Buying your next rental: How to leverage the portfolio you already own
For a first-time landlord, buying is a savings problem. For a landlord with two or three properties behind them, it rarely is. The equity is there and the income is there. What is missing is usually the needed amount of cash in the right place at the right time. Stamp duty falls due within 14 days of completion. The refurbishment quote wants a payment next week. The mortgage on the new property starts whether a tenant has moved in or not. Meanwhile most of your capital sits in properties that are performing perfectly well but can’t be accessed.
The scale of it is worth spelling out. On a £250,000 purchase at 75% loan to value the deposit is £62,500, and that is the part you can plan for months ahead. The additional property surcharge on top of standard stamp duty makes the tax bill £15,000 on its own. Add conveyancing, searches, a survey, broker and lender fees, certificates and insurance and you are close to £19,000 before anyone picks up a paintbrush. Put a modest £8,000 refurbishment through it and allow eight weeks of mortgage payments before the first rent clears, and the cash requirement an additional £30,000 on top of the £62,500 deposit. Nearly half the deposit again! Here are five ways to approach how to cover this cost.
1. Cost the whole acquisition before you decide what to release
You cannot sensibly leverage anything until you know the number you are leveraging towards. Write the full list before you offer: deposit, stamp duty, conveyancing and disbursements, searches, survey, broker fee, lender arrangement and valuation fees, buildings insurance, gas safety certificate, EICR, EPC, inventory, refurbishment, furnishings, lettings fee, marketing and referencing, and the mortgage payments falling due before the first rent lands. Turn the survey findings into a written scope of works and get two or three quotes against that same scope while you are still in a position to renegotiate. Then measure the yield against the total rather than the purchase price, because the total is what you have actually invested - a 6% yield on a £250,000 headline is closer to 5.4% once £30,000 of acquisition costs go into the denominator. Releasing £40,000 to meet a £30,000 requirement is expensive. Releasing £30,000 to meet a £45,000 requirement is worse.
2. Audit the equity and the income separately
Most landlords know roughly what their portfolio is worth. Rather fewer could say, without checking, what their aggregate loan to value is, when each mortgage product ends, or what the portfolio actually produces each month after mortgage payments, insurance, management and a maintenance allowance. Those are your two levers and they behave very differently. Equity is large, slow, and expensive to reach outside a remortgage window. A rent advance is smaller, faster, and available whether or not you happen to be near a product end date.
3. Equity: remortgaging and further advances
This is what most landlords mean by leveraging a portfolio, and for the deposit itself it is usually the right answer. A remortgage or further advance on a property that has grown in value can release a substantial sum, but only if there’s been capital value uplift. Beware, if you are part-way through a fixed rate, early repayment charges can swallow the benefit, so work backwards from your product end dates rather than forwards from the date your offer was accepted. A purchase you were considering anyway can often be lined up with a refinance you were doing regardless.
5. Rent advance: the second lever
The rent your existing properties produce is an asset you can draw against, not only something you spend as it arrives. Rent advance funding works on that basis: a provider purchases the rights to a portion of the future rental income from properties you already let and pays you a lump sum upfront, which you repay monthly over a set term. For the cluster of costs above: a stamp duty bill, conveyancing, refurbishment works, lettings fee, or topping up the cash going towards a deposit - it reaches money that a remortgage cannot get to inside fourteen days. Used alongside equity rather than instead of it, the pattern is simple enough: equity for the deposit, rent advance for the rest.
The bottom line
An established portfolio is a funding source, not just a collection of assets. Used well, it means your next purchase does not depend on how much you happened to save this year. Used carelessly, it means every property you own is exposed to whatever goes wrong at the newest one. Cost the acquisition in full, understand what your equity and your rental income can each realistically do and how quickly, use the right lever for each cost, and stop somewhere short of the maximum you could raise, just in case you need a top-up.
About Factored
Factored provides rent advance funding to landlords across the UK. Advances run from £1,000 to £50,000 against future rental income, with decisions in hours, funds available in as little as 24 hours, and monthly repayments over terms of up to 12 months.
