Turning a Fixer-Upper into a Rental Gem: Anthony Wright’s Expert Advice on Financing Your Property Renovation
In his latest Q&A session, renowned mortgage expert Anthony Wright offers valuable insights to a reader looking to purchase a ‘doer-upper’ property and transform it into a rental. The reader seeks guidance on how to finance both the property purchase and renovation work, which they anticipate will take between six months to a year. Let’s dive into Anthony’s expert advice on the best route to take for funding your project.
The Question
“My spouse and I are considering buying a buy-to-let property and are particularly looking at ‘doer-uppers.’ We’re wondering if we can fund the renovation work through a buy-to-let mortgage or a short-term secured loan. We expect the renovation process to take about six months to a year. What would be the best approach?”
Anthony’s Response
Firstly, congratulations on taking this exciting step toward property investment! Purchasing a buy-to-let property is an excellent way to generate passive income, and it’s great to see you’re looking into ‘doer-uppers,’ which can offer the potential for substantial returns once renovated.
However, there are some nuances when it comes to financing a property for rental purposes, particularly when it involves purchasing a property that requires renovation. Unlike a typical residential property purchase, buying a ‘doer-upper’ with the intention to rent it out afterward isn’t quite as straightforward, especially when it comes to financing.
For buyers like yourselves, a standard buy-to-let mortgage is not typically the best option. Instead, you would likely use a bridging loan. As I discussed in my previous article, a bridging loan is a form of short-term financing designed specifically for situations like yours. These loans are usually granted for a term of around 12 to 24 months, which would give you sufficient time to complete the necessary renovations before placing tenants in the property.
What makes a bridging loan especially suitable in this case is that the lender is not only going to help fund the property purchase but will also release additional funds to cover the cost of renovations. This ensures that the property meets a rentable standard before you begin the process of letting it out. The lender will typically request a schedule of works from your builder, which outlines the renovation plans in detail and serves as a guide for the funds to be released in stages as the work progresses.
Now, when it comes to securing the necessary funds for both the property purchase and renovation work, there are a couple of options available to you. The most common approach is to consider secured loans or a remortgage on an existing property you own (assuming you have equity in it). This means the lender will consider your income and expenses to determine how much you can borrow, and they will treat this loan as a second charge on your property.
The funds from this secured loan can then be used in various ways. For example, you could use the full loan amount to purchase the property outright with cash, or you could use the funds as a deposit for the purchase and secure additional funding for the renovation work, often referred to as development finance.
Both of these strategies are viable, but the approach you choose will depend on your financial situation and the scale of your renovation plans. When opting for development finance, the ultimate goal is to either sell the property once the renovations are complete or refinance the property based on its increased value after the work is done. This is known as the Gross Development Value (GDV), which refers to the projected market value of the property once all renovations are completed and it is in a rentable condition.
Key Considerations for Your Project
As you embark on this exciting venture, it’s important to keep a few key things in mind. The type of renovation project you choose is crucial, as some projects might require more time, money, and expertise than others. Ensure that the builder you hire is experienced with such projects and has a proven track record of successfully completing renovations to a high standard within a reasonable timeframe.
Additionally, you should think about what you’ll do with the property once the renovation is complete. While selling might seem like a quick way to cash out, keeping the property as a rental can offer long-term financial rewards. Carefully consider the local rental market, expected rental income, and the potential for property value appreciation over time.
Anthony Wright is an expert development broker with years of experience in helping clients secure the best mortgage solutions for their property ambitions. With a background working with the UK’s top financial institutions, Anthony is highly skilled in guiding clients through the complex world of property financing, whether it’s for buying their first home, purchasing a second property, or building a profitable buy-to-let portfolio.
As a multi-award-winning broker with four years of industry expertise, Anthony is well-positioned to answer your questions and provide personalized advice based on your unique circumstances.
So, whether you’re just starting out or you’re a seasoned property investor looking to expand your portfolio, don’t miss out on expert advice from professionals like Anthony Wright to help you make the most informed decisions on your property ventures!
