Real Estate - Real Estate Investment

In the not so distant past the term “buy to let commercial mortgage” would have been synonymous with “residential commercial mortgage”. This is because many lenders and brokers regarded buy to let mortgages as commercial propositions.

Many property investors now consider a good mix of residential and commercial property to be a requirement of a well managed portfolio. This change in demand has forced the market to adapt, buy to let commercial mortgages are now one of the fastest areas of commercial lending.

Taking a look at the whole market of commercial investment property, the main types of buy to let commercial mortgage products can be defined generally under the headings ‘blue chip’, ‘premium’, ’secondary’ and ’speculative’.

The highest quality of investment property would be the “blue chip” investment. These properties will have very good quality tenants on a long lease, as well as occupying the best location. Because of the stability of the tenant these properties become very attractive to the institutional investors, resulting in slightly inflated values. These higher values can put pressure on the buy to let commercial mortgage by reducing yields.

Premium investments would typically be very similar to blue chips, with perhaps the exception of the quality of the tenant. Instead of a well established business, such as a national chain or franchise, the tenant would still expected to be of high standing. Because the values of these properties are more realistic they can offer more attractive rental yields, resulting in more interest from smaller investors.

When considering ‘Premium’ buy to let commercial mortgages lenders begin to become much more focused on the experience and financial standing of the investor. Questions will be asked about can the borrowing costs still be paid in the event of the tenant defaulting? this is particularly important and the valuer may well be asked to comment on the likelihood or otherwise of finding good tenants quickly and easily. Due to this potential for risk, a lender will also be interested in verifying the stability and reliability of the tenant(s).

Not surprisingly, speculative investments are the hardest to fund. Very often the property is not pre-let, may be in need of repair or refurbishment and may not even be in a good location. For these reasons a lender will expect the borrower to have the means to support the buy to let commercial mortgage from Day One - and evidence of this will usually be required.

High street banks and building societies are most likely to favour the blue chip or premium propositions, They usually reward solid investment opportunities will very low interest rates and terms.

Commercial buy to let investors seeking funding for the secondary type of properties have historically struggled to find funding at sensible rates, the challenge was being able offset the renal income against the higher interest rates from the banks. Competition in this sector is bringing rates down though.

Speculative investments continue to be a specialist area, and unsurprisingly there are still few lenders prepared to back these deals unless they are confident of the borrowers ability.

Buy to let commercial mortgages are helping a new breed of property entrepreneur seize opportunities. Obviously caution still needs to be exercised when assessing the profitability of any commercial property investment.

Spectrum Business Finance are buy to let commercial mortgage specialists and have been arranging for commercial property finance for over 5 years. When you talk to an experienced commercial finance broker you can be sure to get the right deal for your circumstances.

Some buy to let landlords are beginning to feel the pinch of higher interest rates. This in turn has led to many lenders showing a reluctance to deal with new borrowers unless they can come up with larger deposits. The alternative is for the borrower to deal in property with higher rental potential - which usually means a higher capital cost. Of course, if you don’t have sufficient deposit in the first place, it’s unlikely that the higher rental properties are within your budget: a bit of a chicken and egg situation.
This can make it difficult for newcomers into the Buy to Let market who want to start low and build up their portfolio. That isn’t to say it can’t be done; there are still a few lenders giving ‘good deals’ but they are becoming few and far between.
With interest rates looking at a potential 6% by December 2007 the lenders are concerned that too many borrowers will be struggling to ensure that the rentals will cover their mortgage payments. In some cases lenders will accept that the rent is being subsidised by the borrower’s other income as long as that other income can be verified as more than ?75,000 pa. Below that income level you will be required to show proportionally higher rental cover to get the same deal.. By way of illustration, a loan of ?85,000 to an experienced landlord would require a monthly income of ?468 whereas a new landlord would need ?531 to meet the criteria. In other words, lenders are favouring those with experience unless there is a provable safety net of other income.
Concern has been expressed by the FSA that there is a growing number of repossessions among Buy to Let properties: by December 2006, 25% of these properties sold at auction had been repossessed. Many of them were new build flats. This has been caused partly by excess supply leading to lower rents and partly the failure of newbuilds to go to a premium. Statistics from one of the leading mortgage lenders reveal a fall of 4.4% in prices of newbuild flats against a general market growth of nearly 11%.
Advice from one experienced Buy to Let owner is that you must ensure that your first property produces a comfortable rental income which can stand you in good stead should any subsequent investments suffer a rent shortfall.
Four interest rate rises have exacerbated the problem: mortgage payments have increased by around 20% while rents have gone up by only 5%. However, there is a certain willingness to make up any monthly rent deficit from private funds as the potential for long term capital growth is generally seen as far outweighing any temporary blips.
So, before you launch yourself into the buy to let market, just make sure you have that little extra in hand against the next rainy rent day.