Finance: The Barrier To Property Investment
Finance is the barrier to property investment. If you want to get into property, you need access to it. There’s no way to avoid it. Gone are the days where people used to be able to get started with zero money down. Now, if you want to get into it properly, you need both cash in your pocket and access to wider lending.
It used to be the case that you could get started in property investment by putting “no money down”. There were lots of different products and schemes out there to help you do that. Now – those deals don’t really exist. At least not from the lenders. If you’re lucky you may find yourself a good “rent to rent” opportunity. But if I was you, I would avoid – those sort of things can get too complicated.
That’s the thing about property now, it’s not just open for everyone and anyone to get involved. There’s one big barrier to entry which stops the masses from flooding the market – finance.
To get into property, you need two main things:
- Cash for a deposit.
- Access to finance – either bridging loans or a mortgage.
Cash For A Deposit
You don’t tend to see many young property investors. That’s mainly because property requires a certain amount of cash savings that you need to invest up front in order to get into the game, let alone make it profitable.
On top of that, you generally also need to have your own residential property that you live in. Property for investment is generally done through a second property. (Although don’t be completely put off if you aren’t already on the property ladder, there are ways you can make money through property with your own place of residence – letting a room out for example).
So that’s quite a big barrier to entry already. A property in your own name – which you already will have stumped out a cash deposit on. Plus, enough cash to be able to invest in a second property.
What makes it even harder, is the cash you need for an investment property tends to be higher than if you were buying for yourself. Why? Because lenders only tend to operate with a 75% LTV mortgage or loan. So straight away, you need a minimum of 25% of the property valuation to even put an offer together. The obligation doesn’t stop there though, if you read my article on “Costs To Consider When Flipping A House” you’ll know that there’s much more to investing in a property than the initial up front cost.
So how much do you need to budget?
- 25% for your cash deposit.
- An additional 4% (roughly) for fees associated with the purchase.
- An additional 10% for renovation costs and any fees associated with selling / letting the property after (If you choose to find a property you can add value to).
All in, you’ll need 29-39% of the property valuation in up front cash. These figures are just indicative and not exact, so please do your own calculations before committing to anything!
On a £150,000 property – that’s between £43,500 & £58,500. The more expensive the property, the more you’ll need.
Access To Finance
Great, so you’ve got the cash for a deposit together. Now what?
Well, you’ll need to get access to that 75% LTV finance we talked about earlier.
It’s worth noting at this stage that for some folks who are in a fortunate position to not need finance to invest in property – you could do it just with cash. But a word of caution there – what makes property so lucrative in a lot of situations is the power of leverage. You’ll also be depleting your ROI on cash spent by investing solely in cash – see my calculator to do the maths. So, for me – that means making the most of available finance.
Getting access to property finance for investment isn’t quite the same as when you’re financing your own property. Different lenders have their own specific rules but typically speaking most will require you to have a regular income already in place so you can pay any shortfall in a buy to let mortgage. I won’t go into the specifics here – you’re best of speaking to a good broker.
Unless you are going down the full cash route, if you’re not able to get access to finance for whatever reason – this will stop you dead in your tracks. So before you even think about taking the plunge, take some specialist advice to see if you’re able.
So, Finance – The Barrier to Property Investment. Is the Prize Worth It?
Well, All I can say at this stage is that from my experience so far – absolutely.
But, that’s exactly what this website is here to do – give a full account of my journey into the world of property. Stay tuned as I publish my Monthly Income Reports and you’ll be able to make that decision for yourself.
New to the site? Check out my About Page for what the journey has been like so far!