Property Cycles: The Investment Property Lifecycle – Finance Part 2 | PVP S2E13

The Property Voice Podcast – Series 2: Property Cycles – The Investment Property Lifecycle – Finance Part 2

We continue to look at investment property financing, as we consider the 4 main types of financing more fully: cash, institutional finance, alternative finance & creative finance. To help us along we have three key principles: be aligned, be methodical & be prepared. Walk through each of the 5P’s to stay focussed, which are people, process, pound, property & performance. Finally, don’t forget that each property project and it’s associated financing is a part of the overall business case that we need to evaluate. And, if that is not enough value for you…listen to the Shout Out to potentially save thousands of pounds on your next mortgage renewal.

Resources mentioned

Ask your broker and especially your existing lender if they have any renewal loyalty schemes in place before looking too far and wide – it could save you thousands

Today’s must do’s

Remember when it comes to financing: be aligned, be methodical & be prepared. Use the 5P’s: People, Process, Pounds, Property, Performance as a guide and adopt a ‘business case approach’ when looking at your next property financing project.

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Property Investor Toolkit – here is the book link on amazon.co.uk & amazon.com in case you would like to get yourself a copy to accompany this series

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Transcription of the show

Hello and welcome to another edition of The Property Voice Podcast, my name is Richard Brown and as always it is a pleasure to have you join me again on the show today.

In last week’s show, we had a chat with Simon Allen from Searchlight Finance, who ran us through some very useful pointers with regard to some of the main sources of financing our property investments. Much of what we covered last time out would fall under the heading of ‘Institutional Financing’ due to the nature of the finance providers we discussed. However, today we shall drill a little deeper and consider the other main sources of property financing in addition to cash, namely: institutional as we already mentioned, plus alternative and creative financing as well.

As we shall see, despite all that we cover, we can stay on track by remembering these three key points when it comes to property financing:

• Be aligned
• Be methodical
• Be prepared

That’s it really…well almost, we also have the 5Ps to consider and we have a Shout Out resource that literally saved me thousands of pounds last year, so don’t miss that!

So, let’s dive straight into the heart of the matter now and see what else is involved with investment property financing…

Property Chatter

Last time out, along with Simon’s help, we had a look at some of the main aspects of what I like to call ‘Institutional Financing’. This is property financing, typically provided by a mainstream financial institution. It would include products such as buy-to-let mortgages, commercial finance, bridging or auction finance and to a lesser extent also refurbishment mortgages and development finance. There are often provided by entities or institutions such as, high street banks, commercial banks, specialist buy-to-let, bridging and development finance lenders. Whilst some can be approached directly, many would be available via a finance broker. Remember that not all brokers will automatically have access to all institutional lenders and even if they do, they may not handle that many regular cases to be current and up to date with all of the lender requirements and nuances and so on.

As I mentioned earlier, in addition to Institutional Finance, there are other ways in which we can finance a property investment, including Cash, Alternative Financing and Creative Financing. We shall walk through these a little more in today’s show.

However, before we do that I realise that there is a series of elements that are relatively consistent, regardless of the type of financing used. In other words, some steps that we need to consider when it comes to financing our investment property. We can summarise these elements rather handily using the 5Ps as follows:

• People
• Process
• Pounds
• Property
• Performance

People – is not necessarily individuals, but it can be sometimes as we shall see later. People means who provides the financing that we are looking to use and who do we need to go through to access them. For example, with a buy-to-let mortgage, the answer could be a buy-to-let lender, accessed via a mortgage broker.

Process – summarises the steps we need to take to take us all the way through to having control of the investment property we are looking to acquire. As well as the obvious step of dealing with the finance provider and giving them all that they need to be able to approve the funding, it could also extend to legal steps, such as conveyancing, contract drafting & negotiation and other aspects like insurance, due diligence checks and so on.

Pounds – OK, it is a bit of cheat with the ‘P’ here, but it is all about the money itself i.e. Pounds Sterling or whichever currency you are using if overseas. It includes the terms of the financing, such as loan-to-value levels, fees, early redemption penalties, interest rates and so on. I like to use the term ‘Total Cost of Finance’ whenever I am looking at an investment property financing proposition. This could be literal, such as over 25 years say (assuming we had all the info or suitable assumptions to hand for that length of time), or a more realistic, shorter yet meaningful timeframe instead, such as 5-10 years say. I prefer to use a time frame of this length as it ignores some of the guessing of what could be required often decades away but takes into consideration what a lot of people tend to overlook – renewing financing facilities over the short t0 medium term.

Property – this may sound obvious, but it is worth keeping in mind that the property is our asset and this asset will be used as security to underwrite both our investment and also our financial commitment to any finance provider. Does it stack up? For example, is it built on a flood plain that may hamper its future saleability or insurability? How easy and costly will it be to maintain or are there some major capital expenses looming such as roof, windows, central heating replacement and so on? Does it have all of the required legal protection in place, such as a remaining lease term, or access to the property? Are there any other risks around the property that could undermine our investment and ability to repay the financing…such as knotweed, industrial waste, subsidence, busy roads, etc.

Performance – is all about the numbers…our numbers that is. What sort of returns will this financing help us to generate? Key performance indicators, or KPIs, here will usually include such measures as: annual cashflow & profit, return on investment and / or return on debt, our leverage factor (using other people’s money), payback period (time to get our original investment fund back) and total cost of financing as I alluded to earlier. If we don’t have some idea of what a decent investment looks like to us, then how can we judge whether it is worthwhile or not? Equally, different types of financing may give rise to different metrics to us. For example, if we didn’t have to put a deposit down, or a reduced one…how would that make us view some of the other metrics, like cashflow for example? We may be able to tolerate lower cashflow if we are putting in a limited amount of our own money; I find this to be true at least.

