The number of private individuals investing in real estate has ballooned over the last few decades. Once upon a time it was reasonably easy to make money through flipping a fixer-upper or getting involved in rental property. These days, however, heightened competition in the market has made property investment a far more challenging exercise. “Big win” projects have become as rare as hen’s teeth.
These days the smart property investor – whether that’s a developer or a buy-to-rent landlord – needs to access to ready capital to pounce on opportunities as they arise. Spend too long trying to raise capital in the traditional ways and you might just miss out as another investor beat you to the deal.
But if traditional lending is holding back the growth of your property portfolio, what other more “creative” options are there for securing the right property at short notice?
Creative Ways to Finance Your Property Portfolio
Friends & Family
It’s no secret that many people have become wealthy thanks to property investment. Sadly, gone are the days of easy profits simply by purchasing and then reselling in a growing market.
Instead, these days some of the most successful investors use a bank of specialist knowledge to assess the potential of any property. Years of experience go into formulating an accurate project that meets expectations both in terms of timing and profitability.
If you’re an experienced investor, then this specialist knowledge can have considerable value. It’s likely that you have friends, acquaintances or family members who would be open to the idea of funding your next property, but who lack the experience (or confidence) to do so themselves.
So ask around, and negotiate terms well in advance, so that you and your backer are ready for action when that “must have” project falls into your lap.
If you’re planning on the purchase of a new property in the near future another option for scaling your funding is to refinance an existing mortgage. While the process can take time – meaning that you’ll need to plan well in advance – re-mortgaging a property that has seen an increase in value can quickly unlock liquidity for future purchases.
Having large volumes of equity in a property can also have an impact on lending rates, sometimes saving you considerable money
For UK property investors a 2015 change to the national pension scheme opens up an additional opportunity. From the age of 55 Brits can now withdraw their pension as and when the desire in the form of a cash lump sum. The first 25% withdrawn is done so tax-free, while the remaining 75% is taxed at the highest rate.
If you’ve spent all your working life building up your pension fund, then you may find that you have access to a surprising volume of capital. Just be aware that such an action should not be taken lightly, as it could lead to you struggling later in life with a smaller pension fund.
For US investors, using IRA fund to finance your rental property is an alternative you can think of. The proceeds and profits would also go into your IRA fund. So the cashflow won’t improve for you until you start withdrawing from IRA.
Bridging loans are a specialist form of short-term property finance. As the name suggests, they are intended to be used to “bridge” the gap between purchasing a property and the availability of more permanent funds.
For example, bridging finance may be used to secure a property at auction before a mortgage application is approved, or to cover the short-term costs of refurbishing a property before a quick resale.
Borrowing rates vary, and should be carefully considered before an agreement is made. As an example, some bridging finance offerings start at just 0.6% per month.
There are a number of peer-to-peer platforms now actively engaged in the real estate marketplace.
Indeed, there are two ways in which such platforms may be used by property investors. On the one hand, you may opt to borrow money on a peer-to-peer mortgage.
Alternatively, a number of funds allow you to invest your capital, which is then itself lent out to other investors.
There are a number of reasons why this may appeal to investors.
Firstly, such an opportunity is far more hands-off than actively developing or refurbishing real estate yourself. Secondly, the risk can be lower than going it alone. While some funds will lend your money to one specific develop, others spread your capital across a whole range of opportunities, helping to hedge your funds.
While it’s natural to think of bank-supplied mortgages as the only logical route to funding your property investment dreams, the reality is altogether different.
Thanks to developments in the property funding market, together with economic changes covering taxation and pensions, there are more opportunities than ever before to land the funding you require.