The primary reason why many choose to invest in a property is its high ROI potential and capital growth returns.
However, if you want to generate the expected returns, you must understand the funding behind the property investment itself.
It’s not just about getting financing, but doing it wisely!
The wrong approach can lead to higher mortgage payments during financial challenges. This can be a drop in property values or rising interest rates.
In this guide, we’ll help you make the best decisions for financing your investment property.
What’s covered in this guide:
What is investment property financing?
Investment property financing is the process of funding your purchase of a real estate property through a loan, mortgage, equity, and so on. The main goal here is to gain returns that far exceed your financing cost.
Now, this can be quite complex. Consider the fall of Commercial Real Estate (CRE) prices in the UK for 2024. This means more refinancing challenges, higher interest rates on property prices, and higher debt payments.
There are also trends that indicate costlier borrowings for businesses, vulnerabilities in market-based finance, and other economic challenges.
For the next 2-3 years, you must carefully choose your financing strategy, which we will also discuss further below.
👉 Resources related to commercial property:
What are the types of investment property financing?
To choose the right funding for your property investment, there are key types of financing options available. Each of these cater to different investor needs and property types.
Below are the main types of investment property financing you can consider:
1. Traditional mortgage loans
This is a long-term financing option that is provided by banks, credit unions, or mortgage lenders. In this type of financing, you borrow funds and repay them over time with interest.
This type of financing is important when looking for long-term growth through property ownership without paying full amount.
The interest rates for mortgages in the UK have been facing some challenges. Refer to the chart below to take an informed decision:
Pros:
- Long-term repayment terms, typically ranging 15-30 years
- Investors can purchase other properties
- Consistent monthly payments, easing your financial planning
- With time and appreciation on property, investors can increase their financial security
Cons:
- Strict criteria to borrow money in terms of credit and income requirements
- A 20-30% of down payment, which can limit access to the market
- Long approval process, involving paperwork, credit checks, and appraisals
Suitable for: This type of financing is suitable for investors who can meet the lending criteria and make monthly payments without fail.
2. Government-backed and specialised loans
Government loans are insured or guaranteed by the UK government. For instance, you can avail the Help to Buy (HTB) program and the Lifetime ISA.
On the other hand, specialised loans are for specific groups of borrowers. Such loans are favourable to them, making them accessible to other investors.
Considering mortgage rates have fluctuated, government-backed loans are an attractive option. Buy-to-let mortgages are becoming increasingly popular in the UK, generating high rental yields in some cities, up to almost 9% in 2024.
Pros:
- More flexible repayment terms that fit specific investor needs
- Access to larger loans to fund larger projects
- Consideration of rental income in loan approval
- Property portfolio growth
Cons:
- Certain loans require a track record in property development
- Extra costs for arrangement and deposits
- Some specialised loans come with higher interest rates
Suitable for: Investors planning to rent out properties, and for property developers and those that want to finance several properties under one mortgage.
3. Short-term and bridge financing
Short-term and bridge financing are types of property loans designed to cover immediate financing needs for a short period. This can range from 12 to 24 months, and are used to secure a property or cover financial gaps between transactions.
Bridge financing specifically ‘bridges the gap’ between selling an existing property and buying a new one. Sometimes, it’s needed when quick money is required. Hard money loans also fall under short-term property loans.
Pros:
- Arranged within days to act fast on opportunities
- Utilised for property purchases, renovations, or paying off a current debt
- No long-term commitment
- More relaxed criteria to avail loan
- Useful for refurbishments, increasing property value, or as a part of investors’ exit plan
Cons:
- Higher interest rates due to increased risk for lenders
- Shorter repayment period
- Chances of additional cost of borrowing
Suitable for: Short-term property loans suit investors who are planning to purchase, renovate, and quickly sell properties.
4. Equity-based financing
This allows you to raise capital by offering a part of your ownership in the property or project to other inventors in exchange for funding. Here, you will bring in partners or firms that provide capital in return for a share in the profits or ownership.
Equity-based financing is commonly used for large property developments or when you want to limit the amount of debt. This type of financing also includes crowdfunding, HELOC, and joint ventures.
Pros:
- No requirement to repay the capital
- Raise huge amounts of money
- Risk is shared among all investors
- Opportunity to pursue larger or more ambitious projects
- Attracts inventors or partners with valuable expertise
Cons:
- Shared profits with equity partners
- Loss of control
- Complicated process requiring legal agreements
Suitable for: Equity-based financing is ideal for investors who need large sums of capital for development projects. It suits those who can consider sharing ownership and profits.
5. Private and seller financing
Private and seller financing are non-traditional types of financing. An investor borrows funds directly from sellers or individuals rather than through a financial institution. These individuals can be friends, family, or private investors.
