Speaking the language of Finance in the Property Space.
Speaking the language of Finance in the Property Space.
=When working in the property space, you need to be aware of the finance aspect. Understanding the finance jargon within this industry will help you and open you up to many more opportunities. Through understanding what this jargon is and how it is implemented, you will also be able to operate more efficiently as you will know what is going on in regard to the finance aspect.
Something to point out is that the language that we use in property can be very different to the language that we use in the finance space and when I first started out working in this industry I got very confused by all of these terms. Although these two sectors have different terms, they actually mean the same things. So, let’s get straight to it…
LANGUAGE OF BANKING
What are the main types of debt?
There are 4 key terms within this category that you should be aware of.
Senior debt refers to the main body of lending for your particular development. When you hear people talking about commercial and development finance you may often hear them refer to this term senior debt and all this means is the money that you initially that the bank are going to lend to you.
This typical sits on top of senior debt like a mezzanine floor would and this mezzanine finance bolsters up the amount of lending that you can get in the first instance. For example, it might be with the senior debt you can get 50% loan to value, but then with the mezzanine debt on top which is worth by itself 30% gives you a total of 70% loan to value.
Blended rate simply refers to senior debt and mezzanine finance combined together. You may often hear a broker talk to you about your blended rate looks like.
Equity debt refers to the part of the property finance that isn’t covered by an institutional party. This means it is not covered by a bank, it is something that you put your own cash into, or you work with a partner.
What are the different types of lenders?
It’s really important that you can identify the different types of lenders that you can work with because how you speak to each lender will differ.
A sophisticated lender may be a bank, an institution or it could even be someone who does this professionally as a living. You may often hear brokers speaking about family offices. Family offices refer to cash rich individuals or companies who have taken their wealth to invest in properties and they are going to make up the equity part of your lending.
An unsophisticated lender is someone who doesn’t necessarily do this for a living. This could be a family member, a friend, someone you met networking or a local business who don’t actually know that much about the property space.
What are the different types of banks?
When it comes to banks, we have all heard of your main high street banks such as Lloyd's, TSB, and HSBC. Some of these banks do have a property strategy associated with them. For example, Lloyd's are very good at giving lending in the property space. However, the majority of banks that you will be working with in the property space are challenger banks. It’s important that you understand these as you are more than likely going to working with these challenger banks as they specialise in the sector. More than often the local high street banks may say no to offer you finance and that’s because of their criteria and strategy. If you understand this, it will open your world up.
Challenger banks are not your typical high street banks, these banks work privately from more corporate offices and you are more than likely never would have never heard from them before. For example, there are challenger companies such as Cambridge and County, Aldermore, Keystone and many more. So, these banks are not high street entities, but they are banks in their own right. It’s important that your aware of these challenger banks as they specialise in investment opportunities. To get to these challenger banks you will need to go through brokers.
A broker is someone who has access to multiple different brokers and as an individual you will more than likely not have this access. So, brokers have personal and business relationships with different lending entities. Brokers have the capacities to take your deals out to these variety of lending entities. Brokers also help to present all of your information and yourself in the best way possible. Something to note about mortgage brokers is that different brokers have different relationships with different banks. So, if one broker says no to you, it might not be that the next broker will say the same.
LANGUAGE OF MONEY
When it comes to the language of money there are some key terms that you should be aware of and you will begin to hear people talking about yield, ROI, LTV and much more and all of this can tend to get a bit confusing. If you can gain clarity of all of this, it will really help you not only in the finance area but by speaking and using the right language it will demonstrate your level of expertise…so what terms do you need to be aware of.
It’s very likely that under almost all circumstances that you will have to have a valuation done. Valuations are generally undertaken by RICS Valuer's. RICS is the Royal Institute of Chartered Surveyors and they are the main body when it comes to valuing property. It’s important that you understand the person from RICS is there to represent the lender or yourself when it comes to working out the value of the property.
PG (Personal Guarantee)
A personal guarantee is another term that you might hear people talking about. An example of offering a personal guarantee is if I am going to lend you £100,000, you can offer reassurance that if things go wrong you can offer a recourse on it. A personal guarantee is simply your commitment to pay back a minimum percentage of a loan.
A yield is a word that often gets misused in property and effectively the yields are the correlation between the value of property and the profit it produces. For example, if you have a buy-to-let property which has a value of £100,000 and it's generating £10,000 per year, then this is its yield and in this case the yield is 10%. It’s important to note that the yields are the correlation between the value and the revenue it generates.
This term is used by different developers in different ways and this varies depending on what your strategy is. When you are in the buy-to-let space or when you are retaining stock, ROI is used to define the amount of cash that you have in the property vs the amount of income that it produces after your mortgage costs. In the commercial and development space the ROI refers to the relationship between the amount of cost that has gone into the development vs the amount of profits that it generates. Therefore, it is the same language, but it is used in two different ways.
Technically in the buy-to-let space ROI should be ROCE which stands for Return on Capital Employed.
General when we are talking about the value of a property, we most commonly refer to the net values after costs, because this is the most intelligent way to value your property. However, there are some other value terms to be cautious of.
Gross Income - Gross income simply refers to the total income.
Net Income - The Net income refers to the total income after costs.
Gross Yield - A gross yield is the comparison between the property cost vs the rental income.
Net Yield - A net yield refers to the property cost vs the rental income minus any expenditure.
COMMERCIAL FINANCE In the property space when you hear people talking about commercial finance, we are referring to any finance product excluding a standard residential mortgage. So, any residential or commercial property, all business-related finance products come under this umbrella of commercial finance. Commercial finance refers to the nature of the lending and not the type of building that you are looking at buying. Now beyond this term, commercial finance there are further broken-down sectors such as development finance, light refurbishment finance, bridging finance or buy-to-let finance, but all of these sit under that one key category of commercial finance. THE WAY LENDING IS DONE VS THE TYPE OF LENDING YOU GET.
If you haven’t already, you may come across the term LTV and this means loan to value. For example, if your property is worth £100,000 and the bank say that they will lend you 50% of that value. So, in this instance they will lend you £50,000.
LTGDV refers to the loan to gross development value. For example, if you have purchased a property, done it all up and completed all of the works and it is going to £1,000,000. Then the bank says that they will lend you 50% LTGDV that means that they will lend you £500,000 because they are lending you a percentage of the end value and not a percentage of the original value.
LTC refers to the loan to cost. For example, your property might have a value of £100,000, but you are only going to be spending £80,000 to buy it. the bank will give you a 505 LTC of £40,000. Then the bank will only give you a percentage of what you will spend opposed to what it is worth.