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Investment Finance

The Financial Mechanisms for The Property Investor

Real Estate Investment Finance

Mortgages

When considering a medium or long term investment, mortgages are an extremely efficient mechanism for the completion of the purchase when the roperty has been finished.

In financial terms the process of borrowing funds to purchase property is often described as GEARING. When a property is highly geared this simply means that there is a large mortgage secured against the asset.

The Main Advantages in "Gearing" an Investment

  • Allows financing when the investor does not have enough liquid funds.
  • Avoids tying up significant cash into one investment therefore.
  • Allowing further investments to be made simultaneously.
  • It is easier on cashflow to fund the mortgage repayments than to fund the initial purchase price.
  • The ability to take advantage of different interest rates in differing countries.
  • The ability to take advantage of specific mortgage products to reduce risk such as interest only and fixed rates.
  • Possibility of tax advantages depending on the country.
  • Negates exchange rate risks and differences upon sale.

The Main Disadvantages for Gearing

  • The investor must finance the mortgage repayments.
  • Financing may not yet be available for non residents.
  • The investor may need to demonstrate their ability to repay the loan.

When considering Mortgages and Gearing it is important to consider all the options available, that is to say that it may not be the best option to look for a mortgage in the country in which the investment is being purchased.For example if the interest rates are very high in that particular country and there is another property in another country with low interest rates, then logically it would be more advisable to borrow where the interest rates are lower. In this respect it is always advisable to speak with a professional finance consultant who has experience in the countries you are considering investing in.

Less Sophisticated Finance Market

In northern European countries such as the UK, Ireland, etc the financial market place can be described as sophisticated, with a stable political, economic and property environment allowing banks to be more adventurous and confident in their lending policies. Loans of 80% to 90% of the value of the property are available usually on an interest only basis as the lenders are aware that investors will use equity release for financing further investments but feel comfortable because their loan is secured against a stable asset.The key factor is the affordability of these loans. Set up costs can be very low and as the loan is on an interest only basis the monthly repayments are also as low as possible, making this form of funding truly accessible to the majority of home owners.For existing buy to let investors this allows rental income to cover the mortgage payments leaving a self funding asset appreciating each year until the equity is released.In addition there is a greater number of self certification and non status finance products allowing equity to be released easily and quickly.Please remember that your property is at risk if you fail to maintain the mortgage payments each month therefore consider the monthly repayment carefully.

Sophisticated Finance Market

In many emerging markets and even established markets such as Spain and Italy there is or has been a level of instability in the past which means that banks and lenders are more cautious in their lending policies often limiting the amount that may be borrowed or the purpose for which it may be borrowed. In the case of new emerging markets finance may not be available for non residents yet.Many investors have purchased property abroad over the past few years and have discovered the value over that time has increased significantly, potentially allowing equity to be released.This is ideal when considering the next investment, however please be aware that equity release is a product seen in more sophisticated financial markets as already mentioned, therefore you may not be able to release as much from the property or as easily as you would have hoped.It is important to obtain professional financial advice from an experienced mortgage of finance consultant to establish what is achievable.

Alternative Finance

Other than using mortgages for investment there are alternative methods of financing available to you, the other options to be considered are:

  • Cash
  • Buy to let
  • Company Purchases
  • Shared Investments
  • Pension Schemes
  • Investment fund purchases

Cash

An obvious and simple way of financing an investment if the funds are available. In general terms however it is better not to use your own funds when someone else’'92s is available i.e. a bank. This is simply because by investing only a small amount into each investment and financing the remainder by debt then more investments can be made and therefore potentially greater return can be achieved.

Buy to let

A popular source of raising finance in many countries, this is the raising of finance through the rental income that will be generated. In other words the lender assesses the rental income achievable and lends an amount based on that rental income. Lenders will be conservative in their estimates so it is unlikely that 100% funding will be possible. In addition please bear in mind that many emerging markets do not have sophisticated financing products so this type of product may not be available.

Company Purchases

Some investors will have their own company and may consider using the company for the purchase of an investment. This can make a great deal of sense if set up correctly as an investment company, however the investments will all become commercial assets of the company and careful tax planning is required to ensure there is no double taxation incurred when trying to extract profits from the company. Those investors that have trading companies may legally use their company to invest in a property and this often appears attractive as the company may be able to raise funds more freely than the individual, but this does bring a great deal of tax issues that could affect the profitability of the trading element of the company and means the asset is at risk from the normal trading creditors, therefore it is not normally advisable to use this mechanism if an alternative is available.

Shared Investments

Quite simply this implies buying with a relative, friend or group of friends. This is often a good entry method into investing in property as it reduces the amount of cash investment required by each individual, making the opportunity more feasible to a greater number of people. When investing with others there may be disagreements and disputes therefore it is important to make an initial contract between all the investors detailing the amounts invested, the percentage returns each investor is eligible to and the mechanism of agreeing decisions. is an even number of investors which can lead to split decisions or when parties have invested different amounts.

Pension Schemes

Some pension rules allow for the investment in residential property abroad. Not all pension providers are likely to choose to allow such investments in their main fund so it may be necessary to seek out a specialist pension fund manager.Pension schemes are strictly controlled by law and taxation regulations, which differ between countries, however investing in a buy-to-let property through a pension can be attractive as there are often significant tax advantages regarding the contributions into the scheme, income generated from the investment and capital gains upon sal These are specialised investments therefore it is vital to take independent financial advice from a qualified advisor on the selection of appropriate investments.

Investment Fund Purchases

In basic terms these are individuals who come together under the umbrella of a financial advisor or fund manager to invest in real estate sector.

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