The Complete Guide To Property Finance: Toolbox Of 50+ Financing Solutions Beyond Buy-To-Let

By Richard W J Brown

Book Objective

The expectation is for you to be better equipped to go and do more property deals, by accessing more sources of property finance.

It includes over 50 of the most common real estate property finance solutions and strategies. These form 'tools' for y

• Language: English
• Publisher: Casametro Limited
• Release date: Dec 21, 2021
• ISBN: 9781739832018

Richard W J Brown

Richard is an experienced property investor, businessperson and consultant, with over 30 years' experience. He now owns a multi-million-pound portfolio that spans 4 countries utilising a number of different property and property financing strategies. He has the vision to use his property journey to leave a legacy far beyond his immediate family by supporting others and social enterprises/projects for generations to come.Back in 2008, as a divorcee, with no home of his own, in debt, expenses higher than income and a giant hole in his pension, his starting position was not the best! Through property investment, development and related property businesses, over a relatively short time, these challenging issues have fully turned around, such that he could retire today if he wanted to.Richard is a passionate student of property investment and is a prolific knowledge sharer on forums, social media and through his own blog website www.thepropertyvoice.net, The Property Voice Podcast and as a regular columnist in Your Property Network magazine. He has a strategic approach, with an outlook as an 'investor' and solution-minded problem solver rather than as purely a 'BTL landlord' and passionately believes in value creation as the best property investment principle.Richard has mentored in a variety of situations with a passion for seeing people grow into their full potential and capabilities, turn around bad situations and achieve their life goals. As an author, he tries to share more than just the basic book, with his titles including rich text, colourful graphics and a bunch of additional bonus resources to reward readers for backing his work.

Book preview

Introduction and Welcome

The realm of property investment and development is an expansive one and so too is the related world of property finance. When I set out to write this book, I was clear and deliberate in my mind that I did not want to write a boring book about Buy-to-Let mortgages! This is a book about property finance with a very broad definition, scope and with 50+ different property finance strategies shared, hopefully a wider span of interest too.

My definition of property finance is this:

Property finance comprises payment over time and/or a financial contribution and/or control without necessarily ownership of our property investments and developments. Property finance is therefore the combination of the three levers of money, time and control over property assets.

This book will take you on a journey through all the areas of property finance. It is broken down into three main sections, as follows:

Institutional finance – this is what most people think of when they think about property finance and includes buy-to-let mortgages and commercial loans, bridging finance and development finance and, to a lesser extent, consumer finance.

Alternative finance – starts to take us into less familiar territory and, includes sources such as crowdfunding, peer-to-peer lending, friends and family, becoming our own bank and broker, private finance (including joint ventures) and then bonds, shares and mezzanine finance and finally grants and soft loans.

Creative finance – we have certain methods of financing our property acquisitions that might not, at first glance, seem like a property finance source at all. But not in my book! These could include property and land options, sub-lease or rent-to-rent structures, 100% vendor, developer and bank finance, assisted sales, instalment contracts and exchange with delayed completion, along with the wide array we will see in the ‘Best of The Rest’ chapter, including: adverse possession, assignable off-plan contracts and valuation arbitrage.

There is an argument that this could have been three separate books but, equally, it is not an in-depth tome on each sub-topic either. So, it will cover what you need to know in each of the topics in outline, along with some top tips to add small nuggets of advice from my personal experience intertwined. Consider it a signpost for you to explore each of the topics further, if you would like. It is also intended to form a toolbox comprising the various tools of the property finance strategies and techniques covered. As with any toolbox, there is a tool for every job and every job could lead to using more than one tool. Of course, there are the odd tools in the toolbox that rarely or even never get used – well, there are in my toolbox at home anyway!

In addition, there are a number of extras that make the book even more expansive and comprehensive, which I have chosen to include as Book Bonuses. This includes case studies on many of the property finance strategies, along with additional content and other supporting resources. I would highly recommend that you get a copy of these Book Bonuses to add greater richness and depth to your reading and understanding of the topic. You can get the Book Bonuses here: https://www.thepropertyvoice.net/bookbonus/.

