Apply both BTL financing models to the following scenario:

A commercial property is available at auction for £80,000. It may have potential to convert into 3 self contained residential units with values of £85,000 each. Hence, with some building costs and an initial purchase price of £80,000, there is potential to create 3 properties with a total value of £240,000. That is £160,000 of additional equity sitting there waiting to be created!
Now the typical BTL investor would say I will need 25% deposit to purchase the property (assuming you can get a commercial loan at this LTV). Main stream residential lenders would not typically look at lending on commercial properties. So that is £20,000 cash needed upfront for the purchase. There is then the issue of getting planning permission to convert the property. This will take at least 3 months and will mean paying say 7% interest for these 3 months while you wait for planning permission. That’s £1050 of interest only mortgage costs.

If you don’t get planning permission, then you will be in a pickle. Assuming you do get planning there is then the issue of actually doing the conversion. Most BTL investors would assume these building costs would need to be covered by themselves and if £60,000 of building works is required then the total cash outlay is in the region of £80,000! Not too many people have that lying in their bank accounts.

If the BTL investor did come up with the money and managed to sell the properties for £80,000 each, they would stand to make £80,000 profit. That is a return of 100% as they spent £80,000 to make £80,000 profit!

This is the final part of our serial taken from Toby Hone’s fantastic new book ‘Make Money From Property In the Credit Crunch‘. Buy the book now for even more great tips and advice: click here