Definition
An all money out deal is when a property investor purchases a buy to let property using a deposit and a mortgage, and subsequently refinances it at a higher value, withdrawing the original investment used as the deposit.
The increase in value may be the result of a general increase in the price of properties. It may also be because the investor originally purchased the property below market value or added value through refurbishment. Another way of adding value is by extending a house to create more living space, and converting it to an HMO.
Worked example
Here’s a worked example using round figures for convenience.
- An investor buys Property A for £100,000 with a £25,000 deposit and a 75% loan-to-value mortgage for £75,000.
- The property is later revalued at £133,500, and the investor refinances the property with a mortgage for 75% of the increased value, ie £100,000.
- The investor repays the £75,000, and retains their initial £25,000 deposit to invest in another investment, Project B.
Pros and cons
The advantage of an all money out deal is that it enables “recycling” of the deposit for a new investment. The investor may benefit from capital growth from both the Property A and Project B, whilst keeping the rent from Project A.
The flip side is that the mortgage on Project A has increased, enlarging the investor’s debt, even though the gearing (the percentage of debt compared to the equity) is the same. This increases the investor’s risk. The servicing of the interest payments reduces the net monthly return as a buy to let. It therefore leaves less of a buffer for contingencies such as void periods, unexpected maintenance costs, and tenants in arrears.
There is also the risk of negative equity if there is another property crash. The investor remains vulnerable to changes in interest rates or a tightening of lending criteria at the next refinancing.
