Spoiler alert!! – No money down is rare to non-existent in property purchasing.
I am approached on a regular basis with the key requirements from an investor which are:
- Highest loan to value (LTV) – meaning they want to use as much funding as possible.
- Lowest Rate – meaning the interest rate applied and therefore the cost of the money.
In contrast – so you are aware lenders generally operate the reverse in response – Highest LTV is the most risky so attract the highest rates. However generally speaking the rates are set at 75% LTV and below and can be fixed for up to 10 years on an interest only basis which can be incredibly cheap.
Most property investors follow a simple strategy of leveraging as much funding as possible, as cheap as possible so they can keep as liquid as possible – this enables them to take advantage of any investment opportunity that presents itself to them and they can make more money.
Sometimes I am approached with a requirement to fund 100% of the LTV. This is effectively a no money down deal. The usual outcome is no lend and that’s because all lenders work within the concept of ‘hurt money’.
Imagine you want to buy a £100k property, you need to spend £10k on a refurbishment and you are increasing the value by adding a room or converting into a small HMO. When the property is complete the value will increase to £140k. At this point you can re-finance with a long term buy to let mortgage and tenant the property for a long term gain or simply flip it for a quick profit. This is a straightforward property deal / project.
Now imagine you got the full amount funded with no funds yourself. If there is a problem with the property, refurbishment, planning complication or otherwise its rather tempting to throw the keys back and walk away as you actually don’t have any investment in the property unless you complete the job. Something could happen in your personal life, who knows anything could happen. You don’t have any money in the deal so it doesn’t hurt enough to motivate you.
When the banks were caught highly geared in the last property crash they found the customers all too willing to walk away if they had no skin in the game or little to lose. So now the lender needs to know there is hurt money – the loss you will incur personally should something go wrong and motivate you to make it right and protect the project along with the lenders interests.
For this reason you will rarely if ever find a 100% LTV lender. So the concept of ‘no money down’ property acquisition deals is bogus. There is a concept of no money down lease option deals which is not property procurement – it is rent to rent. This is the concept of offering a landlord a guaranteed rent for her property and making a margin on letting it yourself. The trade off is that the landlord has guaranteed rent for a long term period from you, which is why they agree to a discount on the rent you pay and you have the opportunity to rent the property yourself at full price and therefore make more in rent than you pay to the landlord. You also offer to buy the property from the landlord when you can at an agreed price (the option piece), but you will still need a deposit to fund this purchase.
I understand the concept of ‘rent to rent’ and it is taking on all the liabilities of a landlord without the upside of the asset appreciation. Any void periods will be painful as will any spending on maintenance or repairs as these are just a pure financial cost / loss. If you were the owner of the property you could at least offset losses against capital appreciation. For example you could have a 10 month void period @£500 per month = £5k but the asset appreciates by £5k so your break even.
If you see a ‘no money down property deal’ advertised as a viable property investor strategy – please be aware this is not a property procurement deal. I am not saying rent to rent is not a viable strategy that many property investors use to generate good cashflow. If you can take a HMO property which fully let provides £2000 per month in rent and you can pay just £1000 to the landlord then ‘on paper’ you can earn £1k a month income, then multiply that by 10 as you repeat the exercise and you can enjoy £10k per month in income. Sounds great but if you had 10 properties each with 4 tenants thats 40 tenants your managing, 10 properties your paying the bills for, 10 properties your maintaining and repairing etc lots of liability with no security.
A property deal is generally considered to be a purchase so a ‘no money down property deal’ can be a little misleading. If you want to invest in and buy a property using lender funds in the process here are some basic guidelines:
- Generally lenders will offer up to 75% LTV.
- If the project requires a refurbishment the lender can also fund this, generally, to a maximum of 85% LTV. For example £100K purchase + £10k refurbishment could leverage £85k in lender funds i.e. 85% of purchase price.
- Lenders may request personal guarantees (PG’s) from the borrower as an additional security.
In summary you need to budget for a 25% deposit and there are very few exceptions.
Where the exceptions do exist the funding line is usually very expensive and may hurt more than finding the deposit. This is a very niche area of (mezzanine) finance and doesn’t really apply in straightforward property deals, it is more likely to come up in a development scheme.
For the seasoned professional or the new entrant – Specialist Property Finance has navigated the minefield of funding property deals so you can use our experience and expertise for your projects and portfolios. Drop us a line using the contact page so we can arrange a call to discuss how we can help.