortgage payments/council tax etc). "
    " I have looked at the possibility of a second property mortgage "

    Just to confirm you have been looking at Short Term Bridging Finance costs and not Term Mortgage Costs?
    Mortgage Lenders offer you finance on the foundation that it will be over a long term. They fall out very quickly if abused for Six Months and most have "early repayment charges" to prevent this short term use.
    If your mortgage broker has been looking at Second Home Mortgages or Term Mortgages for flipping property, then id start looking elsewhere for your financial advice.

    " what are the financing options for the initial purchase of the property? "
    You may have some minor issues - for example tell your mortgage lender that you do not own a residential mortgage.
    Whilst it is good that you have existing investment properties in the background, not having a mortgage where you ride can reduce lender opportunities.

    " unless acting within a LTD would give easier access to finance? "
    Prior to 1 January the decision to look at Limited Company was one to discuss with an accountant for Tax Purposes.
    Though since January and new PRA Buy to Let Affordability rules - you can often borrow more in a Limited Company than you can in personal name. If you want to invest in personal name then that is the default if your mortgage advisor is saying that the rental does not meet the stress test for the loan amount you require. Then LTD Company buy to let is an option for you.

    "Low Value Properties"
    This too opens up some difficulties, in that mortgage lenders have "minimum value" and "minimum loan" requirements.
    Whilst Bespoke Finance has access to Micro-Bridging, Micro-Mortgages and a few lenders do offer rather small mortgages - it is something to watch out for.

    "I aim to flip within a 6 month time frame"
    The person buying from you may encounter the "Six Month Rule". This was put in place by mortgage lenders to prevent "flipping" in which the vendor does not add value to the property.
    So you should take into account (never mind the potential of low demand to purchase your flip) a longer period in your calculations.

    Specialist Mortgage Broker for Property Investment

    If you would like some specialist mortgage advice then Bespoke Finance can assist. They are FCA regulated so will be able to assist if required to release equity from residential properties - be that further advance, remortgage, 2nd charge and so forth. Though the mortgage advice company specialises in property investment and has access to Bridging Lenders, 2nd Charge Lenders and Mortgage Lenders. The full suite of mortgage advice for property investors.

    You can contact Bespoke Finance on 08009202001 or email hello@bespokefinance.org.

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    Looking for the Best BTL Mortgage? Call the Specialist Team at Bespoke Finance. The above is not financial advice, its me rambling - just passing time on a coffee break.

    If someone could clarify for me, Ive seen a post regarding someone who purchased a property as BTL, increased its value and then remortgaged to release the equity (but can I find it?!? lol).

    * Property purchased at £50k BTL (25% deposit at 12,500).

    * Property has refurb, which increases its value to £70k


    * At £70k value, if the property is remortgaged to release the equity, does the lender:

     1/. Release 75% of the new market value (so keeping the 25/75 ratio) - So minus initial deposit of 12,500 + 5,000 for new increase = £15k released equity

     2/. Initial 25% deposit is unchanged, meaning £20k increased value given on the initial deposit of £12,500 - Full 20k equity is released.


    I would assume that as a remortgage is essentially a new mortgage, the 25% minimum MLV would need to be continued?

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    The lender might, in theory, release up to 75% of the new value - depending on what rental income the property would support.

    Out of this money, the original mortgage would be redeemed, and you would be left with the difference.

    It is very unlikely you would able to refi all your money out.

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    Vanessa Warwick Landlord and Co-Founder of PropertyTribes.com **5 reasons to get your FREE portfolio review NOW**

    You say In Theory for what the lender may release, what in your experience would the lender release?

    Yes, I have calculated that you would not get the full return of what has been spent, but you would get it at a lower cost than if you bought a 70k BTL property outright?

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    I say "in theory" because there are many issues that may arise, such as the valuer not valuing the property at the value, such as the lender declining to offer a remortgage, such as the rental income not stacking.  I can only talk generically, not offer experience, as it depends on the lender, the valuer, the mortgage product, the criteria etc.

    I don't understand the second question, sorry.  You would build in more equity buying BMV with finance and then adding value, than buying a finished property at the full market value from the get go, if that is what you mean?

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    Vanessa Warwick Landlord and Co-Founder of PropertyTribes.com **5 reasons to get your FREE portfolio review NOW**

    I don't understand the second question, sorry.  You would build in more equity buying BMV with finance and then adding value, than buying a finished property at the full market value from the get go, if that is what you mean?

    I'm thinking (in an ideal world):

    * Purchased property at £50k + Refurb + Remortgage at new £70k value, then release newly created equity,

    As an "overall" cost would be lower than simply

    * Purchase property at £70k



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    Ok......  Examples below.  Figures are estimations for example purposes, but more so that I'm fully understanding in my own mind the general idea and thought planning process.  Im sure someone can point out the glaring error that ive probably missed!  Big Grin

    * 50k purchase includes renovation costs to bring it up to a 65k value.  * 65k purchase is as it says on the tin!


    50k Purchase                                                                     Straight 65k purchase             

    12,500 Deposit                                                                    16,250 Deposit

    4,017 Purchase costs                                                           4,560 purchase costs

    6,750 Renovation

    23,267 Gross Total Spend                                                    20,810  Net Total Spend

    > Property re-valued & re-mortgaged at £65k

    15,000 Created equity ​(releasing 11,250 actual £ )

    - 3,750 increased deposit (new 25/75 @ 16,250)

    - 23,267 Gross Total Spent

    12,017 Net Total Spend                                                        20,810  Net Total Spend

    -8,793 on buying at £65k

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    This is how I would calculate it:

    Purchase price

    Loan at 75% LTV

    New value

    New loan at 75% LTV

    Cash Released

    Equity in property

    Expenses

    Expenses minus new equity

    Total "own cash" required

    65000

    48750

    65000

    48750

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    16250

    4560

    4560

    20810

    50000

    37500

    65000

    48750

    11250

    16250

    10767

    -483

    15767

    So if you could buy cheaply and add more value than it costs to do the work, then this is better.  That's a big "IF", and if some of the low cost comes from you doing work yourself, you should deduct from the "profit" the value of your time spent. 




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