Seller financing, on the other hand, is where the buyer makes the payment directly to the seller over time without the need of a mortgage. This may involve private lenders or peer-to-peer lending.
Pros:
- Flexible terms for interest rates, loan conditions, and repayment schedules
- Faster approval
- Creative deal structuring for negotiation and repayment terms
- Less strict credit requirements
- Avoiding bank fees
Cons:
- Higher risk for lenders means higher interest rates
- Seller’s financial difficulties and legal issues complicate repayment process or property ownership
- Less common than traditional mortgage, marking limited availability
Suitable for: Those investors with limited credit history. These types of financing also suit those who are purchasing properties where sellers are motivated to close the deal and finance the purchase themselves.
How can you qualify for investment property financing?
Now, are you wondering if you are currently eligible for funding to invest in property?
Securing financing is an important step in your investment journey, and understanding what lenders are looking for can help you determine your eligibility.
Qualifying factor | Details |
Credit score | Lenders prefer a score between 640-750. A higher score improves mortgage terms and rates. |
Deposit size | Requires 20-40% of the property’s value. A larger deposit increases chances of better rates. |
Rental income | Expected rental income must cover mortgage repayments. Research the markets and consider renovation to enhance this potential. |
Property type | Different classifications (residential, commercial, etc.) have varying risk levels. Standard properties are considered more favourable for funding. |
Financial health | A stable income of at least £ 25,000 is preferable, though an improving income enhances your financial health. |
1. Credit score
Lenders look for investors with a strong credit score. It shows your creditworthiness and reliability as a borrower. This heavily impacts the mortgage terms, interest rates, and fees. In the UK, there’s no specific credit score requirement for investing in properties. However, most lenders prefer a credit score between 640 and 750 to make you more appealing.
If your credit score is below this preferred range, your application may be denied or you might be offered unfavourable terms. To increase your credit score, try to reduce existing debt, avoid opening new credit lines, and making timely bill payments.
2. Deposit size
This is the initial amount you put down towards the property purchase. It serves as a security for the lender. Most buy-to-let mortgages require a deposit of 20-40% of the property’s value. Very few lenders accept a deposit less than 25%.
The larger the deposit, the higher the chances of better mortgage rates.
However, if you fail to meet this requirement, you may not be eligible for certain mortgages. This limits your options and leads to higher fees and a costlier type of loan.
If you want to save for a larger deposit, create a dedicated savings plan and cut unnecessary expenses. You might also want to consider gift funds from family and friends, as long as you can prove their origin.
3. Rental income potential
Rental income potential is the estimated amount of income you expect to receive from renting out the property. This amount is important for covering mortgage repayments, as it assures lenders that you can cover mortgage repayments.
In the case your income is too low, your investment may be viewed as a high-risk project. Try to research other rental markets properly to improve your income potential.
You can also do renovations or consider properties that are in high-demand areas to boost rental yield.
Sometimes, expert help can prove greatly beneficial! Pluxa Property, a leading investment company in the UK with over 10 years of experience, helps you find the best market for rental yields.
Our team of experts have extensive knowledge of the UK property markets, helping you find profitable opportunities for you. Contact us today!
👉 Learn about best buy to let areas in the UK (updated statistics)
4. Property type
This is the classification of the property that is being purchased. It can be:
- Residential
- Commercial
- New build
- Non-standard properties, such as high-rise flats or unique architectural designs
Each property type reflects a different level of risk for lenders. Standard properties are generally viewed more favourably. Hence, you may not be eligible for specific types of funding if you plan to invest in non-standard properties.
If you’re set on a non-standard property, you can look for lenders who specialise in such investments. Or, you can consider getting a thorough property appraisal to strengthen your application.
5. Overall financial stability
Overall financial stability means your financial health. It includes your income, current debts, savings, and debt-to-income ratio. It shows the creditors your ability to manage financial obligations. A stable income ideally sits at least £25,000 per year.
A lack of such stability means you might be a high-risk borrower, which can most certainly lead to you being denied funding. One best way to improve your financial health is by increasing your income through additional investments or work.
What are the best strategies for securing investment property financing?
Now that you understand the do’s and don’ts of getting funding for property investments, let’s explore strategies that actually help you acquire that financing.
1. Present a detailed business plan (and a clear investment strategy)
A business plan has your business concept, the strategy to achieve them, financial estimates, and market analysis. It shows your lenders that you know your way around the market and understand the risks associated with property investment.
A clear investment strategy focuses on how you actually plan to invest in properties. This may include target markets, expected ROI, and property types. Present these plans to banks, private lenders, or partners to convince them of your competence and reduce risk.
To get started, use tools like Zoopla or Rightmove for property data and trends. You can include information of your research findings or data comparisons in your presentation.
