This article might just as well be titled how not to raise finance for a property investment, or property investment advice: raising finance. This is because through experience we know that it is much better to make people aware of the possible pitfalls when raising finance as it is to make suggestions on how to do so.
Of course there is no right or wrong answer, and we could never hope to cover everything in one article, what we can do is suggest methods of raising finance in a good property investment strategy.
The most important think about raising finance for a property investment is not to over leverage, to do the calculations carefully, and to predict/plan for future interest rate rises.
Avoid Over Leveraging - Excessive Remortgaging - The Mortgage Trap
As any good property investment guide will tell you, a good strategy for investing in property is to use no more than a 50% mortgage for any purchase. This is not always possible at the start but is certainly a point to aim for as a portfolio grows.
No matter how much you borrow it is essential that you do the calculations to make sure that your new rental business can afford the costs of the mortgage. Only you know your circumstances, do you plan to carry on working while making your first investment, so you won't need a wage from the business, etc. You can find out how to calculate investment returns in many articles on this site.
Remortgaging is rarely a good idea, but sometimes becomes essential. When remortgaging it is important to shorten the term of the loan; many people keep remortgaging their 25 year deals and end up in a mortgage trap that will really hit them hard in later life.
Avoid Shared and Mates Mortgages
Shared and so-called mates-mortgages have been the unravelling of many a good investment property strategy.
Shared mortgages are complicated, although they allow for a higher amount to be borrowed they are set out so that one is the primary borrower, and the other the co-borrower. The person who has the highest income is usually deemed primary, even if they have a lower credit score, which means higher rates.
On top of that they accept only one owner on the property, which again is usually the highest earner. This means you will need to negotiate if you would like to have the mortgage ultimately result in ownership split between both you and your co-borrower.
Further, you must place a single survivorship option in your home deed. Failure to do so could mean court-time to file to have the deed to the home and the burden of the mortgage passed to the single survivor of the partnership, although some shared-mortgages have single-survivorship set out in the agreement, it is better to be safe than sorry.
But by far the biggest pitfall of joint, shared, or mates mortgages is the pressure joint-debt can put on a relationship. Friends have never fallen out so quickly, and a turn in one person's circumstances can lead to disaster. Marriages are usually resilient to that scenario, but even loving couples are not immune to the pressure. If the partnership is to be dissolved there is the complicated procedure of splitting the debt, and if one wants to buy out the other, it means surveyors at dawn.