Don’t make mistakes when financing investment property
If you’re considering property investment as a strategy to increase wealth, produce income, or both, you will probably be thinking about ways to raise the deposit you need for that first purchase. There are question marks about the ability of the Bank of Mum and Dad to be a provider of funds to future property investors. More likely you will release equity from your home as the buy-to-let deposit.
In this post, I’ll describe six elements you should consider when using equity release as a strategy to take advantage of the benefits of leveraging in property investment.
1. Only use your equity for its intended purpose
It’s easy to look at the equity you have available in your home and ‘pinch’ a little bit here and there. An expensive family holiday to Florida suddenly becomes affordable. A new car is no longer a luxury. Spending like this simply depletes your equity. These purchases don’t have any chance of showing a financially profitable return.
2. Remember that taking equity is increasing the debt
When you have a big amount of equity in your home, it is sitting in bricks and mortar and not working as hard as it could. If you release, say, £100,000 to invest, the idea is to increase the value of that equity release over time. You want something to show for your efforts.
However, never forget that you have built your debt to do so. If your £100,000 extra debt costs you 4% in interest and enables you to make an 8% return, then you’re getting some bank for your buck. If it only produces 3%, then you’re not even making enough to cover the interest on your loan, never mind repay it.
3. Get an easy-to-manage equity release loan
You don’t want to have to go over old ground every time you want to release some equity. Make sure you don’t have numerous forms to fill on every single withdrawal. It becomes laborious, monotonous, and time-consuming.
4. Be wary of fees
Many equity release loans charge fees. Be wary of annual fees or charges, especially if they are noted as “may vary”.
5. Assess your situation regularly
Even though the best way to invest in property is a “set and forget property portfolio philosophy”, you should regularly assess your financial situation. The day-to-day tasks of property management can be delegated to a professional property management company (we recommend using Ezytrac Property Management). The important task of reviewing, revising, and recalculating your property portfolio finances needs to be done at least every two years.
Part of this process should be to review your cash flow projections.
While we’re discussing set and forget, why not download Brett Alegre-Wood’s award-winning 3+1 Plan (Property is the New Pension)? You’ll receive a free 20-minute module Set and Forget Property Course.
6. Always use an experienced buy-to-let mortgage advisor
Always speak to a buy-to-let mortgage advisor when considering releasing equity for property investment purposes. Not only do they know their market inside out, but they’ll also understand different property investment strategies. They’ll understand your motivations, objectives, and considerations with far more clarity than an ordinary mortgage advisor or bank mortgage salesman.
Equity release is the most common way for beginner property investors to get started in a property. As your portfolio value increases, you’ll probably use the strategy to grow your portfolio faster. Every time you do, always tick off these six equity release considerations.
This will help keep you disciplined and make sure that equity release continues to be cost and performance effective.
For more information or to be put in touch with one of our recommended buy-to-let mortgage advisors, contact the team at Gladfish today on+44 (0)207 923 6100.