How to Use Someone Else’s Money to Grow Your Property Portfolio
You don't always need to use your own cash to grow a property portfolio.
Borrowing money can allow you to spread your capital across more properties, retain cash for future opportunities and potentially build towards a full-time property income faster.
But borrowing isn't about simply finding the lowest interest rate.
The numbers need to work.
Here's how to think about using finance to grow your property portfolio.
Start With the End Goal
Before looking at finance, work out what you're actually trying to achieve.
If the goal is to use property to build a full-time income, the strategy needs to consider both:
Capital appreciation
Rental yield
You want properties that have the potential to increase in value while also generating strong rental income.
That means looking for opportunities such as properties that can be purchased below market value, properties requiring refurbishment, and areas with strong price growth.
At the same time, rental demand matters.
Look for areas with good tenant demand, access to amenities and transport links, while keeping costs under control and maximising rental income.
Step 1: Find and Value the Property
Once you've identified a potential investment, make sure you know what it's actually worth.
Buying below market value can create an opportunity to add value through refurbishment and increase the property's future equity.
Getting an accurate valuation is therefore an important part of deciding whether the deal stacks up.
With Propp, investors can access free Hometrack valuations worth £40 each to help assess potential opportunities.
Step 2: Analyse the Deal
Finding a property that looks cheap isn't enough.
You need to know whether the numbers work.
Analyse the deal before committing to the purchase, including:
Purchase price
Refurbishment costs
Finance costs
Expected rental income
Potential future value
Return on investment
This is where using borrowed money can make a significant difference.
Cash vs Borrowing
Consider two investors purchasing similar properties for £200,000.
Both spend £30,000 on refurbishment.
One investor uses their own cash.
The other borrows £115,000 and contributes £85,000 of their own money.
The investor using finance has paid a cost for borrowing, but they've also retained more of their original capital.
That's the key point.
Borrowing isn't necessarily about making one property more profitable. It's about allowing your available capital to go further.
Step 3: Compare the Cost of Finance
Once the deal works, look at how you're going to finance it.
Depending on the property and strategy, this could include:
Buy-to-let finance
Bridging finance
Commercial finance
The cost of borrowing needs to be factored into the deal from the beginning.
Don't leave finance until after you've found the property.
You need to know whether the margin still works once the cost of borrowing is included.
What Happens After the Refurb?
Let's say both investors successfully complete their refurbishments.
The properties are now worth more.
They're rented out.
And the investors can look at refinancing to release capital for their next project.
This is where the difference between using cash and using finance becomes more obvious.
In the example from our webinar, both properties increased in value from £200,000 to £300,000.
The property funded with borrowed money generated £30,816 in annual rental income across the example, compared with £15,408 for the cash-funded example.
The investor using borrowed funds could then refinance and release capital to put towards the next project, while retaining equity in the property.
The aim is to repeat the process.
It's About Speed
The biggest benefit of using someone else's money isn't necessarily that it makes every individual property deal better.
It's that it can help you move faster.
If you put £230,000 of your own money into one property, a significant amount of your capital is tied up.
Using finance can allow you to spread that capital across multiple projects instead.
As your portfolio grows, you can potentially refinance properties, release capital and use it towards your next investment.
The goal is to make your money work harder.
What Are Your Borrowing Options?
Property investors have several potential sources of funding.
Investors
Another investor may provide capital in exchange for an agreed return or share of the project.
Friends and Family
Borrowing from people you already know can be another option, provided the arrangement is properly structured and documented.
Financial Institutions
Banks and specialist lenders can provide finance across different property strategies, including buy-to-let, bridging and commercial finance.
The right option depends on the property, your circumstances and the numbers behind the deal.
Don't Focus Only on the Interest Rate
One of the biggest reservations investors have about borrowing is cost.
But there's an important distinction to make.
The percentage you should be focusing on is the margin, not just the rate.
A higher rate doesn't automatically make a deal bad.
If the property has enough margin to absorb the cost of finance and still deliver the return you're targeting, the borrowing may still make sense.
The question is whether the whole deal works.
Don't Bite Off More Than You Can Chew
Leverage can accelerate portfolio growth.
It can also accelerate losses if a project goes wrong.
The longer a project takes, the more it can cost.
Delays can mean additional interest, increased refurbishment costs and lost rental income.
Make sure you understand the project before taking on the debt.
Don't take on more borrowing than the deal, and your finances, can comfortably support.
Compare and Optimise
If you're going to borrow money, make sure you're getting the right deal.
Compare the market rather than accepting the first finance option you're offered.
Look at the overall cost of borrowing, not just the headline rate.
And where appropriate, use an expert to negotiate with lenders on your behalf.
Retain Your Cash
Using finance doesn't mean you have to maximise borrowing on every property.
Finding the right balance between cash and borrowing can help you retain liquidity while potentially accessing more competitive rates through lower LTVs.
Your cash can then remain available for:
The aim is to avoid having all your capital tied up in one property.
The Bottom Line
Using someone else's money can help you grow a property portfolio faster.
But leverage isn't a shortcut to ignore the numbers.
Find the right property.
Value it properly.
Analyse the deal.
Understand the cost of finance.
Then make sure the margin works.
The strongest strategy isn't necessarily to borrow as much as possible. It's to use borrowing strategically so your available capital can go further.
And when you're comparing property opportunities, Propp can help you value, analyse and compare finance options in one place.
Use your money wisely. Then make it work harder.