My first book, Property Investor Toolkit, sets out the fundamentals of property investment and has been well received and well reviewed too, thankfully. You might like to get a copy of that book to accompany this one, especially if you are new or in the early stages of your property investment activities. Property Investor Toolkit does discuss the principles of property as an investment, which is foundational to any form of investment. So foundational that I included a modified excerpt of that section here for you.

Leverage and Cash-on-Cash Return

Leverage is the concept of using somebody else’s money to grow the size of our investment fund. The most common example with property investing is a buy-to-let mortgage, where we add funds from a lender to our own deposit to buy a property with the combined fund value.

Our leverage is the ratio by which we increase our own cash investment in relation to the property value. In the case where we can take out a buy-to-let mortgage at 75% of the purchase price (known as the ‘loan-to-value’), our leverage would be 4:1 excluding costs (£100,000 purchase price compared to £25,000 of our own cash).

Put another way, we can multiply our investment funds and hence our purchasing power from £25,000 up to £100,000 by using leverage.

Cash-on-cash return (COCR) is the amount of financial return we make on the personal cash funds invested, expressed as a percentage. Some people refer to this as return on capital employed (ROCE) or return on investment (ROI).

Our COCR is the net return on our actual cash invested. So, on a full year basis if our net income return in the example above were say £2,400, then our COCR would be 9.6% (£2,400 / £25,000). However, if we were to pay for that same investment property in full using only our personal cash funds, then the COCR would be 2.4% instead (£2,400 / £100,000).

This is a simple illustration to highlight the point and excludes a number of costs and fees for ease. However, it also demonstrates the power of leverage and how that can increase our investment purchasing power and investment returns. Leverage is another word for property finance in my world and so you could say that this book is really all about how to maximise our leverage and investment returns through property.

Financial Engineering

I like to think about applying many of the concepts within this book as a form of ‘financial engineering’. We can engineer a solution for our investment and development activities using elements of property finance outlined within this book. By doing so, we can not only magnify or multiply our investment returns, we can also grow and scale our investment and development reach at the same time. Personally, I have reached the point in my own property journey where I can look beyond myself and my immediate family’s needs and plan for my legacy. For me, this is the formation of a foundation that supports causes close to my heart; housing, entrepreneurship, learning and poverty. This spells out the word HELP, of course, so it will be the HELP Foundation. Property finance and the idea of financial engineering have been the means by which I now have this foundation as my life’s purpose, along with sharing my knowledge, such as through this book.

However, when I had my ‘Eureka moment’ in the mid-noughties and discovered all that property investing could offer, I did not set out then to form a foundation. I followed a process of what I now call ‘fix and flex’, where I set a course to achieve a specific outcome and then when I reached that, flexed it to an alternative, often higher outcome.

I started out by wanting to plug a hole in my rather inadequate pension. Realising that I had in fact fixed this with my very first property investment, I was then able to f lex the new outcome to quit my job or achieve financial independence you might say. Then, for my wife to quit her job, although she is very happy with her career and still chooses to work; although we have a nice lifestyle, fortunately. Then it became family legacy, where our three adult daughters would have sufficient means to support their own lifestyle choices. Let’s just say that they all intend to pursue a life purpose that is full of meaning and not so full of financial reward. It is our pleasure and wish to support them in their respective worthy quests. After that, it flexed to give back to and support future generations of people from less advantaged positions. That’s a personal insight that might help you frame or visualise how the tools shared throughout this book might help you to fix and flex the outcomes and causes in life that are important to you too. I sincerely hope it does.

There are a number of financial terms and concepts that are outlined throughout the book, which I endeavour to explain as we go. Some of the earlier chapters are foundational to many of the principles in the later chapters and so reading them in sequence might help. However, many of the chapters are standalone and can be read in isolation too. So, if you have a good grasp of the Institutional Finance options, for example, you could dive into the more advanced property finance concepts outlined in the Alternative Finance and Creative Finance sections. There are over 50 different property finance strategies covered in this book, so dig in and enjoy them all.

