Even in these times of economic uncertainty, more and more people are considering investing their money in property in order to take advantage of long term gains. The real estate market will rise and fall like any other market, but over the lifetime period of a mortgage – typically around 25 years – the value of property will rise, and offer substantially greater returns than simply leaving the money in the bank to accrue what most of us can agree will be a pitiful rate of interest.
The residential buy to let market is particularly buoyant right now. Since the credit crunch of 2007, it’s become incredibly difficult for first-time buyers to get their feet on the first rung of the property ladder. Whilst banks are now starting to show greater leniency, no traditional lender is going to offer 100% loan to value mortgages any more; it’s just far too risky for them.
When the financial downturn first happened, buyers were lucky to see mortgages offered at higher than 75% of the property value. To put that into context, at the time of writing this article, Zoopla had listed the average house price in London at an astounding £628,000! The UK average is closer to the £250,000 mark, so if we take a look at that more affordable end of the spectrum, buyers would still need a deposit in the region of £63,000. If buyers were able to save even 10% of that per year, then by the time they had enough saved up, the value of property would have increased – it’s a vicious cycle.
As we said, things have changed and it’s now not inconceivable to find a mortgage with a 95% loan to value again, although it would be more realistic to look at a figure of 90%. That being said, we’re still looking at a deposit of £25,000, and so whilst people find a way to save that deposit, their best option is to look at renting.
And so of course, this situation has opened up incredible opportunities for buy to let investors. Current buy to let mortgage rates are coming in from many lenders at under 2%. The equivalent rent on the property would more than cover the mortgage, hence there’s a nice income to be made, and most importantly, the investor is sitting on an asset which will appreciate at least 3% per annum, although it’s worth noting that some savvy investors have often bought into areas that have seen incredible rates of return.
Take a look at Hackey – an area in East London. Between the initial announcement of the Olympics being held in London in 2012 – which was announced in 2010, and the market’s peak, property in that area saw its value rise by a maximum of 63%, with other neighbouring areas seeing a figure closer to around 24% - that’s an incredible return on investment.
Buy to Let Mortgages
There are a number of differences between a buy to let mortgage and a ‘regular’ mortgage, but perhaps the most important distinction is that it is the property that comes under the scrutiny of the lender, and not the mortgage applicants.
In the traditional mortgage application, a borrower’s ability to repay the mortgage has usually been based on a simple calculation of multiplying their annual income by a factor of 3. Prior to the credit crunch, some banks were offering multiples of 6 or more, and many market analysts pointed to that excessive amount of lending as the root cause of the credit crunch itself.
However, with a buy to let mortgage, the lender will be looking at the proposed rental income on the property. It’s unlikely that any property investor would be looking to simply break even on their investment, so they’ll be presenting an investment to the bank which is showing a clear profit on a month to month basis.
Appreciation of the asset is still important. If tenants become difficult to find and the property remains vacant for months at a time, the borrowers could run into financial difficulty and find themselves unable to meet their mortgage payments, at which point the bank would want to see that property returned to the market so that the entire mortgage can be settled quickly.
Commercial Buy to Let Mortgages
At their core, there really is no difference between buy to let mortgages for residential and buy to let mortgages for commercial property. The banks – other lenders are available – are essentially sharing in a long term investment. As a borrower, you are working with their money, and like any lender, that investment needs to be worth their while in terms of turning a profit.
Now there are a number of ways in which, as a commercial property investor, you can approach the banks. Bridging loans and development finance often bring about a short term solution to the investor who requires a large amount of capital in order to get a commercial property investment project off of the ground. Such finance is more expensive, but it’s an expense that investors are willing to incur as, without eating into some of their profits, they would not be in a position to make any profit at all.
Commercial buy to let mortgages offer a much more long term solution to commercial property investment finance, and there are some substantial benefits. First, interest rates are low, with some lenders now offering buy to let mortgages at 1.9%. Second, even though the loan may be taken out over a period of 20 to 25 years, some lenders are now offering their buy to loan mortgages with no early repayment penalties.
This can be particularly significant if, as a commercial property investor, you’re looking at a renovation project. Much like the residential concept of ‘flipping’, a commercial unit is purchased in a prominent location but in a poor state of repair. The investor will have done their research, and may well be aware that a blue-chip commercial property client is looking to move into the area – the best example would be a supermarket chain who has seen that their competitors are doing particularly well in an up and coming neighbourhood and who can recognise the potential for themselves.
The property is purchased and renovated to the point where it is stripped bare and thus presented as a truly blank canvass with which our supermarket chain can transform it in line with the rest of their brand.
The lease is likely to be long term, with most blue-chip commercial property clients looking to take no less than ten years on a property.
From an investment perspective, a healthy profit can be turned around in less than 18 months, and hence when, as a commercial property investor, you return to the bank for your next project, they’ll recognise you as a solid bet.
Seek Out The Best Mortgage
Solid bet or not, there is a vast array of lenders to tempt commercial property investors into putting their trust in them, and it’s important to shop around. Much like applying for a residential mortgage, the smart money is not in walking up and down the high street or even mortgage comparison websites.
The best deals will always appear on the radar of the best mortgage brokers first, and at Prideview, we have an excellent team of people who will do just that. But their job is not simply to find the best buy to let mortgage, it’s to take a look at the investment as a whole and advise accordingly.
They’ll want to take a look at all of the criteria that you will have already considered – location, condition, market projections, affordability, etc – and act as a sounding board so that you can discuss the true potential of the asset and the commercial property investment as a project. If you’re new to investing in commercial property, then such advice is of paramount importance. It’s very easy to get swept up in the excitement that comes with becoming a commercial property investor, but it’s also important to have someone in your corner who has no issue with telling you when the choices you are making could use a little revision.
Be a Realist
At the end of the day, the property market is not kind to idle dreamers. Like investment in any property, additional costs are going to come into the equation. In the case of a renovation project, it’s likely that those costs will have been factored in when first structuring the deal, but even then, it’s important that the commercial property investor gives themselves a little financial breathing room if and when problems occur.
To succeed you must be a realist and take responsibility for the property you seek to rent. To start with the most basic equation, if you realise that the mortgage will cost you more than the rent each month, then you’re looking at a bad investment. It would be best to seek out a more cost-effective property and work your way up.
If you need more advice or want to know how Prideview can help you, contact us today to speak to our team.