We are increasing our current property portfolio by 50%
As breifly mentioned in our previous post, we already have two succesful buy to let properties and have decided to get a third.
So there are 2 inital steps required to get things moving:
1) Funding a Buy to Let Property
2) Finding a Buy to Let Property.
Let’s look at the first ston first!
Funding a Buy to Let Property
There are several options to Fun a Buy to Let Property.
a) Use your existing savings
b) Raise funds from equity on your home
c) Raise funds from equity in your existing property portfolio
d) Borrow or get given the money from rich relatives and friends
We’ll briefly discuss the Pros and Cons of these different methods of financing your buy to let property here and may link to more detailed artices later.
a) Use your existing savings
If you have existing savings earning minimum interest in savings and builing society accounts, this can be a good way of funding your property purchase.
One disadvanatge is that you won’t be able to claim tax relief on any mortgage interest.
b) Raise funds from equity on your home
If you are living in a home that is worth £200,000 and you only have a mortgage of say £50,000, then you have £150,000 of available equity.
You could remortgage your existing home to raise the finance to purchase your buy to let property. In the above example, a 75% loan to value mortgage on a property worth £200,000 would result in a £150,000 mortgage. Deducting the £50,000 existing debt on your current property would mean you would have £100,000 available to fund your buy to let purchase!
This method has several advantages:
- All the £100,000 could be used to purchase the Buy to Let property – you don’t have to find a seperate deposit.
- The interest charged on you normal household mortage is typically 1.5% less than a buy to let mortgage
One disadvanage is that you won’t automatically be able to claim back tax relief on the mortgage interest payments. Most Accounants differ on the approach, but as long as you make it clear that the sole reason for remortgaging your home was to raise funds for buy to let purchases, then in theory you can claim the tax relief. However be prepared to argue your case with the tax inspector in the event of audit and their decison might not go your way.
c) Raise funds from equity in your existing property portfolio.
This is the method we are using. We currently have 2 properties:
Property 1 was purchased in June 2003 using our savings and cost £28,000 when purchased. In November 2011, it is worth in the region of £50,000 to £60,000. At the peak of the UK housing market around 2008, similar properties were selling for as high as £67,000.
Property 2 was purchased in April 2007, just before the UK housing market peaked. It was pruchased using funds raised on the equity of our home and cost £76,601 when purchased. In November 2011, it is worth in the region of £65,000, so we are taking out a 65% loan to value buy to let mortgage, which will provide us with a loan on £42,250.
d) Borrow or get given the money from rich relatives and friends
We are unable to tap in to this source of funding, but if things continue as planned we will be able to help out children out in the future so they can get on the buy to let property ladder themselves.
Finding a Buy to Let Property
So once you have the funding ready, it’s time to find a suitable buy to let property. We will share our method for finding inexpensive buy to let properties that have good rental income yield in a future post.