Before the financial crash in 2006, it was well documented that lenders were queuing up to issue 100% mortgages to people. That obviously didn’t turn out too well and, as a result, 100% borrowing has all but disappeared.
However, there are still ways to buy property without putting down a deposit.
In this guide, we will run through the methods you can use to become a property developer, even if you don’t currently have the money to put down a deposit. There are five main ways to achieve this, all of them tried and tested.
Property development is a very profitable industry when done well, and is naturally very appealing to entrepreneurial types. Although there is plenty of money to be made, 100% joint venture development finance for inexperienced developers is very difficult to come by.
Of course, everyone has to start somewhere, and for aspiring property developers, there is a well-trodden path that many experienced developers once took. Here, we will break down some of the more common ways of breaking into property development.
Release equity from your own home
If you’re asset rich, but cash poor, with bags of equity in your own home, you can release some equity through a remortgage or secured loan. This would give you the cash needed to invest into potential property developments within weeks.
This is a strong option as it is simple and can be done quickly, but there are a few things to consider before jumping straight in, such as:
- What if your property investments don’t go to plan? Would you be comfortable having the burden of the debt used to fund it still outstanding against your home?
- The property you choose to develop will effectively be funded 100% through debt, which is a high-risk position, although as you’re looking to develop with no money, that’s a bit of a given.
- Consideration will have to be taken as to whether you are likely to qualify for a residential mortgage. The lender will want to assess affordability based on your current income, and is unlikely to use any speculative, future development income.
Of course, if you have a portfolio of properties, you could use one, or many of them to raise money against, which would usually be preferable to using your own home.
Provide additional security
There are lots of lenders out there who will offer 100% borrowing, if additional security is offered.
This security usually comes in the form of another property. The effect of using additional security is that the overall loan to value (spread across both properties) is at a level that is acceptable to the lender.
The lender takes a charge over both properties and releases the full amount required to purchase the new investment property.
Additional security can be taken over any property, either your home or an investment property. Where the second charge is taken over your own home, the loan becomes ‘regulated’ – and comes under rules required by the Financial Conduct Authority.
Although this increases the protection for you, it does limit the number of lenders who are able to offer property development finance to you.
Joint-venture property development is big business. The process is straightforward, you find a great potential property development and fully research the project. You then join forces with a second person, who is happy to provide the deposit, and usually any other security, such as personal guarantees that any lender may look for.
The theory is that one person has the project, does the hard work and is capable of seeing it through. The other provides the means to complete the project. As with any partnership, you must both do your part fully, finding a great deal is not enough.
By joining forces, both parties will win, as they will share profits on completion. One person profits heavily whilst doing very little work, and the other profits heavily with no financial risk.
Although traditional joint-venture funders won’t usually work with inexperienced developers, many local investors will. This tends to be the best way to approach this type of funding.
Buy under value & refurb
100% mortgages were generally used to buy properties at their full market value without having to put down a deposit or provide any additional security. Although this is not possible post-2006, there are still options out there if you manage to bag a property bargain.
The key distinction is between the purchase price and the open market value (what the property is worth). If you’re buying the property for less than its true value, there are lenders who will consider your loan to value against the open market value, rather than the purchase price.
This means that there is potential to purchase the property without putting down a deposit. This is most common where the purchase price is under 70% of the open market value.
Buy a property with a very short lease
When the lease on a leasehold property expires, ownership of the land and everything above and below it reverts to the freeholder. As the cost of extending the lease increases as the lease becomes shorter, properties with very short leases are often sold as the owner can’t afford to extend.
Such properties tend to be sold at a large discount to their open market value, as the lease is very short, and the value therefore very low.
By arranging for the lease to be extended at the same time as the purchase completes, the value is greatly increased on completion. As a result, the property can be left with a lot of equity in it, even if the purchase and lease extension are funded fully by debt.
The principle works in much the same way as under value purchases. Although 100% of your costs are borrowed, the lender is still left at a low loan to value when the new open market value is used.
These properties are generally funded using specialist bridging loans for short lease properties, which can be funded without the need for additional security.