How to Leverage Financing Options for Property Investment

Tapping in to Financing Options to Fund Your Property Investments 

When it comes to property investment, financing can be the key that unlocks the door to new opportunities. Without it, it can be difficult to get started or scale up your portfolio. But with the right financing options, you can make your money work harder for you, to access better properties and grow your investment faster than you might expect.

Leveraging financing simply means using other people’s money – like loans or mortgages – to fund your investments. This way, you can stretch your own capital further and create more opportunities to build your wealth over time.

At Purseglove Property, we know that busy professionals don’t always have the time to navigate the ins and outs of property investment. That’s why we help busy people build their property portfolios, offering straightforward advice and support so you can invest wisely, without the stress.

The Basics of Property Financing

Property financing doesn’t have to be complicated, and it’s key to unlocking more opportunities in the market. Let’s break down a few essential concepts:

• Leverage: Using borrowed money to increase your investment power. 

If you have £150,000 to invest, you could buy one property outright for £150,000, or put a 25% deposit (£37,500) on four similar properties worth £150,000 and borrow the remaining 75% from the bank.

If you choose the latter, you’ll own £600,000 worth of property investments, and if property prices increase by 50% over the next 10 years, you’ll gain £300,000 in equity instead of £75,000 if you’d bought just one property outright..

• Loan-to-Value (LTV) Ratio: How lenders decide how much they’re willing to lend you. 

Most lenders will offer 70-75% of the property’s value, and you contribute the remaining 25-30%. In some cases, lenders may offer higher LTV ratios (up to 80-85%), but the trade-off is usually higher interest rates to reflect the increased risk.

• Interest Rates: The cost you pay to borrow money, typically expressed as a percentage of the loan amount.

Interest rates can be fixed or variable. With a fixed rate, you know exactly what you’ll pay for a set period – usually 2 to 5 years – and this gives you better control over your cash flow. After that, the rate often becomes variable, meaning it can change based on market conditions. Many investors choose to refinance before the fixed period ends, so their payments stay predictable and easy to manage.

We know it sounds rather technical, but you don’t need to be a finance expert to get this right. At Purseglove Property, we can guide you through the process and help you make informed, confident decisions every step of the way.

The Different Financing Options Explained

When it comes to funding your property investment, there are several routes you can take. Let’s explore the most common options and how they work:

Traditional Mortgages

The most well-known way to finance property is through a traditional mortgage. With a mortgage, you borrow money from a bank or building society to buy a property, and then pay it back over time with interest.

There are two main types of mortgages to consider:

• Fixed-rate mortgages: The interest rate stays the same for a set period (usually 2 to 5 years).
• Adjustable-rate mortgages: The interest rate can change based on the market, which could mean your payments go up or down over time.

When applying for a mortgage, lenders typically want to see that the rental income from the property is at least 125% of the mortgage payment (sometimes up to 140%). This will make sure you can cover the mortgage (and have some breathing room).

Releasing Equity Through Remortgaging

If you already own investment properties, one of the most common ways to raise more funds is by remortgaging. This usually happens at the end of a fixed mortgage term and gives you the chance to switch to a new deal (often at a better rate) to release some of the equity you’ve built up. It works like this:

If the value of your properties goes up over time, the gap between what you owe and what they’re worth increases. When you remortgage, lenders assess the new property value, and you can borrow more against it.

For example, let’s say you bought four properties for £150,000, with a £37,500 deposit on each. Fast forward 5 years to the end of the fixed term, and these properties are now worth £180,000 each.

The £600,000 of property initially purchased is now worth £720,000 in total. If you refinance them at a 75% Loan-to-Value (LTV) ratio, you could borrow £540,000. This allows you to pay off the original £450,000 mortgage and still have £90,000 to use for new investments, like refurbishments or deposits for additional deals.

Bridging Finance

Bridging finance is exactly what it sounds like – a way to bridge the gap between buying a property and securing longer-term funding like a mortgage. It’s often used when speed is essential, such as buying at auction or during a renovation where the property isn’t yet mortgageable.

