- Rising interest rates are making traditional buy to let investment less profitable for investors.
- It may be more difficult to achieve high loan to value borrowing in the short-term.
- Property refurbishment and light development allows you to boost your property investment returns.
- Property refurbishment finance allows you to release the funds needed to undertake improvements on your portfolio.
Property investment through traditional buy to let is a tougher prospect than it was a few years ago. Yields are reducing, lending rules are tightening and interest rates are rising, compared to those in the recent past. As is to be expected, investors are being forced to pivot their strategies in an effort to increase their returns and speed up the growth of their property investment businesses.
Rising interest rates have tightened returns
In a rising interest rate environment, low buy to let yields can no longer be blindly accepted. It’s crucial that you choose your investments wisely in this new era for property investment.
A low yielding, high LTV property simply won’t provide any return when your low fixed rate product comes to an end. This will also mean that releasing further equity may not be possible.
High loan to value, increasing interest rates and a low yield environment represent a combination of factors that property investors must evolve their approach to managing and growing their portfolio.
That said, it’s not all bad news. When using property refurbishment as a pillar strategy, you can beat the market blues and boost your returns. This will protect your investments and give you more breathing space to fund the inevitable unplanned expenses.
Next, let’s take a look at how this approach works in practice.
Property refurbishment in practice
The below is real example of a property refurbishment that we have recently funded:
- Purchase Price: £78,000
- Cost Of Work: £20,000
- Value When Complete: £140,000
- Total Cost: £98,000
- Total Profit: £42,000
The client is rewiring the property, replastering, renovating the kitchen & bathroom, redecorating, fitting a new boiler and remedying a minor drainage issue. For the level of work involved, the client is seeing a significant uplift in value and will achieve a premium on their rent as the finish will be very tidy.
The result will be a £42,000 profit (minus finance costs), an increase in rent and a saving on stamp duty compared to buying a property for £140,000.
Of course, there is a lot more work to be done, but it is well worth it for the right projects. For more details, read our bridging loan example.
What are your options post refurbishment?
There are three main options here, they are:
- Refinance to a BTL mortgage – this option allows you to benefit from the increased value by enjoying higher monthly cash flow. The higher rental income will help to combat poor yields.
- Capital raise to 75% (or higher if the lender will allow it) of the new value on a BTL mortgage – releasing capital will reduce your monthly income, but releases the capital needed to take on another project. This can be a great option for investors who are looking to build a portfolio.
- Sell the property – by selling the property, you’re able to release 100% of the properties increased value, rather than just 75% or so of the value. This will allow you to build up your funds, taking on larger and larger projects. This approach is great for those focussed on capital appreciation, rather than building a portfolio.
How to fund property refurbishment
Property refurbishment is usually funded by taking out a bridging loan, completing the work and then refinancing onto a buy to let or HMO mortgage. Although the cost of doing this has previously been so high that it takes out a large portion of the return, times are changing.
You can read our explanation of bridging loans for more information.
There is a pricing war in the bridging loan market, fuelled by numerous new lenders entering the market who are keen to lend. Bridging loan interest rates currently start at 0.48% per month, the equivalent of 5.76% per year.
Even when borrowing at 75% loan to value on a residential buy to let property, funding is available for light or medium refurbishment from 0.65% per month (7.8% per annum). With a similar reduction in fees and charges, the costs are down significantly, making refurb-to-let more viable than ever.
Calculating your maximum loan
Each lender has their own criteria and will lend different amounts. Generally speaking, when calculating your maximum loan, there are two ways that a lender will look at it, they are:
- Day 1 Loan to Value Only: Lenders that fall in to this camp tend to be cheaper but will lend slightly less. They assess their maximum loan based on the loan to value (the amount lent in relation to the value of the property, as a percentage). Many lenders will allow you to borrow up to 75% of the property value, leaving you to fund the cost of works.
- Day 1 Loan to Value Plus the Cost of Works: The lenders who fall into the second camp allow you to borrow as above, but will also fund some, or all of the costs of the work. These lenders tend to charge a slightly higher rate but can help where you could not otherwise pay for the work. Where a lender is going over their maximum loan to value to fund the cost of works, they will be keen to understand how much the property will be worth when complete.
By taking one of the above routes, you are going to be able to agree to a much faster completion time, as bridging loans generally take around 2 weeks to complete.
When committing to a 21, or 28-day completion on properties in need of refurbishment, there is often movement on the price. In addition, if completing in this sort of timescale, auction purchases are open to you as you can comfortably hit the deadline using property auction finance.
By taking this approach and being smart with the offer you make, the cost of taking out the additional finance can be saved before you even start.
When does refurbishment become development?
Property refurbishment finance can be used for a wide spectrum of requirements, from light internal redecoration, right through to large extensions. This allows you to perform significant works on a property and therefore add value. Common works include:
- Full redecoration
- Changing the internal layout of a poorly designed property
- Replacement of kitchen & bathroom
- New boilers and installation of central heating
- Rewiring the property
- Conversions to HMO
- Change of use
- Loft conversions
- Removal of internal walls
As you can imagine, for the right property, the value added by taking these actions can far outweigh the cost of the work to do it.
The final word
There is a real opportunity to add value to your property investment available at the moment. With demand for buy to let plummeting, the chances of picking up a bargain and far greater than they were previously.
Purchasing at the right price for a property in need of refurbishment, combined with cheap borrowing and lower prices for quick completions can make you real money.
You will see both an increase in value, and higher rents. The returns are out there. As a matter of fact, higher returns than those accepted by buy to let investors over the last few years are out there, it’s just a case of going the extra mile to find them.
Another great option is using planning gain finance to create capital gains through the granting of planning permission.