Disclaimer

The strategies and topics covered in this book are financial in nature and can be complex. Everybody’s situation is unique and so specific to them. This book is for educational purposes and many of the comments by the author and other contributors are personal opinions or ref lect our personal situation. Therefore, I strongly advise that you seek independent professional and tax advice before applying any of the strategies, tools or techniques outlined within this book.

Whilst I attempted to ensure that the content within is accurate at the time of writing, much is subject to change. A lot depends on external third parties, such as national and local government, lenders and the relevant legal, regulatory and tax authorities. In some respects, the book could be out of date or mention policies or products that no longer exist, are no longer available or indeed new alternatives have arisen too. Therefore, please make your own checks and enquiries in terms of relevance and currency of the content before relying too heavily on it.

The information available through this book is for your general information and use and is not intended to address your particular requirements. In particular, the information does not constitute any form of advice, whether financial, tax, legal, regulatory, or otherwise nor any form of recommendation by the author. The content is not intended to be relied upon by readers in making (or refraining from making) any investment decisions.

Acknowledgements and Thanks

A lot of the content has come from publicly available information published on government, regulatory, industry association and individual institutional websites. Some case studies and proofreading suggestions have been provided by friends and members of The Property Voice community – thank you kindly.

In addition, I have been supported by a number of people that have added greatly to the publication of this book in a variety of ways. My thanks go to the following people:

Helen Pollock and Catherine Williams from The BizBook Foundry for helping to make sense of my ramblings and present this book in such a wonderful way.

To Mafalda Casanova, who you can find on Linked In for designing the book cover and icons within.

To John Howard, property expert with four decades in the property sector, who provided the foreword to the book. Also, to Jayne Owen, Rupal Patel, Stephanie Taylor and Kemi Egan, who provided some kind words having reviewed the book before publication.

To friends and members of The Property Voice community that helped with case studies, proofreading and other notable contributions: Kemi Egan, Alice Williams (Pilot Fish), Sue Whittle, Damien Fogg, Dominick Hardy, Darren Millwood, Richard Corcoran, Martin Hetzel, Richard Parker, Matthew Saunders, Carl Gilbert, Daniel Theo, Lee Hall and Sergio Grande.

To the ever generous Stephanie Taylor, property investor and author of Rent to Rent Success, for providing some invaluable pointers on getting the message out about this book.

To the members of the Creative Finance Mastermind Group that was formed several years ago and helped to form some of the foundations and original content contributions upon which this book was built and developed: Kylie Ackers, John Burridge and Sundeep Vaswani. It has changed a lot since then, although you helped to start this off.

To my lovely wife, Catia Porto, who saw me disappear most weekend mornings for around six months to convert a rough draft into 80,000 words of what lies ahead. To our daughters, Natalia, Laura and Jessica for what you are and what you will become, supported by our property adventures.

To the team behind The Property Voice that help me to do the stuff that I either can’t or don’t like to do most of the time, in particular to Karen Tan and Nina Kaminskaya.

To all in my wider social and professional network that supported with likes, shares, words of encouragement and other contributions at various stages throughout this process.

Being of a certain age, there could well be someone that I may have inadvertently forgotten. If so and that’s you – thank you sincerely and please forgive me for the unintended omission.

Finally, to you dear reader. Thank you for purchasing a copy of this book. I am very grateful that you did and equally, I hope that you gain great value from your investment in yourself.

I have one small request. If this book has helped you in some way, why not consider ‘paying it forward’ and gift a copy to someone you know who could benefit by reading it? I will gladly replace your personal copy with a PDF version if you would like to gift your own book and still retain the content. I mentioned my life’s purpose with the HELP Foundation, and whilst the odd book royalty would help that cause, perhaps of equal importance is my wish to share my knowledge for others to learn from too. Please help to make that happen, with my sincere thanks and appreciation.

Now, settle down and enjoy the book …

Part One

Chapter One

Buy-to-Let Mortgages and Commercial Finance

What You Need to Know

Buy-to-Let (BTL) mortgages are secured loans, provided by mortgage lenders, specifically aimed at enabling the purchase of property that will be let out to tenants. Many property investors use BTL mortgages to grow their property portfolio more quickly. Borrowing large sums of money from a mortgage provider means that available cash can be spread as deposits across several properties rather than investing it in just one.