It’s sometimes seen as an expensive way to borrow, and if you’re comparing it directly to a mortgage it is. But the two are completely different products designed for different purposes, so they shouldn’t be compared. Bridging is about flexibility and speed, not long-term affordability.

It’s important to note that bridging finance typically has a lower LTV ratio than a traditional mortgage, usually around 60 to 70%, so you’ll need a larger upfront deposit to get approved. Also, rather than paying interest monthly, interest is deducted upfront. If you borrow £100,000 at 15% interest for 12 months, you’ll only receive £85,000, with the full £100,000 due back at the end of the term.

Used in the right way, bridging can be an effective tool for investors, but it’s important to have a clear plan and a solid exit strategy before jumping in.

Private Investors & Partnerships

Another option is to work with private investors or set up a joint venture. This could be a family member, friend, or business partner who helps fund your property investment in exchange for a return. In this case, they act as the “bank” by lending you money, and you pay them an agreed-upon interest rate.

The key benefits of this method are speed and flexibility – you can skip the lengthy approval process of a bank and may be able to agree on more favourable terms. That said, it’s not without its risks.

You don’t always have to share profits, and some arrangements may feel more casual (especially if you’re working with someone you know). But mixing business with friends or family can get tricky if things don’t go to plan. That’s why it’s always a good idea to have open, honest conversations up front.

If you do enter into a joint venture with friends or family, make sure to ask yourself “What happens on the worst day?” So that if something goes wrong, that scenario has been thought through and agreed on. Discussing those things early on, and ideally putting them in writing, protects everyone involved and reduces the chance of future misunderstandings.

Creative Financing

For those who are looking for more flexible, alternative approaches, there are creative financing options to consider. Here are a few examples:

• Seller Financing: In this scenario, the seller agrees to finance part of the purchase price, effectively acting as the lender. This is similar to a joint venture, where you both benefit from the arrangement, and you can avoid dealing with traditional banks.
• Lease Options: This is where you agree on a future purchase price but “rent” the property with the option to buy it later. This can be a useful strategy if the property is currently worth less than what the seller owes, as you can agree on a price today and buy it later when property values have hopefully increased.

Creative financing is especially useful in low-capital situations or when you want to leverage (borrow) more of your investment to grow your portfolio faster. At Purseglove Property, we can guide you through the process. Get in touch to book a strategy call to see how creative financing could work for your next deal.

Choosing the Right Financing Option for You

Choosing the right financing option is one of the most important decisions you’ll make in your property investment journey. With so many different options available, it can feel overwhelming at first, but by considering a few key factors, you can make the right choice for your specific situation. Here’s what to think about:

Market Conditions

Before deciding how to finance your property, it’s essential to take the market conditions into account. For example, interest rates can significantly impact your monthly payments and overall costs.

If interest rates are low, you might want to lock in a fixed-rate mortgage for a few years to benefit from predictable payments. On the other hand, if rates are high, you could wait until the market cools down or explore alternative financing options like private investors or creative financing.

But even in a low interest rate environment, it’s crucial to stress test your deal (i.e. running the numbers based on a higher interest rate than you’re currently paying). A lot of investors who borrowed heavily when rates were at historic lows have since struggled to keep up with payments after re-mortgaging at today’s higher rates.

It’s also worth considering whether property prices are rising or falling. In a rising market, it might make sense to move quickly and take on higher-risk investments, knowing that property values will likely increase. In a slower market, you might want to focus on lower-risk investments or those with steady returns, such as buy-to-let properties.

Your Financial Situation

Next, take a hard look at your financial situation. How much capital do you have to invest? What are your income and savings like? Are you in a strong position to cover your mortgage payments, or would you need to rely more on rental income to make it work?

Many property investment courses sell the dream of passive income and quitting your day job – and yes, it’s absolutely possible. But we’ve seen too many people make that leap too early. Giving up steady employment too soon can make it harder to secure finance, and if a property doesn’t perform as expected, you might find yourself under pressure if it’s your only source of income.

We’re big believers in building a solid foundation first. Investing should give you more freedom, not more stress. It’s worth planning your finances carefully and keeping a buffer in place as you grow.

