Lenders or equity investors – which are the better partners when acquiring buy to lets and other commercial property?
While there isn’t a straight answer here is a selection of key factors to bear in mind.
Return on Investment vs Affordability
First and foremost, you will need to convince both a lender and an equity funder of providing money for your project. The level of return on investment (or return on equity with an investor) determines whether you can afford to pay back a loan AND whether your property beats alternative investment options for an equity investor.
Deposit And Gearing
Most often, property investors turn to full equity funding when they cannot or don’t want to provide a 15 – 30% deposit for a commercial/buy to let mortgage or bridging loan and their usual banking provider is no option. To benefit from the effects of gearing (the ratio of debt to equity capital) consider a mix of equity and debt, where equity is not necessarily limited to a minimum deposit. In fact, the lower the loan to value of your mortgage, the lower the interest rates.
Economic Environment
With interest rates potentially on the rise, an equity investor or a longer term fixed mortgage may be worth considering. And as long as property prices rise, most private investors will find this market attractive. Though as the market cools down eventually, the risk of negative equity rises; a commercial interest-only mortgage with a higher loan to value can potentially mitigate that equity risk.
Finding the Right One
While there is no shortage of UK lenders for property lending, equity funders for SME property projects are harder to come by. On top, if you promised a profit share to a private investor and they were not a sophisticated investor or an investor familiar with the risks they could potentially sue you. When searching for the right loan make sure you are aware of changing lending terms and of the right lender for your particular circumstances.
To check on debt finance available for your property plans book a meeting with me: https://www.cc-finance.co.uk/contact-us
