How Can You Finance a Renovation of Your Rental Property?
Owning rental property is something of an aspiration, a solid investment in the future that, if managed right, can be lucrative for you as you move towards retirement.
It is not without problems, of course, tenant management, repairs and renovations for a home you do not live in and the tax system all affect your bottom line. Indeed, the Guardian report the number of landlords with multiple properties is falling thanks to the tax system but does not mean it is not a good investment strategy if done correctly. If you break even over the course of a rental then it is a boost, but as the property builds up equity, it becomes the nest egg that complements something more unpredictable such as a pension. If your existing rental property becomes run down, you may need to undertake a remodel or renovation, and that too hits you on the bottom line.
How do you go about financing the purchase and renovation of a rental property, and what financial steps should you take to protect your investment? We have a handy guide here for you which should help you take the first tentative steps towards building your property empire.
The obvious method by which to finance a renovation is by remortgaging the property. This will require a degree of equity to be in the building, as you are borrowing money against the value of the home. You cannot remortgage a property if the amount you want to borrow, plus the amount you currently owe, is more than the current property value. Remortgaging is a good method of raising funds if you have added value to a property, if the area it is in has seen significant rises, or if you have already repaid a chunk of the original loan. Also, as the Financial Times explains, remortgaging is popular when interest rates are low because the amount you have to repay is much lower than at other times.
Personal loans are the most common form of loan, which is often unsecured and allows you to borrow up to £25,000 or £50,000 depending on the lender. Your eligibility is based largely on your credit score, with rates available from just 3% APR if you have very good credit and other strong indicators such as a homeowner status, strong income and low overall debt. If you have bad credit, you may pay up to 50% APR – and you may be limited on the amount you could borrow.
A bridging loan might be an option if you wish to borrow money over a short period of time. These are useful if you only need money for a short period of time, such as waiting for a remortgage to come through. Assuming you want to renovate quickly, they can be arranged in a week or so, giving you instant capital. If you are waiting for another property to sell, or a remortgage to come through, they ‘bridge’ the gap. The interest payments are rolled up and added to an end payment, meaning less outlay for the duration of the loan. You can also have open bridging loans, with no exact date for repayment, and closed bridging loans which are more stringent.
If a property requires renovation, it might be time to review your portfolio. This is more applicable to a landlord with several properties, but it might be time to move one on to finance the renovation of others. Do you have a property that has stood empty for a while? Is one losing money week in, week out due to location or condition? By releasing equity and selling one property, you can adequately finance the renovation of another, especially if you have a large property to convert into an HMO, which will then draw more yield over time.
We have already touched on insurance in another article titled What is Home Insurance and Why is it Important? However, that focused very much on you as a resident and homeowner, not as a landlord. Aside from the obvious building’s insurance, which protects the mortgage company as much as you, why would cover be important? Well, there are specific policies for landlords listed on HomeServe, which give your tenant a degree of control as they are able to talk directly to the provider in the event of a problem. These policies cover the likes of the heating and electric system, so in the event of a breakdown not only is the stress taken away from you, but also the financial responsibility, too.
Where this applies to a renovation is clear – if these elements of your property become faulty, rather than you having to finance a whole project, a breakdown is likely to be covered and sorted for you.