Is build-to-rent a viable strategy?

THE QUESTION

I’ve been looking at developments, if I was to cash build let’s say a row of terraced houses, once built can I refinance at whatever LTV available, take the cash, and rent the properties out under the company? 

I’m just looking at other avenues rather than the normal build and flip scenario. I’d like to know if there are any implications if I wanted to build properties with the sole purpose of refinancing and renting out.

THE ANSWER

Build to rent is an established concept, so getting finance to pull your cash out should be fairly straightforward.

You should be building to a minimum profit margin of 20% of GDV, but preferably more. You can finance at 75% of GDV - subject to the rental income being sufficient to borrow that loan to value. 

One element that should add to your bottom line profit with build-to-rent is the standard of internal finish. If you are building to sell that quality has to be good enough to convince would-be buyers to part with tens, probably hundreds, of thousands of pounds. For renting, it only has to be good enough to convince would-be tenants to part with hundreds of pounds monthly, allowing the wow! factor to be scaled down.

Cash removes barriers

Using your own cash helps your bottom line profit (zero borrowing costs) during the build phase and also overcomes the first barrier to getting development finance, which is that lenders expect prior new build experience.

Getting BTL mortgages on a row of houses could be challenging if you attempted it property by property. BTL lenders get twitchy when the borrower owns houses next door to each other. They also have over exposure rules which mean you will almost certainly need to use multiple lenders to achieve your objective.

A simpler route would be to use a commercial lender to grant you a single mortgage for the whole terrace. Rates will be a bit higher but you may consider that worthwhile for the reduced hassle. One caveat here is that you will need a minimum 12 months landlord experience to be eligible; if you have that you are good to go.