I have had a question in from Michael. I have changed his name by the way, it is not his real name, because he might not want me to give away his personal details. Michael is a self-employed electrician from London and he earns roughly £20,000 a year, and he wants to get into buy to let. He’s asked me if I can give him any tips which will help him.
If I was with Michael the first thing I would be asking him is does he own his own home, because if he is going to apply for buy to let finance in order to finance his buy to let properties most lenders would like him to own his own home before they lend him any money. I am going to assume for the purposes of this video that perhaps if he is earning £20,000 and he lives in London he probably doesn’t own his own home because on £20,000 a year it would have been quite hard to save up a deposit to buy a property in a high value area. So, let’s assume he doesn’t own his own home.
The other thing which I noticed instantly is that he is on an income of around £20,000 a year and many buy to let lenders would require him to have a minimum income of £25,000 per annum before they will lend to him. Not all lenders, but many buy to let lenders do. So, there is 2 things which are going against him instantly.
Does that mean it is hopeless? Does that mean Michael can’t invest in buy to let? No, of course not. But, he is going to have to think very carefully about how he does this. If he is going to try to do it all off his own bat that is going to be very hard.
If I was sitting down with Michael the second thing I’d be asking him is what was he thinking of in terms of trying to raise a deposit for his buy to let properties, because it could well be that he may have a relative who’s got some money who may be able to finance his purchase. Just to be very clear on this most, if not all, buy to let lenders will not allow you to borrow the deposit. They want you to have the money yourself, or, alternatively, if you haven’t got the money for the deposit yourself, one thing they will usually accept is if you have a gift, notice I use the word gift and not loan, from a close relative. The close relative will depend on the bank, they all have different criteria. It could be a grandparent, it could be an uncle or an aunt, they usually like it to be parents but it could be grandparents or even more distant relatives. But it needs to be a relative and they need to gift the money. In other words, their money has to be given without any expectation of a repayment. That is not to say that at some point in the future you couldn’t regift the money back, but I am not going to go into that because if you knew you were going to do that then potentially that’s mortgage fraud. As far as the bank are concerned, the money has to be given in good faith, as a gift without expectations of repayment. If Michael has access to money like that, then that could become the deposit for his buy to lets.
What if he hasn’t even got access to that? Is it all hopeless? No, of course it isn’t, but he may have to look at fairly creative strategies. He may have to look at doing what we would call the no money down type deals. No money down does not mean there is no money used, it just means it is not your money that is used. Examples of no money down, and I’ve done videos which you can find on my YouTube channel which talk about this, include things like lease options, instalment contracts and creative ways of doing property where you don’t need very much of your own money. Or, another way which it can be achievable for Michael is to think about using private finance, so that he doesn’t have to go to the bank in the first instance. One of the best ways about doing property is to find private finance to 100% finance your properties. If you can also get the same backer, the same investor, to give you the money for a refurb you can borrow literally all of the money that you need to buy a property and to refurbish it. Then 6 months down the line you can then finance the property and hopefully get all or most of your money back out and pay back all or most of the money back to the investor. Why 6 months? Because of the six month rule, and again I have done other videos on my YouTube channel about the six month rule. If you are wondering what happens if you can’t get all of the money back out, before you even borrow the money off the investor the best thing to do is to flag up that when you come to refinance you might not be able to get all of the money back out, but if you can’t get all of the money back out what money is left in you will continue to pay them interest on and you will pay them back at some point in the future. And you can agree how that could happen.
So, Michael are there things that you could do? Well, absolutely, there are but you are probably going to have to use private finance in some form or another. Either as a gift from a close relative to fund a deposit, or as 100% finance to use to buy your properties. Then you can do a refurb, add value (if you look at my other videos you will see how to do that) and then refinance and then get the money back out. I hope that helps Michael.
Peter
Peter Jones
(ex) Chartered Surveyor, author and property investor
https://thepropertyteacher.co.uk
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