The Art of Financing Your Renovation and Extension
One of the best ways to get into making money in the property business is to purchase and renovate a home, for either renting or selling off for a profit. If you can find an old property to renovate, then your onto a sure fire winner these days, with the market we are experiencing today.
There are however ways to do this quickly and get the best result as fast as possible, and in this article we explore some of the ways to go about financing the project be it commercial, domestic or residential. Whatever your projects, there are ways to get it done, but the best ways to get it done are often the simplest.
Most of the high street lenders only want to offer a mortgage on a property that is considered “habitable” but the key is finding and purchasing a property that does not fall into this category, and this is where you can really earn the profits. By buying a property that does not fall into this category you can really get your portfolio into the big time. Never forget once you master this form of purchasing, you will be able to do it again and again, so the only limit is yourself. Once you have your first property, you can use this as your asset to buy another and thus repeat the process as many times as you wish.
Some of the basic information you will need to know before you start includes the following considerations and the main attributes you are looking for are:-
- It is in a state considered derelict.
- It is in need of conversion extension.
- It needs some renovations, so without it will be considered not habitable (for example no working kitchen or bathroom).
- Extensions will be likely to need both architecture and planning permission, so it will be simpler to start with a basic shell of a property when you begin, but the same system applies to both in the main.
- Versions that best work for Finance and Renovations.
For a property that is considered run down but habitable, the majority of lenders will offer you (at best) 80-90% of its market value as it stands, as well as potentially holding on to what is called a retainer. This is pending the completion of the renovation as their backup insurance for want of a better description.
The lender will need to survey the property and you will have to include the price of this in your budget in the costing of the project at the start, so make sure this is factored into your model from the start. Without this you cannot get the funding from a lender for the work that you need to get done.
Some of the work you will also need to look at can well include things like damp-proofing, roof repairs, rewiring, repairs to central heating and or plumbing, plastering, rendering, outdoor decoration, flooring repairs after any pipe work is completed, the fitting of bathrooms and or kitchens, as well as the general regulatory requirements of things such as fire regulations, which may include fire doors fitting as and when relevant. All of these aspects need to be factored into your plan and every detail will need to be investigated, checked and verified before you apply for the funds you will need.
In the cases of non-habitable properties and conversions, some of the best places to look for funding you will need, is to look for financial lenders that offer special self-build mortgages in the first place. Typically these will finance renovations from 66-90% of the value of the property in its current condition, but they may well provide the option of further finance once you have completed the repairs or other work, once they see the required works have been done. This is always an important point to go through with your financial provider at the start of the contract and or agreement; funds to repay other forms of borrowing.
Some other considerations you would want to know about include things such as penalty clauses, insurances (which are complex and varying at the same time from home and contents, fire, defaulting and rental policies), all of which need to be factored into the equations. It is important to remember this project might well be the biggest and most important investment of your life, so it is vital you get all of your facts correct in the first place.
So what is the amount you could borrow and why?
As a rule the amount you could borrow is directly linked to the value of your property, especially in the form of a financial tool called a “bridging loan” (and here is a great bridging loan calculator to use) which is solely based on the principal value of your property. Your income (or joint incomes) will of course be directly related to the amount you can borrow. The property also the “asset” upon which you secure the loan, so you are basing the loan on ownership of this, so should you effectively default, your property asset will be taken from you in the worst case so this needs to be made clear.
Your credit history will also be of relevant of course but in the case of a “bridging loan” for the most part, your asset guarantees the loan in the first place, so in these cases they tend to be much faster, simpler end thus more effective to obtain. Another benefit for the choice of choosing a bridging loan is that at the end of the day you can complete the renovation, restoration or other building work ahead of schedule, you can pay off the loan while being “quids in” at the same time.
Some of the issues to remember with this type of finance is that in general, interest is in the realms of 1.5% per month and any delay can push up the relevant charges should there be some issue that holds up the work/s on you project. Admin and other costs should be duly noted, as so should the fact you must make sure you are using an accredited organisation that has been vetted by the Financial Conduct Authority (FSA).
As ever there are other forms of finance available such as credit card overdrafts, personal loans, cash deposits, peer to peer lending, private investment opportunities, friends and family backers and other forms like taking out a basic bank loan, but as we detail here, it is your choice at the end of the day how you go about getting the job done.
As for finding the property you need, you should consider looking to auction houses, getting to know your local estate management and selling agents, scanning free sources of property advertisements and even go out looking for the kind of house/ property you are interested in to find the best bet on the markets. Hidden gems are out there just waiting to be found so the onus is of course on you to get the best deal you can. All in all the world is your oyster and to get the pearl you have to take the plunge first.
Hope you enjoyed reading this article and we look forward to getting you more tips and advice in the coming posts, but remember to make sure you don’t jump in with your life jacket first. Caution is always the best way to go, especially with a big investment commitment like this.