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Is cashback buy-to-let property the new way of attracting potential landlords and a great way of enabling you to build up your property portfolio quicker than you would other wise be able to or is it just a carrot that developers are using to lure in potential buyers blinded by sums that are too good to be true?
So how does it work? Well, imagine you purchase a buy to let property for £150,000 in cash and the developer hands you £20,000 'cash back' then you have in effect purchased the property for £130,000. But realistically, how many people buy their property with cash? In another instance, if you purchase the same property for £150,000 and have taken out a 100% mortgage and the developer gives you £20,000 'cash back', to really benefit you need to use the 'cash back' to pay that amount off your mortgage. If not, you have, in effect, taken out a loan that you have to repay.
There are many ways that a cash back deal can work. One of the most popular is Delayed 'cash back'. Some developers are offering cashback buy-to-let property that gives you the cashback after say 2 years. This means that you are, in effect, making a loan to the developer. They have the use of your money to finance their business for the next two years. This delayed 'cash back' is starting to become more common because it is a cheap way of raising finance. As long as these schemes are honest, properly costed and run by competent management teams they can be to everyone's advantage.
In reality, what you are being asked to do is to pay more than your property is worth at the time upfront so that the developer can use your money to finance the building of your property and another property too. What you have to think about and assess is what your property is going to be worth at the time when you'll be getting your cash back, say two years time. Will the future value of the property be at least the value you are being asked to pay upfront now? In this situation it's important to be realistic and do your homework. Check the value of the property, which will probably be 'off plan' at this stage, against newly built similar properties in the area. This will give a guide to how much extra you are being asked to pay towards the financing of the development's next phase.
If it is say 20% then this should be the minimum starting point of the 'cash back' offer. However, there are two more considerations. Firstly, you are providing interest free risk finance and that should be worth something. Secondly, by being an early buyer you are providing credibility and are helping get the project off the ground. It therefore might not be unreasonable to see a minimum 25% to 30% 'cash back' after two years. If the developer is raising 40% more from you than a similar property is worth then a mouth watering 50% 'cash back' may be in order. These deals are starting to appear in many popular overseas property and domestic property markets. Remember, you are in a good position to negotiate in your favour. There are certainly some great deals to be done when it comes to cashback buy-to-let property.
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