BTL mortgages are widely available with loan amounts of up to 85% of the purchase price of a property – known as the loan to value (LTV) percentage – in some cases. While 85% LTV mortgages do exist, most investors use 60% to 75% LTV products for the security of having equity in a property and because the interest rates are lower.

BTL mortgages were originally aimed at property investors that bought and rented property in their personal names, whether alone or with up to three others.. However, recently, more landlords and investors are choosing to invest through a limited company or a limited liability partnership (LLP). This trend accelerated markedly following the introduction of restrictions on the ability of individual landlords to reclaim mortgage interest payments as an allowable business deduction for tax purposes, known as ‘Section 24 Relief ’ or ‘S24’. Essentially, this makes BTL less profitable for higher-rate tax payers owning property in their individual names. It can be complicated to work it out, but as a rule of thumb, if you are already or will become a higher-rate taxpayer, then the profitability of BTL could be lower owning the property individually versus through a company, where the mortgage interest IS a fully allowable deduction – at the time of writing, at least!

Many lenders will offer BTL mortgages to both individuals and limited companies. However, not all lenders do offer BTL mortgages to limited companies and if they do, they may offer them on different, often less favourable, terms to a mortgage in someone’s personal name. The main reason for this is that a company or LLP has limited liability and so the risk of lending to them is higher than lending to an individual. For the most part, we will refer to BTL mortgages as one category, but do be aware that there could be differences between personal and business BTL mortgages.

TPV TIP: When weighing up ‘incorporating’ a property business, consider your long-term objectives and how professional you intend to be as an investor – not just taxation benefits. Keep in mind that a couple owning BTL properties together would need to earn over £100,000 jointly before they became higher-rate tax-payers, so it’s not as straightforward a decision as it might appear. Speak to your accountant and consider both the ‘now’ and also the ‘then’ in terms of your plans.

Let’s look at a simple example using 75% LTV. Imagine that a property has a purchase price of £100,000. Using a BTL mortgage you could borrow £75,000 (75% of £100,000) leaving a required deposit of £25,000 which you would need to fund from your own cash reserves. If you actually had £100,000 in cash then you could buy four properties of £100,000 in this manner, rather than buy just one property with cash. Please note that this simple example has not taken into account any of the associated costs with buying a property, such as legal fees, Stamp Duty Land Tax (SDLT), broker fees and so on.

The following sections outline the characteristics of BTL mortgages, highlighting important considerations that must be made when choosing a BTL mortgage product.

Mortgage Providers

Typically, BTL mortgages are provided by the major bank and building societies. In addition to these there are many specialist providers who target a niche audience, for example light or heavy refurbishment projects or properties with lease issues. One point of note is that a large number of lenders are members of the Council of Mortgage Lenders or CML. The CML has a code of practice that requires their members to adhere to. Non-CML members are not bound by that code, however. The reason for making this distinction is that sometimes you can agree more flexible terms with a non-CML member than a CML member. One of the most important distinctions is when it comes to arranging refinancing of a property, say after a refurbishment. Most CML lenders won’t allow you, nor an incoming buyer of that property if it were a f lip for example, to refinance the property for at least six months under the CML code of practice. Non-CML members are not bound by this provision and so could allow a refinancing much more quickly.

TPV TIP: If you are refurbishing a property and want to follow the Buy Refurbish Refinance Strategy or ‘BRR’, then if you can complete the refinancing after say 3–4 months with a non-CML lender rather than say 6–9 months with a CML lender, then you can recycle your funds under the BRR strategy much more quickly. This would then allow a greater ‘deal velocity’ or, in plain speak, to do more deals more quickly.

Due to the wide range of providers and products, with over 2,000 different products available at the time of writing, it advisable to consult with a mortgage broker. While you may have to pay a small fee for this specialist advice you often find that a broker is much quicker (it is their job after all) and you gain so much more in terms of a product that suits your own personal circumstances. You will also find that many products on the market are only available via intermediaries, so not consulting with a mortgage broker could actually harm your portfolio.

TPV TIP: Choose a mortgage broker that specialises in BTL mortgages and also has ‘whole of market’ reach to be able to access all lenders.

