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Do your lenders love you?

ninja learning Feb 10, 2018

Many people aspire to become a full-time property investor, but I wonder if they’ve considered the adverse effect it has on their ability to raise a mortgage.  They might find it better to slow down and take their time reaching that pivotal moment when mortgages are less critical to their property investment.

To be able to create enough passive income from property to be able to give up the day job and become a ‘full-time property investor’ seems to be a highly desirable state – a nirvana.  It is frequently encouraged on property courses and at meetings.  It is held up as the definitive status symbol, to be worn almost as a badge of honour.  Property speakers often spit out the term ‘wage slave’ as a form of derision.

There is undoubtedly great merit in finally being able to throw off the shackles of an unrewarding and unfulfilling job.  There is a huge sense of achievement in bringing about such a momentous life change.  However, what happens when you realise that your portfolio expanding ambitions may have just ground to a halt?

Nobody can argue that it is not an achievable goal, but its achievement will bring you into conflict with almost all Buy-to-Let lenders.  The last thing these lenders want is full-time investors.

The type of Buy-to-Let investor that the lenders (commercial lenders aside) want to lend to now would look like this:

  • Has a full time job unrelated to property
  • Has good earnings to cover their mortgage payment in the event of any rental voids (for most lenders, that’s in excess of £25,000 per annum)
  • Has a few, but not too many properties. Each lender has a view on what ‘too many’ is.  Lenders fear that the more properties a landlord has to look after, the worse job they do, so the property’s value can suffer
  • Has a nice wedge of their own (not anyone else’s) cash that can be put down as a deposit. They know that investors look after a property more diligently when they have their own cash tied up in the property.  Conversely, most of the problems have arisen where the borrower has refinanced all his cash out of the property and is ambivalent to making the mortgage payments on time, maintaining the property properly etc.  It is common for lenders to ask for not only proof of deposit, but also an audit trail of where that deposit has come from in the preceding 12 months.  This has now been extended to post completion random audits one or two years down the line, instructing the borrower to provide the audit trail of the deposit

With these issues in mind, it’s prudent not to rush headlong into a full time property career.  The secret is to plan it more strategically so that, when you finally make that move, you are much less reliant on getting future mortgages from Buy-to-Let lenders.

Get clarity on just how many properties will give you the cash flow needed to replace your employed income.  Just as important, get clarity on how you will continue to be able to raise mortgages on any future additions to your portfolio when you now no longer meet BTL lenders criteria.  Don’t wait until after you’ve quit your reliable income generating employment to check this out.

When you leave the BTL world behind, or more accurately, those lenders leave you behind, you naturally enter the world of the commercial lenders.

Commercial lenders embrace full-time landlords, or at least they embrace those that are experienced, profitable, organised and professional about their business.  A massive portfolio is not necessary, neither is a portfolio of just commercial property.

It is tougher to get interest-only mortgages with commercial lenders as repayment mortgages are their norm.  But it is still possible to get an interest-only mortgage, you just have a reduced choice of lenders.  Some single lets may not generate a positive monthly cash flow from a repayment deal, but cash flow is much stronger with HMOs and multi-lets, so some landlords still make good positive cash flow even though they are on a repayment deal.

The lesson is to stick to the day job for as long as you need to get more BTL mortgages; however unpleasant and demotivating it may be.  Quit the job when your profile is desirable to commercial lenders, then you can enjoy your new-found freedom with greater peace of mind.

Learn how to do this on the Ninja Investor Programme or on one of the Property Finance Masterclasses.


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