Property Investment and Management: Identifying your budget

Property Investment and Management for Beginners

From First Purchase to Managing a Portfolio – Identifying your budget

Continuing on our journey exploring property investment and management for beginners from first purchase to managing a portfolio. This month we are looking at identifying your budget.

How much cash or savings do you have and are willing to put towards the purchase of a property as an investment. Banks are often willing to lend subject to a few requirements. They will expect you to use your own capital or cash to fund part of the purchase.  

The banks will offer a percentage of the purchase price depending on their appetite for lending and the sector in which the property or business sits. This is known as the Loan to Value (LTV). 

Currently the business and banking community are expecting a recession over the short to medium term. Therefore they are looking to fund a lower percentage of the purchase price than in times of economic boom or even stability. This is in effect lowering the lenders exposure to risk.

Challenges and considerations

What if you cannot keep up with repayments. Lenders must then re-possess the property and would be selling it in a currently depressed market. There is the potential that they could not achieve the amount of money they have lent. 

Lenders advertise rates to attract customers, the actual LTV rates are normally somewhat lower than those available once the application process has begun. We would always advise using a finance broker to ensure that you get hold of the right product at the right rate and LTV.

Current advertised loan rates are up to 75%, but most property loans would be between 50 –60%.  If you were buying a retail unit for £250,000 you would need to have £130,000 in capital/cash available once fees, valuations and insurances are considered.  

The lender will require that an independent valuation from a chartered valuation surveyor is completed to confirm that the purchase price reflects the value prior to completion, you will pay for this as well as an admin fee. The lender will work from the valuation when calculating LTV’s and risk.  

Any loan repayments must be considered when calculating your return on investment.

Another way for business owners to purchase property is through their Self-Invested Personal Pension or SIPP

A SIPP works in a similar way to a standard personal pension. It gives you a much wider choice of investments including commercial property (not residential). This allows you to purchase the property through a SIPP “wrapper” and pay a rent that goes directly back into your pension.

This is a very simple explanation and the rules around SIPP’s are anything but simple. We would advise you get additional advice from a SIPP provider or financial advisor before proceeding. There are additional costs involved including solicitor’s fees in setting up the lease and regular valuations to ensure that it complies with legislation.  

Please do contact us if you have any questions office@jsreakes.co.uk

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