This is one of the most common questions posed to me by one-to-one clients. My initial answer is always the same, I am not qualified or insured to give financial advice – you should only take financial advice from a registered professional
I will always listen to their situation and share my experience. I have a huge Filofax of professionals who specialise in different aspects of financing. One of the keys to this, and most aspects of property development is finding the right person for the job
By finding someone who specialises in a particular niche you can utilise their experience and knowledge. Over time you can build up a handy array of contacts that can help guide you through the process. When starting out, it can be extremely daunting to know who the best person to use is, with everyone saying they have the answer
In my experience financing has been one of the most stressful parts of developing property. The cheapest form of borrowing is generally a residential mortgage. When I started out, I was renovating my own residential property, so was able to utilise these (you do need to make the lender aware and / or get permission for some work though)
This is fine for buying the property, if you have a big chunk of cash in the bank and can afford to do all the renovation work then that is great – sadly this was not my journey in the early days. Funding a renovation when you are already leveraged with a high LTV (loan to value) on your mortgage can be extremely challenging
I’ve utilised most options over the years, from bank loans, credit cards and loans from individuals. The main challenge for me in recent years has been the affordability calculator that the finance industry now needs to conform to. This really came into play after the 2008 credit crunch (aka massive balls up by the banks)
The reason behind this is to ensure that people do not over leverage themselves, borrow more than they can afford and not be able to pay it back. The finance industry uses an affordability calculator to see how much you can safely borrow. They will consider all of your outgoings – thus it’s going to get even more challenging with the energy costs escalating the way they are
Their preference is for people to have a PAYE (employed) job, that is considered far safer than someone who is self-employed. I struggle with the logic of this, essentially, they are saying that the company owner is more likely to lose their job and income, than someone who works for them . . . but what do I know!?!?
Having always been self-employed and at times had lower than ideal earnings, has meant it’s been extremely challenging to raise finance. When I was nearly finished with Otterhead House, I had under £200,000 in borrowing against a property which at the time was worth well over £800,000 (only 25% LTV). Even though there was £600,000 of capital sat there (meaning extremely low risk to any lender), no one would lend me anything due to the affordability calculator. I even got refused bridging loans as they deemed me too high risk (be extremely careful around bridging loans, they are very expensive and should not even be considered unless you are 110% sure you can repay on time – again seek professional advice)
I got through it, but it was extremely challenging and stressful, it involved A LOT of thinking outside of the box and being creative
My number one piece of advice to anyone starting out is to ensure that you get your house in order, what I mean by that is;
- ensure you have a good credit rating (If its currently not so good put effort and energy into improving it – websites like https://www.moneysavingexpert.com/loans/credit-rating-credit-score/ can help)
- Get saving – cash is an absolute necessity for property development
- Speak to mortgage advisors – understand what you need to do to put yourself in the best position
Just these simple steps will make a huge difference
For those who are keen to start their journey, I have created a Free mini course, it’s packed full of useful info
By the end of the course, you will be able to;
- Get yourself in the perfect position to invest in your first property
- Understand how to minimise risk with your first property investment
- Point out what REALLY adds value to any property renovation
- Maximise the end sale price of your first investment property so you don’t leave any money on the table
>>> Click here to sign up and get started on the journey >>>
As always, if you have any thoughts or questions on this or anything else property related, I would love to hear from you?
Cheers George B
