How do I finance a rental property?

How do I finance a rental property

As a first-time investor planning to invest in rental property there might be an overwhelming amount of information to digest on how best to fund your investment.

Should you purchase a property yourself or put money into an investment fund?

There are several options available to investors, each with their unique set of risks and potential for reward. We consider the different type of rental property investment most commonly available.

Becoming a property investor

Investing in property can be extremely lucrative. There are plenty success stories of savvy investors who were eventually able to quit the day job by earning more than enough from their portfolio of rental properties.

UK real estate appeals greatly to all types of investors, both domestic and international. As an asset class it presents a strong case when compared to simply leaving money sitting in the bank.

The best known route into UK property investment is to purchase a rental property and earn regular steady income from the rent and in the long term see capital growth.

First time investors are having their heads turned by alternative property investment methods, perhaps from their view they are mitigating risk by merely dipping a toe into the vast real estate investment market.

So, what are the other options and are they worth considering?

Property crowdfunding

By definition, property crowdfunding is when a group of people purchase a single property asset together and each owns a share. In practice, there are now companies, usually an online platform, which bring together a large number of investors and manages the process for them. It will usually own many investment properties as a part of the fund.

A major appeal of these crowdfunding platforms for many are the low price of being involved, which can start as low as £100 as a minimum investment amount.

There are predominantly two types of property crowdfunding platforms, one focusing on property development and the most common being investment into buy-to-let property.

These investments are usually structured with the property being held within a company and you then purchase and own a share of that company.

Whilst the positives of these crowdfunding platforms might be low buy-in figures and a very hands-off approach, the reality is that you do not get to choose the properties being purchased meaning you have little control over the likelihood of success.

Property crowdfunding and peer-to-peer lending, our next header, are often confused by those new to these types of investing, not helped by platforms which might offer both types of investment strategy or even a product which is a blend of both.

With property crowdfunding you own equity in property (or the company which owns the property), with peer to peer lending you effectively become the mortgage lender, you own the debt, you don’t own the property in any way.

Peer-to-peer lending

In plain terms, peer-to-peer lending is simply lending money to another person or business without a bank being involved.

Peer-to-peer lending in property can either be to developers or landlords. Lending long term to landlords is deemed less risky and reputable platforms will only lend to creditworthy borrowers, usually professional landlords.

Some platforms will allow you to pick and choose who you lend your money to and others simply ask you to invest, they’ll choose where your money foes and provide you with their predicted returns.

Some peer-to-peer platforms might offer dizzying predicted percentage returns the reality could be much, much lower and on some occasions, you might even make a loss.

Whilst peer-to-peer lending might often be presented as an alternative to traditional rental property investment it really is very different.

Property ISA

Recently the Innovative Finance Isa has come forward as a way to help you earn tax-free from these investment platforms.

There are several investment property funds which facilitate your rental property investment being held in an ISA. You are essentially buying shares in a fund which invests in buy-to-let properties with returns based on rental income and capital appreciation of the portfolio.

Holding your investment in an ISA means you can shelter the investment from tax. Created by the government to encourage saving ISA’s come with a limit to how much you can put in each year so they really only work for smaller investors.

Innovative Finance ISAs don’t always work as they will only allow you to hold the investments of one new platform per year which isn’t ideal if you’re planning on spreading your money across several investment platforms. This factor combined with the limit on investment into the ISA can take this off the table as an option for some investors.

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Joint Venture

Another type of financing for a rental property is entering into a joint venture. These can be arranged between two or more people, it might be that one has the knowledge and skills to execute the investment and the other has the money to fund the investment. It could be any combination of people with different expertise or even two friends, the key is that there is more than one person involved.

From the perspective of a person looking for finance to purchase a rental property, it might be that they’ve found an ideal rental property but are looking for funding that isn’t from a bank or other type of lender.

First-time investors might not always find it easy to gain financial backing from another party if they only have limited experience in rental property so this route doesn’t always come to fruition.

Buy-to-let property

The most traditional route and one that has long proven to be a successful way of financing a rental property is to obtain buy-to-let lending.

There is an element of security in owning a rental property outright yourself; an asset you have chosen based on your own careful considerations – you are in control.

Buy-to-let investors who are not in a position or wish not to purchase with 100% cash will finance their rental property purchase with lending from a bank or similar institution. Lenders will have strict criteria and expect the property to perform financially.

This will require an investor to choose a rental property to buy that is predicted to provide stable returns, potentially has assured rental income and predictions for capital growth as these factors will all appeal greatly to a lender. Whilst your individual financial situation is a large factor when obtaining lending the property must also meet a lender’s set standards.

An inexperienced investor might struggle to find a property that meets the requirements set by the lender. A property investment consultant can help you find a property that meets the criterion.

Furthermore, once purchased a buy-to-let property needs to house good tenants, the property needs to be managed and rent collected each month. All elements to consider but all easily solved by working with the right team of professionals.

How can we help?

Entering into the world of buy-to-let property can seem daunting, obtaining finance for your rental property is the first hurdle, finding the right property is the next step and one we can help with. For more information on our services, you can call us on +44 (0) 2039507939 or send us an email at