A good rule of thumb is to ensure that your gross rental income covers at least 125% of your mortgage payments (this is usually a requirement for lenders). If you’re uncertain about how much you can afford to borrow, it might be helpful to speak with a financial advisor or a broker who can help you assess your financial capacity.

Another key factor is your equity. If you own properties already, do you have enough equity to release and use for further investments via options like refinancing? This could give you the flexibility to scale your portfolio more quickly without needing additional savings upfront.

Don’t forget to assess your risk appetite. Some financing options, like adjustable-rate mortgages, can be riskier if market conditions change, so it’s essential to feel comfortable with the level of risk you’re taking on. If you prefer more stability, you might lean towards fixed rates or partnerships where the financial terms are more predictable.

Your Property Strategy

Finally, think about your property strategy. What kind of investor are you, and what’s your end goal? The strategy you pursue will influence the type of financing that suits you best. Here’s how it might break down:

• Buy-to-Let: If you’re looking to build a portfolio of rental properties, traditional buy-to-let mortgages are often the best choice. These loans are designed to cover the cost of the property while generating rental income to cover the mortgage. If you’re planning to buy multiple properties, borrowing against your equity or using mortgages can help you scale faster.
• BRRRR (Buy, Refurbish, Rent, Refinance, Repeat): This strategy can benefit from more creative financing options, especially in the initial stages when you’re buying and refurbishing properties. You might need a mix of funding sources (e.g., bridging finance for the purchase, a joint venture with a friend, family member or colleague to cover the refurbishment costs, and then refinancing on to a traditional mortgage once the value has been added). After the property is refinanced, you can release your capital and use it for the next deal.
• Flips: If your goal is to buy properties, improve them, and sell them quickly, you might want to go for a short-term loan or bridging finance. This gives you the cash you need upfront to make improvements and then you can pay it back as soon as the property sells. It’s important to remember, however, to allow adequate time for the sale of the property when using bridging to flip a property, as this can take much longer than anticipated.

Choosing the right financing option is a balancing act – it’s all about finding a method that aligns with your goals, financial situation, and the current market environment. Take the time to carefully weigh your options, and don’t hesitate to seek expert advice to help you make the best decision.

Boosting ROI Without Overstretching Your Finances

When it comes to property investment, the golden rule is simple: just because you can borrow more, doesn’t mean you should. While financing can help you grow your portfolio, it’s important to use it strategically to boost your return on investment (ROI) without overextending yourself.

Here are some tips for using financing wisely to maximise your returns:

Leveraging Equity to Grow

One of the most powerful ways to grow your property portfolio is by leveraging your equity. If you’ve owned a property for a while, the value may have increased and you’ll have paid down part of your mortgage. This equity can be used to secure additional funding for new property purchases.

For example, if your property has increased in value, you could release some of that equity (through refinancing or second charge finance in addition to your main mortgage) and use it as a deposit for your next investment. This means your initial capital can keep working for you, rather than being tied up in one property. The key is to strike a balance – taking advantage of the equity while still leaving room for other investments and potential market fluctuations.

Using Refinancing to Recycle Capital

Refinancing is another great strategy to help recycle capital and free up cash for more investments. After you’ve added value to a property (through renovations or market growth), you can refinance it to release some of the equity. The idea is that by refinancing, you can pull out some of the money you’ve put into the property (either through repairs or the rise in its value) and use that cash to fund future deals.

This is particularly useful if you’re following the BRRRR strategy. Instead of waiting to save up enough capital for your next property, you can keep the momentum going by recycling the money you’ve already invested. It’s a smart way to scale up without needing a large initial deposit for each new property.

Tracking Cash Flow and ROI

One of the most crucial aspects of financing your property investment is ensuring that your cash flow and ROI are healthy. Cash flow refers to the income you receive from your properties (like rent) minus your expenses (such as mortgage payments and maintenance costs). Keeping a close eye on this will help you ensure that your properties are covering their costs and generating profit.

