When securing finance for property purchases or refinancing, the valuation method used can significantly influence borrowing capacity. Two primary approaches are bricks and mortar valuation and investment valuation, and these can yield dramatically different results—especially for properties intended to generate rental income, such as Houses in Multiple Occupation (HMOs) or buy-to-let investments. Understanding these valuation methods is critical for investors looking to maximise their financing potential.
In this guide, we’ll explore the differences, delve into the advantages of investment valuations, and demonstrate why working with lenders who use this method—even at slightly higher interest rates—can be a smarter choice for your property investment strategy.
What is a Bricks and Mortar Valuation?
Key Factors Considered
- Size: Square footage and the number of rooms.
- Condition: Overall state, including the need for renovations or repairs.
- Comparable Sales: Recent sale prices of similar properties in the local area.
Core Characteristics
- Focus: Exclusively on the property as a tangible asset.
- Income Generation: Ignores any income-generating potential, such as rental yield.
- Suitability: Best suited for properties intended for private residence rather than investment.
Example:
A three-bedroom terraced house in a suburban area might be valued at £250,000 using a bricks and mortar approach, based on recent sales data of similar properties nearby.
What is an Investment Valuation?
Key Factors Considered:
- Rental Income: Current and projected rental earnings.
- Market Demand: Local rental demand and occupancy rates.
- Location: Accessibility, amenities, and desirability for tenants.
Core Characteristics:
- Focus: Prioritises the property’s income-generating potential.
- Valuation: Often results in higher valuations for rental-focused properties.
- Investor View: Provides a more realistic view of the property’s worth for investors.
Example:
If the same three-bedroom house generates £2,500 per month in rental income, its investment valuation could reach £500,000, depending on market yields.
Why Investment Valuation Unlocks Higher Borrowing Potential
1. Rental Yield Drives Value
An investment valuation calculates the property’s worth based on rental income, making high-yield properties far more valuable to lenders.
Example Calculation:
- Annual Rental Income: £30,000 (£2,500/month)
- Yield-Based Valuation (at 6% yield): £30,000 ÷ 0.06 = £500,000
In this scenario, the investment valuation doubles the bricks and mortar valuation of £250,000
2. Higher Loan-to-Value (LTV) Ratios
Lenders offering investment valuations often provide higher LTV ratios, as rental income assures repayment capability.
Example:
- Bricks and Mortar LTV: 75% of £250,000 = £187,500 loan
- Investment LTV: 75% of £500,000 = £375,000 loan
This additional funding can be pivotal for expanding portfolios or financing large-scale projects.
3. Ideal for Rental-Centric Properties
4. Supports Long-Term Cash Flow and Growth
Why Paying a Higher Interest Rate for Investment Valuation Lenders Can Be Worth It
Increased Borrowing Power
Tailored Solutions for Complex Properties
Realistic Reflection of Property Value
Enhanced Return on Investment (ROI)
Conclusion
Understanding the distinction between bricks and mortar and investment valuations is crucial for property investors. While bricks and mortar valuations work well for standard residential properties, investment valuations unlock the full potential of rental-focused assets. By leveraging these valuations, you can secure higher loans, improve cash flow, and achieve better long-term returns.
At Auction Finance, we specialise in working with lenders who recognise the true value of rental income and offer financing solutions tailored to your investment goals. Contact us today to discuss how we can help you maximise your borrowing potential and take your property portfolio to the next level.