So these 5Ps: People, Process, Pounds, Property & Performance, act as a guide to help us work our way through any form of financing, to ensure that we cover all of the basics and make a good judgment call as to whether the financing is worthwhile and appropriate. We should not forget that all of this should be taken into consideration along with our goals and strategy – is everything aligned? For example, if we plan to flip a property on, why would we be interested in a 5-10 year time horizon? The same is true in reverse, if we have a long-term investment horizon for our pension or children’s inheritance, then why would we not keep in mind what can happen with our financing over an extended time period?

Personally, when I look at any form of investment property acquisition and the financing involved, it forms part of what is known as a ‘business case decision’ in investment circles. What is the business case? Does it stack up with our strategy and goals, what are the returns, how about the terms of finance and the conditions or constraints we have to live with, how about renewal of the facility over time and of course our exit and how achievable that is…how will all of this work in this particular case?

As we often find in property, what is on the surface a very simple idea, has several layers of complexity beneath it and so we need to be aware of that and then have some steps in place that allow us to work through them. For me, the 5Ps along with a business case approach, helps me to assess the relative merits of any investment property acquisition and it’s financing method in particular.

Needless to say, I think I may have taken something of a tangent there, so let’s get back to the core of the subject shall we…with the main types of investment property financing…

Right, types of investment property financing…

• Cash
• Institutional Financing
• Alternative Financing
• Creative Financing

Cash – cash is king they say, but it is also limited as a resource and investment property acquisition can hardly be described as a low cash business model in the most part. However, if we are fortunate enough to have cash funds available to acquire properties, it could put us in a strong buying position, perhaps ahead of many other potential investors. This could mean getting first dibs on a juicy deal, or it could mean being able to act quickly to exclude our competition. All well and good, however, it does have its limitations, such as being limited and reducing some of the financial returns possible in property investing possible with leverage…or using other people’s money. Cash is therefore most suited to short-term projects, or where the cash can be replaced later on by one of the other forms of financing we discuss here today. It should also be highlighted that to many agents and sellers, bridging finance is often seen as cash equivalent these days too.

Institutional Financing – is as we described earlier, conventional financing products like buy-to-let mortgages, commercial finance, bridging or auction finance and to a lesser extent refurbishment mortgages and development finance. The key being, they are provided by more mainstream financial providers and are the most common ways of financing an investment property.

Alternative Financing – is alternative due to the providers of the finance and to some extent the finance product. It can include friends and family, joint venture partners, private lenders, peer-to-peer lenders, pension funds and so on. To some, it could also include personal loans and credit cards, however that is a very high risk method of funding a property investment and may be more suited to ancillary costs and expenses related to a property transaction such as works, professional fees and so on.

Creative Financing – is often, at first glance at least, not usually thought of as ‘financing’ at all, until you think about it more fully. Examples include lease options, rent-t0-rent, instalment contracts and delayed completion, assisted sale, vendor & developer finance. The key aspect that makes it creative is that we are effectively leveraging somebody else’s asset or funding in a creative way. For example, with a lease option, we are leveraging the existing property owner’s own financing rather than us taking out the finance ourselves. We will probably still make payments to reflect the costs of financing, here the ‘lease’ rentals, however we do not directly have the relationship with the finance provider ourselves. Creative often comes tied with another word…advanced. Many of the financing strategies outlined here would require more education, understanding and support to be implemented correctly.

Needless to say, don’t forget these three main summary points when it comes to investment property financing:

1. Be aligned – choose the right financing method to match your investment project and indeed your chosen goals, strategy & available resources.
2. Be methodical – regardless of which method you decide upon, follow the 5P’s process of people, process, pounds, property & performance along with a ‘business case approach’ to help guide you to the best outcome.
3. Be prepared – get yourself finance-ready in advance, taking care of all the necessary details before the time comes, including checking credit files, bank statements, HMRC tax return info, source of deposits and so on.

If we follow these 3 steps, along with the 5Ps and adopt a ‘business case approach’ to each investment project, then we should be in good shape for your next investment property financing project.

Given that I have covered a fair bit of ground over the past couple of weeks and indeed in other episodes on the subject of investment property financing, I shall probably leave it there for now. However, I shall return to the subject a little later, perhaps sharing one or two case studies of my own as object lessons in some of the less familiar methods of using alternative & creative financing to support our property acquisition and portfolio building objectives. After all, I sincerely believe that financing is perhaps one of, if not the major, resource that we need to be successful as a property investor. It need not always be our own financial resources though as we have seen, still a major part of what we have to master on our property investment journey.

Finally, I am currently in the process of writing my second book, which will address more advanced financing methods. This will be released during the first few months of this year, so do look out for that or drop me a line to go on our book launch list and I will let you know when it will be available: email podcast@thepropertyvoice.net for that as usual.

Let’s leave it there for now and take a look at your engagement with the show.

Your Voice

Last week I asked you to let me have your thoughts and ideas for content in future episodes. I could be a general theme for a series, or for an individual topic instead.

So far, I have had requests to cover financing more fully, along with lease options and working with deal sourcers. What is missing from your top of mind list of property related content you would like me to cover?

Drop me a quick email: podcast@thepropertyvoice.net with your ideas of topics, themes or other content for the show and I will do my best to plan it into the schedule for you.

That aside, here is a 5-star review of the podcast that I want to share with you today.

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