ALTERNATIVE FINANCE

Learn about alternative forms of property financing available to the Property Investor.

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

• Buy to let
• Company Purchases
• Shared Investments
• 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’s 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. The latter point is particularly important when there is an even number of investors which can lead to split decisions or when parties have invested different amounts.

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.

For example

A fund manager sets up a fund requiring an initial investment of 10,000 per person, and requires at least 500 investors to invest. This provides a fund of 5,000,000 which can be invested in a complex of apartments generating both rental income and capital appreciation. Please bear in mind that these funds do need to be run by a fund manager therefore costs will be associated with the investment but these are often calculated as a percentage of the income. Also this is not a personal investment and decisions regarding the investment are often taken by the fund manager in the interest of the investors.