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Rent-to-Rent to Buy-to-Let

Uncategorized Dec 05, 2021

Rent-to-Rent is a great way to get into property without having a big lump of cash to invest.  But it is time-consuming as you’re operating as the landlord, with all the responsibilities for maintenance, finding and monitoring tenants, etc. - you have to work hard to make a profit.

Given that most rent-to-rent properties belong to owners who simply can’t be bothered to look after them, they’re often open to selling if it’s worth their while.

If your rent-to-rent is coming to the end of your contract and you think the landlord may be interested if you make an offer, but you haven’t got a big enough deposit yet, does that mean you have to just carry on with rent-to-rent until you’ve built up your nest-egg?

Not necessarily!

Breaking the barriers

The first barrier is finding a lender willing to give you a mortgage to buy the property.

The second barrier is finding a way around the deposit challenge if you don’t have enough to put 25% down. 

A rent-to-rent contract with the current owner breaches the 'arm's length transaction' requirement that virtually every lender insists on.  Arm's length means that the buyer and seller have no pre-existing relationship (family is excluded and acceptable). 

Why is this an issue for lenders? They usually have past experience where collusion between buyers and sellers known to each other has disadvantaged the lender.

The basis of any mortgage granted at point of purchase is - the lower of purchase price or value.  So the mortgage lender will calculate the value based on current market value - even if you’ve improved the state of the property to uplift its value. 

That means that even if you improve the value of the property by 25% hoping to work around the deposit - that isn’t going to work.

The solution to both of these barriers is to buy the property first, then get a mortgage on it.  How does this work?

  •  Once you own the property, mortgage lenders are unconcerned about the previous owner.  Any relationship between you is now irrelevant.
  •  As you already own the property, mortgage lenders are prepared to consider lending on the value, rather than the purchase price.  Some lenders are more open to this than others.  Plus some want you to own it longer than others, usually 6 months. A good broker is probably essential to getting the most appropriate lender at the point of getting it mortgaged.

But how do you buy the property if you cannot use a mortgage to buy it?  There are two ways to do this.

Cash - yours or someone else's.  100% of the purchase price of any property is a lot of cash to find.  That means finding a Joint Venture partner who satisfies the FCA’s regulations about ‘sophisticated investors’  - and giving away a chunk of your profit, which may make the deal not worthwhile.

Bridging finance - the interest rates for this kind of loan are higher, but it is a means to an end - improving the property’s mortgageable value.  Plus it will almost certainly cost you less than you would pay a joint venture partner in profit-share.  Not any bridging loan will do though - most bridgers lend on exactly the same basis as mortgage lenders - the lower of purchase price or value. So you would still need a 25% deposit.

The solution is one of the five types of bridging loan that I have identified in over a decade of brokering hundreds of bridging loans - a Done up Value Bridge.  This lends on the uplifted value at point of purchase - usually at 75%. 

You will probably still need a deposit, but less than 25% if you can negotiate a below market value purchase price.  There are other costs to setting up a bridging loan that will also need to be found, but it does allow you to buy properties that might otherwise be beyond your current financial resources.

In addition bridging allows you to get a big chunk of your money out of the deal at the point you remortgage (or sell) and you’re ready for the next deal.

It needs thought and careful management, but the transition from rent-to-rent to buy-to-let is definitely achievable.

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