Venture Capital for Buy to Let Landlords

by Mark Alexander

10:02 AM, 31st October 2013
About 6 years ago

Venture Capital for Buy to Let Landlords

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Venture Capital for Buy to Let Landlords

Until now it has not been possible for private landlords to access venture capital but times are changing.

Historically the only form of funding for buy to let investors has been mortgages, i.e. debt based finance where the returns for the provider comprise of fees and interest.

In the world of corporate finance it is common for business funding to comprise a mixture of both debt and equity finance.

Equity finance is different in that the provider makes a return by sharing profits, often when the business or asset is sold or refinanced. This form of capital is also know as mezzanine finance, private equity and venture capital amongst professional corporate advisers. Venture Capital for Buy to Let Landlords

A respected mortgage lender has now entered the  provide equity finance market and will be offering it’s products to private landlords. The lender will take a legal charge over rental property to protect their interests in much the same way as a traditional mortgage lender does, however, their charge will rank second to that of a traditional mortgage lender, thus enabling a mixture of debt and equity funding. A typical structure based will be:-

  • 65% debt on a traditional buy to let mortgage secured by first charge
  • 20% buy to let equity loan secured by second charge
  • 15% owners own funds

No interest or monthly repayments are made on the buy to let equity loan. The return for the lender comes when the property is sold or refinanced. The equity loan is repaid and the lender takes a 40% share of any capital gains. For example, if the property had increased in value by £100,000 the lender would take £40,000 of the profit plus return of capital. If the property had decreased in value the equity lender would still get their capital returned but would take 40% of zero profit, i.e. a zero return on investment.

For most buy to let landlords this very radical alternative to traditional mortgage financing alone will take some thinking through. There are pros and cons which I have thought through in quite some detail. For further details please CLICK HERE



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