which finance option is best for me

Which Finance Option Is For Me?

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While this blog is aimed primarily at property investors, the finance options outlined also apply to those looking to purchase their own residential property.

As an investor, you probably will have heard “Choose the right mortgage option and property type for you”, but what are these?

Knowing where to start with a Buy-to-Let property can appear difficult, especially if you’re only just starting out with your research. As an asset now synonymous with reliability and resilience, the growing popularity of Buy-to-Let property means it’s vital to start understanding the financing options and property types out there so you can meet your goals in a competitive market.

While all investments have a variety of financial considerations, Buy-to-Let property comes with different mortgages and property types, all of which have their own sets of benefits and drawbacks depending on what you’re looking to achieve.

Finance Options

If you’re considering your finance options, you’ll need a good idea of your financial position and your investment goals. This is key because the three common ways of investing in property depend on various factors:

  • The amount of time you intend on spending in the market
  • The returns you’re aiming for within that time period
  • Your risk threshold
  • Cash flow position

These, once identified, will then naturally determine the right finance option to meet your goals, which will likely include one of these avenues.

Repayment Mortgage (Capital and Interest)

What is it?

Essentially, this mortgage type involves paying back both the capital on the property, along with interest during your mortgage term. What often makes this option stand out against others is that by the end of the repayment period, you’ll own the property outright.

Is it right for me?

By paying back both the capital and interest, this mortgage option is usually more common amongst those with a bigger income. While other finance options mean that your rental income usually covers your mortgage, the bigger payments with this option mean that this is less likely.

Investors commonly use this rental income for any expenses that come with their property, such as maintenance and management fees. But with this finance option usually not offering this luxury, investors choosing a repayment mortgage will need a liquid income to account for any issues or void periods that may occur.

What else should I consider?

With this finance option, the returns are initially fairly low. The nature of your repayments means that over the mortgage term, you’ve been building up equity while paying your loan and interest off, meaning that the return on capital employed isn’t as strong as it potentially could be.

However, this finance option is arguably more beneficial for a long-term investment. By the time your mortgage term ends, you’ll own the property outright, so if you sell the property, there won’t be an outstanding mortgage to consider.

Interest-Only

What is it?

An interest-only mortgage is often the most common financing option, which is considered to be highly flexible when compared to other avenues. With this mortgage type, investors will pay off interest every month, but not their loan. Instead, when the repayment term ends, you’ll have to pay off the loan in full.

Is it right for me?

This finance option is usually more common amongst investors who don’t have a financial safety net to fall back on. By paying back just the interest every month, there will likely be more profit, which is often used for maximising savings.

For those who don’t have the cushion of a stronger cash position that can make a repayment mortgage more viable, this mortgage type is often more beneficial. The interest-only fees mean that the monthly payments are typically more affordable, which rental income usually covers with ease.

What else should I consider?

Although this option is considered to be more flexible than others, there are certain things to remember. As you’re only paying back the interest every month, when the mortgage term ends, you’ll have to pay this off somehow, whether that be by selling the property, or by alternative methods.

As a result, this mortgage doesn’t compare to alternative methods in terms of long-term potential.

Cash Investment

What is it?

Pretty self-explanatory, a cash investment involves paying upfront for the property. This means that you’ll have no mortgage to consider, and in turn, your monthly rental income will be yours to spend (or save).

Is it right for me?

Property is expensive, so this finance option is usually an avenue amongst those who have a high, positive net cash flow. That said, it is also an option for retirees looking to invest their pension pot, or those who have inherited a lump sum.

What else should I consider?

By removing the need for a mortgage, this finance option is usually more hassle-free than others and offers an immediate passive income.

While these investment pathways are just some of the common routes investors can choose, everyone’s situation is different. As this is intended just as a guide, thoroughly researching all of your options and seeking the advice of a financial advisor is key before making any concrete decisions.

Property Types

As one part of the puzzle, you might now find yourself thinking, “what property types can I choose from?”. Apartments and houses each offer plenty of positives that could be key to a successful property portfolio, which often includes:

Houses

Aside from getting a property that is usually bigger than an apartment, the opportunity to appeal to a wider tenant pool is a positive of investing in a house. Houses typically come with a garden, parking spaces and a garage, meaning that they tick a lot of boxes for families, that apartments often don’t.

Additionally, investing your money into a house gives the opportunity to turn your investment into a “house in multiple occupation” (HMO). This is often a popular path for investors who are looking for maximum returns on their property, with renting per room giving multiple monthly incomes.

Depending on the location of the property, investing in a house also gives the option of renting to students. Student accommodation with an institution is typically fairly expensive, forcing the majority to look for alternative options. Aside from driving demand, this also means that students are usually willing to pay higher rents.

While this also applies to apartments, the prices of this property type have seen consistent growth for the best part of 20 years. Property prices have been in an upward trajectory, with the UK average now sitting at £309,103. This means that in the long-term your house will likely gain more value.

Apartments

When you think of a city centre, whether it be London or Birmingham, do you see houses or apartments? A key benefit of investing in apartments is that they’re typically in more central locations than houses. Not only does this often make them highly sought after amongst young professionals, but more lucrative in terms of rental yield and income.

Apartments are usually more affordable to purchase than houses, but when considered with the high rental yields with this property type, Buy-to-Let apartments often have more potential for bigger capital gains.

Studios and one-bed apartments are usually popular amongst the younger generation, especially graduates and young professionals. This is good news for investors, with these compact apartments typically offering more affordability upfront, without compromising rental yields and capital appreciation.

But what about two beds? During the height of Coronavirus, we saw two-bed apartments rise in demand, with a lot of couples and single occupants searching for more space. This gives the opportunity for home offices or hobby rooms, which studios and one beds don’t. So whether you choose a studio, one or two-bedroom apartment, you can still expect strong returns on your investment.

Some apartment blocks also offer unique tenant-only facilities, which could lead to higher rents. These buildings are not only kitted out with eco-friendly additions, but some are also offering resident-only spas, collaborative working spaces and gyms. These Buy-to-Let properties are redefining the standards of the rental market, and will likely continue to rise in popularity amongst tenants.

From finance options to property types, there’s a lot of food for thought here, but as always, choosing the right combination for your investment goals is key.

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