Property Expert Nick Statman on Invest in Buy-to-Let: Once you’ve decided you want to jump into the buy to let investment strategy, it’s time to start finding ways to finance it. Raising capital for an investment can be one of the most challenging and time-consuming parts of an investment project, and buy-to-let properties often require more than just the cost of the home. You also have to consider the purchasing fees and the costs associated with upgrading and refurbishing a home before you can start accepting tenants and making income.
Seasoned investors will tell you that there are many ways to raise capital for a buy to let property, and implementing one or two of them at a time can help you raise the necessary funds quickly.
Save Up
The first way to raise enough capital for a buy to let property is the old-fashioned way: save it up. This method requires time, discipline, and patience, but in the end, it allows you to pay for an investment property without paying interest. The buy to let industry is fast-moving, so waiting to save enough capital for a property may not be realistic for all investors. While you’re saving, you can implement some of these other financing options to help you achieve your dreams of investing in buy-to-let properties sooner.
Mortgage
The next option is to take out a mortgage or a property loan. This is a common way to borrow money to use toward a property investment. When you refurbished the home and it is ready for tenants, the monthly rental will go towards paying off the mortgage. The monthly rent should follow the 1% rule: the monthly rent should be at least 1% of the total purchase price of the home. The higher this percentage, the faster you can pay off your loan. Check with your bank about loans targeted especially to property investors.
Crowdfunding
For investors who want to think outside of the box, crowdfunding can be an option. By listing your project and financial needs on a crowdfunding platform, you can attract the attention of interested investors. These investors can contribute money to the cause in exchange for a portion of the ownership (and profits) of the investment.
Some of the benefits of raising capital for your buy to let using a crowdfunding platform include
- The ability to diversify their financing strategies
- Low investment minimums
- High dividends
Private Loans
Another way to generate capital for a buy-to-let property is to take out a private loan. This could be a personal loan from a friend or family member (be careful about mixing family and finances!) or through a private lender or business partner. Regardless of who you borrow from, keep in mind that they will expect the loan to be completed, paid back promptly, and often with interest.
To find a private lender, many investors start their search using the circle method. The circle method breaks your private lender search down into your primary circle, your secondary circle, and your third circle. Your primary circle includes your family and friends and is usually the first place to start when looking for a private loan. These loans tend to be easier to obtain because the investor knows you, and there is (usually) very little competition for these kinds of loans. The downside to these loans is that mixing friends, family, and finances can put a strain on personal relationships.
The secondary circle is the friends, colleagues, and investors of your primary circle. This group, because they don’t know you personally and may not be as invested in the project, is usually slower to say yes to a personal loan.
The third circle includes people who are removed from your personal circle. They are investors and people who you don’t know, so it takes a lot of work and time to get connected. However, this circle is where the big money is. If you can connect with these people and pitch your project right, you increase your chances of getting the financing you need.
Home Equity
Many seasoned investors with more than one property use the equity in one home to finance the mortgage for their next home. This starts a chain reaction, allowing investors to buy property, collect monthly rents from multiple tenants, and continue the cycle. You can also tap into your home equity line of credit and use the funds to refurbish or upgrade an existing rental property to appeal to a higher-paying demographic of renters.
The Takeaway
There are many benefits to adding buy-to-let properties to your investment portfolio. This strategy allows investors to generate multiple, steady streams of income. Not only can you earn money through renters, but also through capital growth. Buy-to-let properties are great for new investors because they are tangible assets that can be monitored as you learn the ropes of property investing. Raising capital for it can be a challenge, but knowing your options can help you make informed and confident financial decisions. Want to know more? Let’s connect.