Similarly, ROI (return on investment) is a key metric that shows how much profit you’re making compared to what you’ve invested. It’s essential to regularly track these numbers to ensure your investments are on the right track and that your financing is working for you. Good cash flow means you have the financial flexibility to handle unexpected costs, and a solid ROI shows that your investments are paying off.

Planning for the Worst

While it’s exciting to think about all the potential rewards of property investment, it’s equally important to plan for the worst-case scenario. What happens if property prices drop, rental income falls, or maintenance costs unexpectedly increase? Contingency planning is about being prepared for the unexpected, so you don’t get caught off guard.

Stress-testing your deals is a crucial part of this process. Make sure that even in a downturn, you could still cover your mortgage payments and other costs. This way, you can avoid putting yourself in a vulnerable position by overextending on financing or relying too heavily on optimistic assumptions.

It’s always worth asking yourself: What’s the worst that could happen? Having a solid plan in place for tough times can help ensure that you’re prepared, no matter what the market throws at you.

Case Studies

To illustrate how different financing options work in the real world, here are two deals we’ve completed at Purseglove Property. One follows a more traditional buy-to-let route, and the other uses a more advanced strategy involving multiple funding sources. These case studies demonstrate how the right finance setup can make all the difference.

Example 1: Traditional Buy-to-Let

• Purchase Price: £150,000 for a two bedroom property
• Deposit: £37,500
• Rental Income: £900 per month
• Mortgage Payment: £497 per month (at 5.3% interest only)
• Monthly Profit: Around £350 (after paying for insurance)
• ROI: Roughly 11% (before maintenance costs and tax)

This deal is a solid example of a traditional buy-to-let investment. While the ROI isn’t sky-high, it’s still far better than keeping money in a savings account. Plus, this deal doesn’t account for property value appreciation over time, which is a key part of the long-term investment strategy. This is a good starting point for anyone looking to dip their toes into property investment without taking on too much risk.

Example 2: Complex Refurbishment with Strategic Financing

• Purchase Price: £525,000 for a block of four apartments (around 35% below market value)
• Mortgage: 75% LTV (loan-to-value)
• Joint Venture Financing: 25% through joint venture partners (with an agreement to pay interest at the end of the project)
• Personal Funds: None

Adding Value: 

Divide one apartment into two, to turn the block of four into a total of five apartments. Refurbish the remaining four apartments to increase their value.

• New Valuation: £1.2 million
• Refinancing: 75% of the new value (£900,000 – and use this to pay off the initial mortgage and joint venture financing)

The Result:

• Equity: £300,000
• Monthly Profit: £10,000 per month from rental income
• ROI: Unlimited (since no personal money was invested, all returns are pure profit)

This deal highlights the power of joint ventures and creative financing strategies. By using other people’s money (in the form of joint venture partnerships), we were able to increase the value of the property and create a significant profit. The key here was leveraging the property’s potential and recycling capital to fund further deals, all while managing risks effectively.

These case studies show the flexibility of property investment, whether you’re just getting started with a straightforward buy-to-let or taking on a more complex project that requires strategic financing. Every deal will look different depending on your goals, available capital, and risk appetite, but they all offer opportunities to generate solid returns.

Knowledge is Power

When it comes to property investment, knowledge is power. Understanding your financing options is essential before diving in, and taking the time to evaluate your goals, financial situation, and property strategy will set you up for long-term success. The right financing approach can help you scale faster, build wealth, and make smarter decisions along the way.

But you don’t have to navigate it all alone. Property investment can be complex, and it’s always a good idea to seek expert advice when needed. Whether you’re unsure which financing route is best for your situation, or you’re looking for a tailored strategy to earn a passive income through property investment, we can help you make informed choices and avoid costly mistakes.

Not sure which financing route is right for you? Book a strategy session with Rich – he’ll help you run the numbers, assess your goals, and build a plan that works.

Partner with Purseglove for Property Investment Support

At Purseglove Property, we offer a range of services to support you on your property investment journey. From sourcing and consultancy to project management and property management, our team is here to make sure your investments run smoothly and deliver the returns you’re looking for.

Get in touch today to discuss how we can help you build your property portfolio with confidence.