Raising capital is often the biggest hurdle to property investment. To cover your buy-to-let deposit, purchase fees and refurbishment costs, you could:
- Save. That’s the obvious answer. Avoid lifestyle inflation and put your cash aside instead.
- Remortgage. If your property has risen in value – because you’ve improved it or the market has gone up – you can withdraw that equity tax-free by borrowing against the new value. However, the amount you can take out will be capped by either the property’s rental value (if you’re taking out a new buy-to-let loan on your rental property) or your own income (if you’re borrowing against your main home). Also, beware your cash flow: more debt means higher interest payments. If you barely break even or make a monthly loss, you won’t be able to ride out problems and could lose the property altogether. Lastly, watch out for hefty repayment penalties from your current lender.
- Sell. A good option if your old property is not meeting your goals anymore, but selling may land you with a fat capital gains tax bill.
- Pension. Under new rules, over-55s can now withdraw all or part of their pension pot and use the money as they please – including on buy-to-let. However, this involves far more work, stress and risk than buying an annuity that pays you a monthly income. You may also face a triple whammy of tax that you would not have to pay if you left the funds in your pension: income tax, capital gains tax and inheritance tax. Get expert tax advice before taking this route.
- Joint venture. Team up with a family member or friend who has the cash, ideally in the form of a loan on which you offer them a fixed interest rate (typically 6%–12% a year). You could split the profits, with them putting up the money and you doing the work, or you could both put in equal amounts and share the rewards. No matter how close you are, always draw up a declaration of trust that says who will invest how much, do which tasks and against what security. Also state what happens if things go well – and if they don’t.