With more and more people being denied mortgages, there is a huge incentive to break traditional property chains and purchase a property without a mortgage.
Not only are potential homeowners and developers unable to get a mortgage, there is also the long application process which many will want to do without. With this in mind, we give you 5 alternative ways to raise money for a property.
1. Peer to Peer Real Estate
There is now peer to peer websites, mostly in the US, which allow you to raise money for property with other investors around the world. Websites including Fundrise and CrowdStreet allow you to start your own project and get investors from as little as $1,000 each.
For crowdfunding website Patch of Land, you can borrow the money you need, provided that it is used on a property and they verify its value. They will give you the money upfront and require you to repay interest. The money you receive is partly from the lender but also from other investors putting money into the same property and receiving a return of up to 10%.
2. Bridging Finance
One of the most common alternatives to getting a mortgage, you can borrow up to £25 million in the form of a bridging loan. This is typically used to help you to secure money quickly (between 2 and 4 weeks) so that you can purchase a property before it is snapped up by someone else.
The loan is not supposed to pay for the entire property as it is a maximum of 75% loan to value, meaning that you have to come up with the remaining 25% or more.
The loan is always secured on the property so you risk losing it if you do not keep up with repayments over a maximum loan term of 24 months. The loan is usually repaid upon the point of sale i.e when you have renovated and sold the property or you can simply refinance the loan.
3. Mezzanine Finance
This is similar to bridging finance but instead of the bridge metaphor, it uses a mezzanine like the extra floor in between a room. Mezzanine finance is usually for much riskier property opportunities. Since the lender may not be able to finance as much as you require, they make the arrangement part loan and part equity.
This means that the loan provider will have a stake in your business too so if you are able to purchase the property or land and make a profit, they will not only receive the regular interest they receive, but also some of your revenue generated.
Since the opportunity is much riskier, the lender considers that it could potentially make even more money and the only way to provide the funds is to have some kind of equity.
4. Development Finance
This is a type of finance surrounding property development so it is rarely used for non-commercial purposes. Development finance lenders will pay up to 50% of the land costs and then 100% of the construction costs required to renovate a new or existing property. The development can be built up and then resold at a higher price on the open market or rented out to tenants through buy to let. This type of funding typically only lasts up to one year and the maximum amount borrowed is £2 million. (Source: Regentsmead)
5. Auction Finance
There are several properties that can be purchased on the cheap and these are usually made available through auction houses. The properties tend to become available due to probate, lack of demand or a seller trying to make a quick sale (maybe to pay off other debts). Bidders can potentially buy a property at an auction for a fraction of the normal price and then renovate the home or rent it out to tenants to generate income.