With the news constantly warning of an impending pension crisis in the UK, many people are looking to property investment to provide security later in life. After a period of uncertainty surrounding Brexit and the general election, the housing market is on the up, making now a great time to start investing.
But how do you get started in property investment if you don’t have huge sums of cash?
Joint Venture Finance
If you lack the capital to purchase property on your own, find a partner or multiple partners to invest with you. Your partner could be a wealthy family member or a business contact who has the capital but lacks the time or inclination to seek out investment opportunities.
Joint venture (JV) finance can work in several ways, depending on the wishes of those involved. Each party could own a proportion of the property in line with their financial contribution, so ownership and profits are shared. Alternatively, the agreement could be that one party provides the finances and the other — the investor — does all the work involved in setting up and managing the investment. This is effectively a straightforward loan.
You may wonder why someone would hand over their cash for you to invest, rather than doing the deal themselves. Many people are keen to invest in property and have the means to do so — but lack the knowledge and time to instigate projects themselves.
JV finance does carry some risks. There is the potential for disagreements and conflicts between partners, which could impact on the success of the venture — especially if family members are involved. Disagreements are more likely to occur if the parties involved have very different levels of expertise and capital to invest, adopt conflicting management styles, or if each partner’s responsibilities are not clearly communicated and agreed.
According to the latest “Bridging Trends” report, bridging finance accounted for 25% of all lending for property investment in Q2 of 2019. Bridging loans are a popular choice among property investors because they provide quick access to funds when standard mortgages are unavailable.
Unregulated bridging loans involve much less red tape than traditional loans, allowing providers to expedite the application process and release funds in as little as seven days. Speed is of the essence for investors who must act fast to snap up a great opportunity before their competitors.
Loan amounts generally range from £100,000 to £2million and are typically borrowed over four to 12 months. If you’re just getting started in property investment, a bridging loan can be a great way to release the funds necessary to make your first purchase. You can use an existing property as security for the loan and borrow the funds required to get started. There are no monthly payments as the interest is “rolled up” and added to the total loan amount due at the end of the agreed period of borrowing.
Property investors will pay a lump sum finders fee for anyone who can source and package a property deal they want. A “packaged deal” consists of a pre-negotiated sale with the deal packager managing all aspects of the sale as part of the service. Fees typically range from £3,000 to £5,000.
You may find an investment opportunity that isn’t quite the right fit for you or perhaps is beyond your startup budget. Sell the deal on to another investor and bank the cash. The proceeds can be used for your first investment.
There’s no startup capital required for deal packaging, making it a good option for those new to the industry. Deal Packagers tend to focus on three types of deals — Rent to Rent, Below Market Value and Lease Option properties — although the latter may be affected by the new government legislation on selling leaseholds.
Due to a few rogue traders who have forced sales through on unfair terms, deal packaging is under greater scrutiny than it once was. The Office of Fair Trading and the Property Ombudsman have issued guidelines on deal packaging or “property sourcing” that must be adhered to. If you’re considering pursuing this option, be sure to do some research into relevant regulations and legislation.
Make Money from Your Home
If you own your home, there are several ways to raise funds for investment projects. These may take longer than JV finance or a bridging loan and realistically, are only an option for those who need a small cash injection to get started.
The government’s “rent-a-room” scheme allows homeowners to earn up to £7,500 a year tax-free from renting out a spare room. Take in a lodger and add the rental payments to your property investment pot. To maximise earnings, move in with friends or family temporarily and rent out your home on a site like Airbnb (taxes will apply).
There is an increasing number of mobile apps and websites that provide homeowners with a platform for advertising parts of their property for rent. If you live in a central location where paid parking is at a premium, renting out the driveway can bring in a regular income. Likewise, many people will pay to rent out an unused garage or shed for storage.
Investing in property can be an exciting and financially rewarding business. There are many ways to raise funds to get started. Choose the right option for you based on the time and resources you have available. Raising funds from your home means no debt but will take considerable time. A bridging loan is quick and easy if you have a property to provide as security. Getting started in property investment when you don’t have much cash is perfectly possible and could be the beginning of a lucrative and satisfying career.