If you’re looking to build up a portfolio of properties in which to invest, one of the first and most critical questions is likely be how do you finance your portfolio purchase.
General principles
Investment in property is akin to any other business initiative:
- the prospects of a positive yield from the investment made in terms of the income generated, in this case from your receipt of rental income;
- any capital appreciation in the value of the assets employed – in this case the anticipated increase in the value of the property portfolio when it is eventually put on the market for sale.
Finance is raised for such purchases either by seeking a loan from an interested party, who is then likely to take a charge on the property bought, or from investors who look forward to a share in the profits of your property portfolio.
How does this work in practice?
Buy to let mortgages
Probably the most common way of raising finance for the purchase of any property is through a mortgage – a lender advances a percentage of the funds necessary for the purchase, whilst using the property or properties themselves as security against repayment of the loan.
It is important to remember that in the case of a property portfolio – bought for the purpose of raising income from rents and the potentially eventual re-sale of the assets – the venture is entirely business oriented.
The mortgages raised in this way are focused on the anticipated success of the business and this marks them out from the mortgages raised by prospective owner-occupiers who are looking for somewhere to live.
Mortgages for property portfolios are advanced on the basis of the estimated affordability of the loan in terms of rental yields from the business; residential mortgages for homebuyers are advanced on the basis of the purchaser’s ability to repay the loan – typically from the income earned in their line of employment.
A property investment portfolio is expected to be sold at some date in the future, so buy to let mortgages are nearly always interest-only mortgages, with the capital repaid on the eventual sale of the properties concerned.
Furthermore, a mortgage advanced for the prospective owner-occupier is one for the very home in which they plan to live.
Bank loans
Traditionally, banks have been one of the principal sources of funds for any aspiring business.
When advancing a business loan, the bank has also weighed up the potential success of the proposed venture in terms of the yield on the assets employed. In the case of a property portfolio, of course, this is measured by the anticipated rental yield and the expected appreciation in the market value of the properties concerned.
Any loan advanced by a bank in this way is almost certain to result in the lender taking a charge on the assets purchased, by way of security against the repayment of the loan. That charge is effectively a mortgage on the property, and the type of mortgage advanced for such a business venture is a buy to let mortgage.
In other words, banks are also in the business of providing buy to let mortgages.
Remortgaging
Landlords with existing properties that have equity in them may decide to remortgage their buy to let property to release some of that equity which can then be put towards a new investment.
This can be particularly useful for expanding a portfolio as it avoids the need for raising entirely new capital while leveraging the existing value of your properties.
However, it is crucial to ensure that the rental income from your properties covers the repayments for the remortgage and that you factor in potential risks, such as fluctuations in rental income or property value.
Angel investors and venture capital
It might be possible to raise funding for the purchase of your property portfolio from angel investors or venture capitalists. From sources such as this, you might expect to attract investments rather than loans or mortgages.
Once again, however, any investment is going to be made only on the expectation of a positive rental yield from the purchase of a property portfolio which also appreciates in capital value over a given number of years.
The difference with such an investment, however, is that those funding the business may be looking to a return on their investment – a share in the success of the business – rather than securing any loan against the business assets.
Crowdfunding
Crowdfunding has emerged as a modern way to finance property investments. Platforms specifically designed for property crowdfunding allow multiple investors to pool their money together to fund the purchase of properties.
This approach is often seen as an innovative and accessible way for smaller investors to participate in the property market. However, it also requires careful consideration, as the terms of such investments can vary significantly, and the returns are often dependent on the platform’s performance as well as market conditions.
Joint ventures
A joint venture (JV) is another potential route for financing a property portfolio. In a JV, two or more parties combine their resources – such as capital, expertise, or existing property – to achieve mutual financial goals.
This approach can be particularly beneficial if one party has the financial means while another brings in operational or market expertise. However, entering a joint venture requires a clear agreement and understanding between parties to ensure transparency and avoid disputes in the future.
Tax considerations
Financing your portfolio is not just about finding the money; it’s also about managing your tax liabilities.
It’s also important to consider stamp duty land tax (SDLT). For buy-to-let properties, an additional surcharge applies to the purchase price, which can significantly affect your upfront costs.
Seeking advice from a tax specialist experienced in property investment can help you navigate these complexities, ensuring your portfolio is both financially viable and compliant with tax regulations.
In summary
There are many different avenues for you to explore if you are looking to finance your property portfolio. The option you choose may depend on a number of things, including your attitude to risk, any equity you have in existing properties, your ability to get the finance, and your future plans. Therefore, seeking independent financial advice may be the next step to ensure you choose the most appropriate finance solution.
Finally, don’t forget property portfolio insurance which offers comprehensive protection for landlords managing multiple properties. This tailored policy consolidates cover for all properties under one plan, simplifying administration and reducing costs.
Disclaimer
The information provided in this guide is for general informational purposes only and is not intended to constitute professional advice. While every effort has been made to ensure the accuracy and relevance of the content, the financial landscape is subject to change, and individual circumstances vary significantly.
Readers are strongly advised to use this guide as a starting point for understanding the principles of financing a property portfolio. It is not a substitute for seeking tailored advice from qualified professionals, such as financial advisors, mortgage brokers, tax specialists, or legal experts.
The authors and publishers of this guide disclaim all liability for any actions taken or not taken based on the information contained herein.
