I’ve had a question in from James. James isn’t his real name but I’m going to protect his identity in case he doesn’t want me to share his personal details. James is on short term contracts, he is an IT consultant and although he gets regular work the contracts are always of a relatively short duration. This has meant that he hasn’t been able to buy his own home, but he does want to build a buy to let portfolio and he’s asked me for any tips I can give.
The very first thing is I did a video recently for Michael who had a very similar situation. He hadn’t, I’m assuming, been able to buy his own home and in that video I explained that many buy to let lenders require you to own your own home before they will lend to you.
The reality is that it is not all lenders, but there is a handful of lenders who will consider lending if you don’t own your own home. I would certainly talk to a mortgage broker to find out what finance is available, but the key thing is to think about what strategies would work around this and to think about whether James should actually be buying his first home.
The reality is that if you can buy your home, I would do that. I would do that in preference to buying buy to lets to be honest, James, and I will tell you why.
The first reason is if you buy your own home you are going to get a much better mortgage deal. A typical buy to let loan will give you a 75% loan to value, whereas a typical residential mortgage for an owner occupier first time buyer is around 90%, but it could even be 95% which means that you only need to save a relatively small amount. I know you have had some trouble in the past because your contracts are too short to be able to get a normal residential mortgage but what I would say is I would probably talk to different mortgage brokers because in my experience you can usually find the finance somewhere, someone will usually lend it to you. It usually comes down to terms, it might be slightly more expensive but there is probably a lender out there who will lend to you.
Let’s assume you can’t buy your own home, and that you want to get into buying buy to lets. Because you’re on short term contracts, you haven’t told me how much you actually earn and it could be that you earn enough to go past the £25,000 qualification criteria which many buy to let lenders have. In which case I would be talking to a good broker because the broker will be able to take you to the lenders who will lend to you even if you don’t own your own home.
If we assume that that doesn’t work and that because of your circumstances there aren’t any buy to let lenders who will lend to you, what can you do? There is a number of things that you can do. The first is that you can look at some of the no money down strategies, like using options, instalment contracts and so forth. You could even use strategies which don’t require any capital, such as rent to rent, that could be a good way forward. You could consider deal sourcing, deal packaging, finding deals and then selling the deals on for a fee, and saving the fees and using that to build your capital.
Or you could use private finance. If I was wanting to build my portfolio and I had literally no money and no chance of borrowing conventional funds I would definitely be thinking about private finance. Finding individuals who want to get into property but perhaps they don’t have the time, they don’t have the knowledge, they don’t have the confidence, they don’t have the experience. I would be finding deals, taking the deals to people who’ve got the money and trying to do some kind of agreement with them, a JV agreement, where either they pay you for finding the deals. Or even better is that you become part of the deal, perhaps sharing 50/50 ownership, sharing the rent 50/50. Or even better is finding somebody who just wants to earn money on their money, there are lots of people who are earning .5% or less even in the bank and you can offer them a very decent return, you can offer them 10x that amount and they will think they are getting an absolute bargain in terms of the return their making on their money, and they can just give you a straight loan to be able to go out and buy properties and they can 100% finance your property purchases.
So, there is all sorts of ways you can do it, James. This is a very short 2 minute video so I cant go into all the ins and outs. But the point is, yes you can do it, you just need to sit down and think carefully how can you do this? Particularly think about who do you know that might want to invest in you as an investor and who might want to make a decent return either from lending you the money or make a decent return potentially from investing with you?
By the way, I should say for those who are watching if you think about taking somebody on as a 50/50 equity partner there are rules around that. You need to make sure they’re high net worth or sophisticated investors which is one reason why using just a straight loan is a much better, much safer, much cleaner and less complicated way of financing your properties.
(ex) Chartered Surveyor, author and property investor
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