2. Build strong relationships with lenders
You must develop trust and rapport with banks, mortgage brokers, and private lenders to avail better financing terms. You can also leverage these relationships for advice on funding options, preferential terms, and referrals to other funding sources.
You can start by networking through property investment seminars or attending local business events to meet lenders.
But before this, research local markets, firms, and lenders that specialise in property financing. Then, create a list of lenders, noting their strengths and weaknesses along with lending criteria. This also helps you create a better investment and business plan.
3. Diversify your funding sources
Do not just rely on a single type of financing, but rather use a combination of loans, government grants, and personal savings. Having multiple funding sources spreads risk and allows you to respond to market changes better.
Some sources are:
- Residential mortgages
- Buy-to-let mortgages
- Commercial loans
- UK government grants, such as Help to Buy scheme
- Local council initiatives for housing development
Create a funding strategy by determining the capital you need for your property investment. Then, rank the above funding sources based on accessibility, interest rates, and terms. You can then compare the pros and cons to make a final decision.
4. Partner with other investors
This involves forming joint ventures or partnerships to gather resources, share risks, and utilise each other’s expertise in property investment. When you work with other investors, it increases your purchasing power and provides you with chances of investing in other properties.
It’s also equally important to have a clear agreement on each partner’s contributions, responsibilities, and decision-making powers. Be specific about duties and how profits will be shared as well. Consider creating a partnership agreement with the above key sections highlighted.
5. Utilise crowdfunding and peer-to-peer lending sites
Crowdfunding and peer-to-peer lending are alternative financing methods, which you can use to pool your money online. This is to help fund your property investments. You can also welcome small contributions from multiple investors or loans from individual lenders.
Present your property investment opportunities on crowdfunding platforms or lending sites. For this, you also need to have a strong online presence. Ensure that your property portfolio and professional background are well-presented on investment forums or websites.
Make use of platforms like Crowdcube, Funding Circle, or Property Moose. These cater specifically to property investment in the UK.
What is the best loan term for an investment property?
The best loan term for an investment property in the UK ranges from 5 to 25 years, depending on your financial strategy. Shorter loan terms offer lower interest rates but come with higher monthly payments. A 10-15 long loan term is a good balance for affordability and quicker equity building. To choose the right loan term for your investment property, assess your cash flow needs, profitability, and interest rates of different lenders.
How to calculate return on investment (ROI) for investment properties?
To calculate the ROI on investment properties, follow the below steps:
1. Calculate the net profit
Net profit is your annual rental or property income minus all property-related expenses. This can be maintenance, property taxes, insurance, or basic management fees.
Net Profit of Property = Annual Income/Revenue – Total Property Expenses
2. Determine the total investment cost
Total investment cost includes all those associated with acquiring and maintaining the property.
Total Investment Cost = Purchase Price + Closing Costs + Renovation and Repair Costs + Financing Costs + Property Taxes + Insurance Costs + Property Management Fees + Miscellaneous Costs
3. Generate ROI
Now, divide the net profit by the total investment cost. Multiply this by 100 to get a percentage.
ROI of property investment = (Net Profit ÷ Total Investment Cost) x 100 |
For example, your property earns £30,000 in rent and has £10,000 in expenses. Its purchase price is £200,000 with renovations of £50,000.
Net profit = £30,000 − £10,000 = £20,000
Investment cost = £200,000 + £50,000 = £250,000
The ROI in this case would be:
ROI of property investment = (£30,000 – £10,000 ÷ £250,000) x 100
The ROI of property investment here is 8%.
How does Pluxa Property assist in securing investment property financing?
Pluxa Property is a trusted name in the UK’s property investment world. It leverages its decade-worth of expertise and helps you in securing financing for your property ventures. Our deep knowledge of the market helps us provide you with tailor-made solutions to help you achieve all your financial goals!
With Pluxa Property, you’ll be exposed to high-yielding property investments more likely to grant you funding from lenders. We ensure that you can purchase properties at the best price possible. For those looking at overseas investments, we also encourage investors to diversify their portfolios.
Get in touch with us today and unlock the funding and expertise required to succeed in the property market!
Peter Juhasz is the founder of Pluxa Property, the biggest property investment company in UK and Group CEO of AIP Capital Group and a property investment expert with over a decade of experience in the UK market.
He built a successful property company using innovative cashflow strategies like Serviced Accommodation and HMOs, scaling to 200 units in four years.
Peter leads a team specializing in property and business acquisitions across various sectors. A former co-host of “Cashflow With Property,” he shares his expertise in real estate investing and business scaling.
He is committed to continuous learning and helping SME owners and investors maximize their returns, driven by his passion for empowering others to achieve their financial goals.
To learn how Pluxa Property can help you in UK property investment, contact our experts.