Investing in a buy-to-let property can be a great way of creating a regular source of income (through rent) whilst building long-term wealth. But what if you don’t have large sums of cash ready to invest? Don’t worry—there are still practical and responsible ways you can make a buy-to-let purchase happen.
Here’s a guide to help you explore some of the different options for financing a buy-to-let property if you don’t have all the cash on hand.
1. Consider a buy-to-let mortgage
A buy-to-let mortgage is a popular way of financing a rental property. These mortgages are designed for property investments and though they do often require a deposit, lenders may offer higher loan-to-value (LTV) ratios for well-qualified borrowers.
- Interest-only payments: buy-to-let mortgages are often interest-only, which means your monthly payments just cover the interest, making it easier to manage cash flow. At the end of the mortgage term, the loan principal will still need to be repaid.
- Rental income requirements: most lenders will want to see that the expected rental income can cover at least 125% of the mortgage payment. You should make sure to research rental yields for similar properties before applying.
- Higher deposit requirements: while you might be able to secure a higher LTV, most buy-to-let mortgages still require a deposit of at least 25%. Without that cash to hand, you could consider a HELOC to cover the deposit…
2. Use a HELOC (Home Equity Line of Credit) as a purchasing vehicle to fund your deposit
Don’t have a deposit? One option is to use the equity you’ve built up in your current property as a way of funding your next investment. By making the most of the flexibility that a HELOC offers, you can seize the opportunity of a buy-to-let property without having to endure the lengthy approval times that come with securing a buy-to-let mortgage first.
HELOCs are popular with homeowners in the US, Canada and Australia, but Selina is the first provider to offer them in the UK. Here’s why this way of using a HELOC works:
- Flexible borrowing: a HELOC allows you to access a line of credit based on the equity stored in your home. You can borrow and repay funds within a certain limit, typically for a long-term period. Easy to set up, if you’re eligible, you could have the approved funds in your account in as little as two days after you have submitted an application.
- Agile approach: whilst using a HELOC to get your property purchase over the line, you can take your time securing a longer term source of finance. When this comes through, you simply pay off the HELOC; because the funds are multipurpose, you can use them to fund renovations, or to secure the next buy-to-let deposit!
- Low interest rates: the interest rates offered with a HELOC tend to be lower than with unsecured loans (like bridging loans), as the loan is secured against your property. Rates will likely be higher than with a buy-to-let mortgage, which is why you’ll want to use the time the HELOC has afforded to set up a longer-term source of financing.
Learn more about a Selina HELOC
3. Look into property auctions
Properties at auction often sell below market value. They can be ideal for investors looking for affordable entry points, especially if you’re prepared to do some work on the property.
Whilst the potential upsides are clear (discounted property prices, quick transactions…) it can be riskier than buying through an estate agent, and you'll usually need to have the funds to pay for the whole property within 28 days. To get around this you could…
- Consider a HELOC: as above, a HELOC can be set up in advance within a shorter time frame than a mortgage, and will allow you to have enough money prepared whatever happens in the auction. You’ll also know your interest rates and can therefore plan a bit upfront. The downside is that your current home will be used to secure the loan, as collateral.
- Consider a bridging loan: a short-term loan that can be arranged quickly to cover the property’s purchase price, a bridging loan can pay for the property whilst buying you enough time to refinance later with a mortgage. These sorts of loans can be expensive, and you’ll need to have an exit strategy ready.
Learn more about how Selina can support you buy-to-let initiaitve
4. Partner with an investor
If you don’t have the funds, partnering with someone who does could help you on your way to acquiring a buy-to-let property. This could be a particularly good option if you have expertise in property management but lack the upfront capital.
- Profit-sharing agreement: a joint venture can be structured so that both parties share the profits. It’s common to set up a partnership agreement that outlines each person’s responsibilities and share of any future rental income or profits.
- Additional skills matter: if you can handle property management, repairs, or renovations, this might be appealing to potential investors. They get a partner who can contribute non-monetary value, while you avoid having to front all the cash.
5. Explore peer-to-peer lending platforms
Peer-to-peer (P2P) lending has become a popular way of securing funding without having to go through traditional banks. Like a marketplace, P2P lending platforms help match people and businesses that want to lend money with those that want a loan. It’s a way for borrowers to get funding without going through the traditional channels, such as banks and building societies.
- Flexible loan amounts: many P2P platforms let you borrow money that can be put towards a buy-to-let investment. Terms vary, so if you’re clever, you could potentially find an arrangement that suits your budget and timeline.
- Competitive rates: depending on your creditworthiness, P2P loans may offer competitive rates compared to other forms of financing. It is, however, essential to consider the potential risks; unlike with banks and regulated loan providers, your money won’t be protected if something goes wrong.
Final takeaways: investing in a buy-to-let property when you’re strapped for cash
You don’t always need to have a lot of money saved to start building a property portfolio. By tapping into alternative financing options like HELOCs, exploring property auctions, or partnering with investors, you can get started in the property market without dipping into cash savings. As with any investment though, it’s always essential to do proper research; you ought to understand the risks that come with each option, and seek professional advice so you can make the best choice for your needs.
To learn more about how Selina can help improve your personal finances, visit our site or speak to one of our advisors today.