Borrowing Criteria

Every mortgage provider has different lending criteria but there are some criteria that tend to be very similar across lenders and products:

The monthly rental income of the property must cover the monthly mortgage payment. Lenders often use a multiplier of 125% for individual or company borrowers, although it’s 145% for higher tax rate payers buying in their individual name. This means that if your mortgage payment is £360 per month, then you need to achieve a rental income of at least £450–£522 per month.

As an individual you often need to have a certain amount of non-property income. This can be anywhere in the range of £20,000–£30,000 as a minimum. Some lenders will take rental profits into account but not all. Outgoings may also be taken into consideration by some BTL lenders.

You will often need to provide proof that you also own a residential property. This can sometimes be overlooked if the property you are buying is in a location far from where you live and work. Again, there are some mortgages available if you don’t own your own home but less of them than if you do.

Each mortgage applicant must usually be resident in the UK. If you are not a UK citizen you will need to provide evidence that you have the right to reside in the UK. There are some lenders that will lend to overseas nationals and/or residents but once again, fewer of them.

The provider will require that you pass a credit check. Any CCJs, unpaid loans or a lot of recent searches associated with your credit file will no doubt put you at risk of non-approval. There are some lenders that will still lend to you with an impaired credit history, which is often referred to as ‘subprime lending’.

Stress testing the rental income to cover any increases in interest rates often at 5% per year. This is in addition to the 125%–145% rental coverage multiple mentioned earlier.

TPV TIP: If you don’t meet all of these criteria, then a mortgage broker is likely to be an essential person to have on your team; they will know which lenders can be flexible or not. If you do meet all the main criteria, then there is an argument that you can save on broker fees by doing your own ‘whole of market’ search for a mortgage. So, use a broker to add value, save time or get you into a niche product that suits your situation.

Mortgage Types

There are three main types of BTL mortgages: interest only (higher risk by deferring the full mortgage balance until the end of the term but better cash-f low on the rental side of things), repayment (lower risk by paying down the mortgage but less cash is released from rental income) and part repayment (if you want to lower your risk/debt level but cannot afford full repayment).

With an interest-only mortgage you only pay the interest on what you have borrowed. Monthly payments are lower, which improves your cash f low – but this does not pay off the principal sum borrowed. From the example above, if you choose a £75,000 interest-only mortgage on a £100,000 property with a 25-year term, then at the end of the term you will still owe the lender £75,000. However, by the end of this term:

Your property will hopefully be worth much more than the £100,000 you paid for it due to house price growth.

Your increased cash f low may have enabled you to either take an income during ownership or purchase additional property at an earlier stage than otherwise possible, so multiplying your purchasing power and/or compounding your investment returns.

Alternatively, you could set aside some of the surplus cash profits and repay some of the mortgage periodically to reduce your debt. This is known as ‘overpayments’ in the industry but make sure you check with the lender, as not all lenders allow overpayments and if they do they are usually capped at around 10% of the mortgage balance per year without an early repayment penalty being applied.

The outstanding principal sum of £75,000, due to inflation, will seem a lot less in 25 years than it does today. In fact, this would be the equivalent of around £40,000 assuming a 2.5% annual inflation rate expressed in today’s equivalent terms. That’s where inflation can work in your favour! Inflation reduces the effective mortgage debt outstanding, whilst at the same time increasing the value of your property to create ‘inflation equity’ over time.

Depending on the property performance and your investment strategy you could:

Sell the property, pay off the mortgage and pocket any profit.

Refinance the property and continue as before.

Refinance the property at a higher level (i.e. borrow more) and use the additional funds raised to buy another property.

Refinance the property and pay yourself a tax-free lump sum from the additional funds if investing as an individual.

TPV TIP: Beware of two potential traps with constant refinancing. Too much refinancing can put you into a situation of becoming an unwitting hostage to the taxman and/or a mortgage prisoner with the lender! There needs to be enough equity in the property to cover any debt, even in times where house prices fall, which they do occasionally, and the taxman needs to be paid their slice regardless of whether there is enough equity available to cover the tax bill.

Using a repayment mortgage, you pay the interest due on the