Jun 7, 2022 11:45:00 AM · 5 min read
Updated on December 28, 2023
Getting the money to invest in property deposits can be challenging at the best of times — especially if you haven’t got any capital. However, there are certain paths you can take to source funds and get your portfolio started.
The good news is you don’t need to use all your money. You can use a mortgage for most property purchases and — as a general guideline — you can use mortgages for up to 75% of the purchase price. Sometimes it’s a bit less, sometimes more, but 75% is a good general number to have in mind.
Assuming you have a mortgage, you’ll still need your own cash to cover the remaining 25%, plus any costs you encounter in the process. In this article, we’ve highlighted the six main sources of funding that most investors use to get their portfolios started. None of this will come as a big revelation to you, but whichever property strategy you choose, you’ll need some money.
It may sound a little boring, but it works. Have you saved for a holiday before? A car? Well, buy-to-let investors often save for a deposit because they know the benefits it will bring them.
Now, saving for your first one or two properties can be a long process depending on disposable income, but it does get easier as your portfolio grows. This is because you’ll have more properties bringing in more income, so your savings pot tops up much faster.
It’ll require patience initially, but eventually, as your portfolio gets to a decent size, things begin to snowball for the better. Savings don’t get talked about much because it isn’t exciting, but it’s the most common method of getting money together to buy a property.
Many people are in a situation where they don’t have much in the way of savings, or they aren’t able to save up that much extra every month. However, they own a home, pay a mortgage and the property's value has increased over several years.
They now have equity in that home that can be released to turn into cash and use it to buy a property. So compared with saving, equity release is a form of borrowing. It’s also the cheapest borrowing you’ll ever have because lenders feel very secure with residential property and the rates are among the lowest you’re ever going to get.
For many people, it’s an attractive option, but it isn’t one that everyone will be comfortable with. If everything goes wrong, you’re putting your home at risk. Some people will be comfortable with that because they’ll believe the risk is low as they aren’t pursuing a particularly risky property investment strategy. For others, it just won’t be acceptable. They’ll want to pay their home loan down to nothing as quickly as possible.
There’s no right or wrong answer here. It’s all about what you’re comfortable with and what makes sense for your situation. But if you have equity in your home, it is an option you can consider.
The next potential option you could consider is family money. You may be fortunate enough to have a relative who has a bit more cash than you and is willing to give it to you so you can start your property investment journey.
They may do it and be happy to split the profits with you, or if you’re very lucky, they might just give you the money as a gesture. Be kind enough in return to en that your strategy is the right one so funds don’t get wasted.
You could use other people’s money rather than family money. This is generally known as a Joint Venture (JV). For example, it could be you and a friend each pooling a smaller amount of money so when you combine the total, you have enough to invest in a property.
Joint ventures can work well, but you have to be careful. If you’re joining forces for a project like a flip, there’s a lot that can go wrong. You could end up losing money rather than making it quite easily.
If it’s a longer-term project, you’ll have to agree on handling everything that comes up and ensuring your interests remain aligned. While joint ventures can work, we believe they’re best reserved for when you’re further on in your property journey and you’re confident about what you’re doing.
Although you can’t put your deposit on a credit card, you can use it to fund your refurbishment costs. This can work well if the card has a decent interest-free period and you just make the minimum payments.
You’d buy the property, add value to it using your credit card, get it refinanced at a higher value once the work is done and then pay off the credit card debt.
If this sounds a bit risky, that’s because it is. You should be wary about implementing this strategy if you haven’t done property investment before. But credit cards could be an option if you’ve built up confidence and experience in doing refurbs, run out of cash and want to carry on.
Bridging finance is basically borrowing finance from a bank or other financial institution similar to how you would with a mortgage. However, bridging finance is short-term, unlike a mortgage that lasts for 20+ years.
It’s designed to be paid back normally within a year. It’s technically possible to take out bridging finance covering 100% of the property purchase and your costs, but it’s unusual.
Depending on the project and how you structure it, you could borrow more on bridging finance than you would be able to with a normal mortgage. This means you aren’t eliminating the requirement to put in your own money, but you aren’t relying as much on your savings or a mortgage.
Much like credit cards, bridging finance isn’t for beginners because it’s risky and it needs to be paid back quickly. The only way you can pay it back is by completing the project and selling or refinancing and replacing the bridging loan with a long-term mortgage.
There are many reasons why you might not be able to do this in the relatively short amount of time you have. If you get stuck on bridging finance, the rates are high and can become very expensive. Bridging finance can be a fantastic tool to accelerate the growth of your portfolio, but it probably isn’t something you should use on your first couple of deals. In short, it isn’t ideal for beginners.
So, there you have it, six different ways to raise funds for financing your next property project. To help you further, we’ve created a playbook that outlines more strategies you should consider for property portfolio success.
Ready to get started? Access your copy below.