At a time when Banks are sitting hard on their cash reserves, Investors are having to find more innovative ways of Finding Finance. Finding the money is only the first hurdle you will have to jump if you or your business are going to ultimately secure the funds for expansion, redevelopment, commercial premisses or whatever else it is that the business needs to grow.
So.. What makes one person’s pitch for finance rock and another’s roll?
It’s The Fizz.. It’s ‘The Soda in The Campari’
Lenders look for certain information when they consider a Finance Proposition. They remember what to ask for by referring to CAMPARI.
C is for Character and that’s your Character. Just like any partnership; and essentially anyone lending you money is becoming your partner in business. You wouldn’t think about taking on a partner unless you knew and trusted the person you were going into business with, so why should the lender. That’s why it’s always best to start with a lender who knows you and your business. Failing this, you have to convince the lender that you are trustworthy.
A is for Ability; can you do what you say you can do, can you prove it. It may be that you have Educational Qualifications in your field of expertise or that you have years of experience running a similar business.
M is for means; God forbid your business plan will fail, but if it does can the lender recover its loan from your assets. Lenders hate risk and conversely love security, be prepared to provide a personal guarantee or use your home as security if there is no security in the business itself.
P is for Purpose; so what’s the money for? If your business needs money to support a sinking ship, then think again. Tighten the sails and stop the leaks first. Lenders like forward thinking businesses, those that are full steam ahead..heading for distant shores..not sinking.
A is for Amount; is the amount you are asking for the right amount to achieve the objectives of your plan. Prove it.
R is for Repayment; The lenders want to see that you can afford the monthly repayments for the debt. They want to be convinced that your cash flow forecast is not a work of fiction, rather based on reliable data, such as a full order book or OAP’s banging on the door of your nursing home.
I is for Insurance; The worst case scenario - something might go wrong; your key person might become ill or die, the factory might burn down..not likely but possible. Any self respecting lender would want to know you had considered all eventualities and having the right insurance will cover these bases.
Meeting the Campari criteria requires some tough work ahead and thats before you make the pitch for finance.
The pitch requires the Soda..the Fizz which will sell your plan to the lender.
Can you have a Campari without the Soda.. yes of course but will it hit the spot, I doubt it.
£5 in the Pig £15 on a Buy to Let Mortgage
So, how is buying a property to rent different from buying a home to live in? The property price is of course the same but the type of funding available to purchase a Buy to let is different. Why? Because it carries more risk for the lender.
As an independent Mortgage Broker I have access to 30 lenders who combined are presently offering hundreds of deals for Buy to Lets Fixed and Tracker rates from 3.19% over base. The Lenders require capital of between 25-50% of the property value. They will also want you to demonstrate that rents of 125% are achievable. Obviously the less risk the lender is exposed to the better rate you will be able to get.
You may have heard stories about investing in Buy to Lets with ‘No Money Down’; strictly speaking this practice is illegal and frowned upon by lenders and the FSA and is one of the reasons so many property owners are now in financial difficulty.
The moral of the tale is if you are going to borrow money to buy property do it sensibly, treat tenants fairly and keep your property in a good state of repair. If you have confidence in the market and your ability as a Buy to Let Landlord then in the long term you will be rewarded handsomely.
To summarise you will need:
At least a 25% deposit.
Rents in excess of 125% of Mortgage repayments.
To demonstrate that you are a Credible Landlord (this may be evidence that you have already succeeded in the industry or that you have a business plan which clearly sets out how you are going to manage the property) or that you will be using an ARLA (Association of Residential Letting Agents) accredited property agent.
Although lenders don’t usually require it, it’s always a good idea to protect any loans you take out in case of the unexpected happening. For example you may become ill or even die unexpectedly and be unable to manage your portfolio, leaving your nearest and dearest responsible for repayments and management. For the sake of an extra few pounds a month much of the risk can be insured against.
The other factor that affects investors is the ongoing and terminal Tax considerations of Buy to Let Investments.
In the short term all rents are treated as income and should be declared on a Inland Revenue Self Assessment tax form within the property pages. The good news is that expenses of the letting business can be offset against the rent, for example:
Mortgage interest
Agents fees
Repair and maintenance Costs
On disposal of the property any Capital Gain (the difference between the buying and selling price less certain costs) is subject to Capital Gain Tax. There is now a single tax rate of 18% of the Gain. However in each tax year (April –April) individuals are entitled to make a Capital Gain of £10100 (2009/2010) before any gains are subject to Tax, it follows that if an investment is in joint names the entitlement increases to £20200 as two personal allowances are due. There are also special rules in place where you have personally lived in a property before disposal. For more information on Tax issues the Inland Revenue’s website http://www.hmrc.gov.uk is a great source to delve into.
Now you have read my Buy to Let Blogs do the Buy to Let Quiz.
Helen Clover- Edinburgh, UK
