How to fund an investment property that needs a lot of work
Short-term finance can help you capitalise on opportunities, but you need a clear exit strategy, says Ben Lloyd, head of affiliates at Roma Finance
Sometimes the most attractive returns come from the least attractive properties. Those that involve risk but offer landlords potentially high yields.
In the right area and with the right know-how, savvy investors can turn even the ugliest property ducklings into profit-making investment swans.
But only if you can find the right funding solution.
Depending on the state of the property you want to buy, a traditional buy-to let mortgage may not be an option.
Mortgage lenders usually want to the property to already be in a lettable state, with at least a working kitchen and bathroom. Although some specialist lenders offer refurbishment buy-to-let mortgages, most have been pulled from the market during 2020.
Buy-to-let product numbers have plummeted, as lenders look to manage risk and balance volumes, particularly for landlords with smaller deposits. At the beginning of March, there were 2,897 buy-to-let mortgage available to landlords but, by August, this had fallen to just 1,660 (Moneyfacts).
It’s not just a problem of fewer deals. Bigger deposits are required, rates are higher, criteria tighter, and providers less able to be flexible where a case falls out of policy.
The upshot for property investors is a less accessible buy-to-let sector and, if the property needs work, you’ll struggle.
But there is another way.
Luckily, there are funding options designed to help landlords to buy property and fund any necessary refurbishments.
Bridging loans: These short-term finance products provide you with quick access to funding to buy an investment property and get it ready to let. They suit a wide range of circumstances, not just refurbishment, and can be taken over a term from one to 24 months.
Bridging finance is available from a diverse range of providers, some of which assess what they will lend based on the property’s value, and others, such as Roma Finance, that focus on your finances, skills and experience, or a mix.
Development finance: If the property you want to buy needs more significant refurbishment work, you’re edging into development finance territory. There are no industry-wide definitions for this but, as a rule of thumb, if a property isn’t watertight, it probably requires development finance. It’s still easy to access but loans are calculated using the potential value – or Gross Development Value – rather than the purchase price.
Commercial finance: If the property is to be let to a business rather than a residential tenant, commercial finance options are available, often through the same providers of bridging and development finance loans.
Know your exit strategy
There are plenty of options, but one rule applies to them all. If you take a short-term finance solution to purchase an investment property, an exit strategy is essential.
You have two choices at the end of the term – repay the borrowing or refinance.
If you’re buying the property as a long-term investment, repaying the loan (by selling the property or using other funds) is unlikely, so refinance options need to be considered.
These are your options:
Refinance to a mortgage: Assuming the refurbishment work has been completed and the property is now in a condition to let to tenants, you could move your borrowing to a standard buy-to-let mortgage. Despite the choice narrowing this year, there’s still a wide range of options for landlords with at least 25% equity.
Ask for an extension: This a temporary option if there’s been a delay to the refurbishment work and you simply need another month or two to get the property into a lettable condition. In the current market such delays are common, as a result of lockdown as well as shortages or raw materials for building work. At Roma Finance we have offered clients extensions of up to four months to account for this. Good lenders would rather work with customers to reach a solution, so keep communicating if you think you are going to struggle to repay your borrowing.
Refinance to another short-term loan: This is known as rebridging. Your existing bridging lender is well placed to offer it, or you may be able rebridge to a different provider. Either way, the lender will want to see your long-term repayment plan.
Flexible funding: A handful of providers offer agile funding solutions that flex between short-term and longer-term loans as your needs require. At Roma Finance, our bridge-to-term product is an initial bridging loan that can be converted to a buy-to-let mortgage on completion of the works, and we’re flexible about when that switch happens, according to your needs and the progress of the work.
There’s no escaping the reality that the buy-to-let sector is far more challenging in 2020 and choices are currently limited, but it doesn’t need to thwart your property ambitions.
Whether the property needs a little work or a major refurbishment, short-term funding such as bridging loans or development finance remain easily accessible, fast, competitive, and flexible.