Property Development Without a Deposit (and Where Bridging Finance Fits in)

The appeal of becoming a property developer or investor in the UK is easy to understand. Over the past year alone, average house prices have shot up by more than 10%. Average monthly rents are at an all-time high and further growth is forecast across the board indefinitely.

Whether you are looking to buy and sell homes for capital gains or put together a profitable buy-to-let portfolio, there is money to be had for those who make the right moves.

All well and good, but finding an affordable entry point to the UK’s property market isn’t easy. With the average UK home now hovering at £300,000 or so, coming up with the deposit alone can be practically impossible.

But there are options available for making your mark on the property development sector, without having to pay a deposit at all. If you have all the ambition in the world but limited start-up, you simply have to set your sights beyond the more obvious options.

How Does Property Investment Work?

Property investment involves the purchase of a property of any kind with the goal of turning a profit. The most popular approach to making money from property investments has traditionally been to buy homes and let them out. 

These days, this means handing over a minimum of 25% of the property’s value in the form of a deposit. For the average £300,000 UK home, this would mean coming up with £75,000 – plus all other associated purchase costs.

For obvious reasons, this simply isn’t a viable option for most first-time investors. 

The second main approach to profiting through property investments is creating capital gains by selling on homes (or business premises) for profit. This can be a long- or short-term strategy depending on how fast the investor intends to ‘flip’ the homes they buy. 

Though once again, conventional mortgages for these kinds of property purchases attach high deposit requirements. Even if a lender is willing to accept 15% or even just 10% as a deposit, that’s still £30,000+ you need to pull together.

Can I Invest in Property if I Don’t Have a Large Deposit?

The short answer is yes, but you have to look for investment opportunities beyond the more conventional channels.

For example, you could set your sights on a property in questionable condition in a location with comparatively low house prices. Homes in need of major repairs and renovations often go under the hammer for less than £50,000, paving the way for a much smaller deposit.

You could also consider the option of picking up a property at an auction, where just 10% of the lot’s selling price is payable on the day. Most properties sold at auction sell for less than their true market value, making them great for investors looking to flip homes for profit.

But there are also options available for making money without paying any deposit at all. Examples of which include the following:

Rent to Rent

This is basically another name for subletting, which must only ever be done with the formal consent of the property owner. With rent to rent, you lease a property (residential or commercial) for an agreed period of time and then let it out yourself to your own tenants. 

Sub-letting can be a potentially profitable venture without the binds of actually owning (and therefore maintaining) a property yourself. However, it can be tricky to turn a decent profit with rent to rent, as the property’s owner will be looking to collect the highest possible rent payments from you in the first place.

Below Market Value Property (BMV)

A good BMV property investment is hard to find, but can be worth its weight in gold where available. BMV properties are those that are sold for significantly less than their true market value due to their owners needing to complete the sale as quickly as possible. Property sales are often hurried following the threat of repossession, or when homeowners encounter serious financial difficulties.

With BMV property investments, the difference between the home’s selling price and its actual market value can be used in place of a deposit. The remaining balance can then be covered with a bridging loan, aka bridging finance, issued to cover up to 100% of its purchase price.

When the transaction is complete, the property can be refinanced onto a standard buy-to-let mortgage and sold on for profit, with no deposit having been paid.

Partner with Investors

This is a more hands-off approach to property investments, where you simply entrust your capital to other established investors and property developers. Of course, this is only possible if you have reliable investors and developers within your network and can be assured of a positive outcome.

There are websites and services that link investors from all backgrounds with businesses looking to source capital for planned and in-progress projects. But as there is always the risk of considerable losses, decisions must be made on the basis of extensive research and analysis. 

Use Your Equity

If you own your own home and have repaid most (or all) of your mortgage, you may be sitting on a stockpile of equity. By releasing the money you have tied up in your home, it could be used to buy into the UK property market as an investor.

One of the biggest benefits of using your own equity is being able to purchase properties outright. Cash buyers can avoid complex property chains entirely and are typically afforded discounts of 2% or more for fast completions. 

Of course, you could also simply release enough equity to fund the deposit on a property you intend to buy and repay the remaining balance over several years with a conventional mortgage.

Deposit-Free Property Investments with Bridging Finance

Bridging finance works in a similar way to a conventional mortgage, only on a much shorter-term basis and with no deposit required; an ideal solution for those who are asset-rich but cash-poor, bridging loans provide property owners with the opportunity to leverage the equity they have in their homes (or business properties).

With bridging finance, the funds needed to buy an investment property can be arranged and accessed within a few working days. A bridging loan can be secured against almost any type of property, with LTVs of up to 80% readily available (sometimes up to 100% in special circumstances).

Quite simply, you take out a bridging loan against your current home, you use the funds to buy an investment property for cash and you sidestep the usual deposit requirements.

Bridging loans are designed to be repaid within 6 to 18 months, during which interest accrues at a rate of around 0.5% or less. The two most common repayment options (exit strategies) for bridging finance are as follows:

1. The investor renovates the property purchased to boost its market value, sells it on for significant capital gains and uses the funds raised to repay the loan.
2. The property is brought up to an acceptable standard and let out to tenants, after which the loan is repaid by taking a conventional long-term buy-to-let mortgage.

In both instances, a property has been purchased and used to generate significant revenues, with no deposit required. Bridging finance gives property owners the opportunity to leverage the money they have tied up in equity and to avoid the complications (and costs) associated with traditional property loans.

What Are the Main Benefits of Bridging Finance?

The popularity of bridging finance has skyrocketed over the past 12 months, attributed mainly to four standout benefits:

1. Speed

Bridging finance is a uniquely fast-access facility, which can be arranged and accessed within a few working days. Investors are empowered with the spending power to take advantage of time-critical purchase and investment opportunities, which simply is not the case with conventional loans or mortgages.

2. Versatility

A bridging loan can be secured against almost any type of property and can be used for any legal purpose; whereas traditional mortgages are restricted exclusively to the purchase of habitable homes, bridging finance can be used to purchase properties in poor condition to be flipped for profit.

3. Accessibility

Most bridging finance specialists are surprisingly flexible with their eligibility requirements. Credit history, employment status and even proof of income are not important if the applicant has assets of value to cover the costs of the loan and a workable exit strategy.

4. Affordability

Charged at rates as low as 0.5% per month, a promptly repaid bridging loan can be more cost-effective than any comparable product; all associating borrowing costs are also low (or absent entirely), including arrangement fees, exit fees and so on.

For more information or to discuss bridging finance for property investments in more detail, contact a member of the team at UK Property Finance today.