7 Things to Know about Using a Bridging Loan for Property Development
Buy-refurbish-refinance is a fantastic (and very popular) strategy but it is difficult to get right and newcomers to the industry should approach it with caution.
In a nutshell, it involves purchasing a house, adding value through refurbishment and renovation work and then re-mortgaging the house at the higher market value.
This way, you can reclaim your expenses (your deposit and the money you have spent on the work done) and move onto the next project with.
I won’t lie, to be successful in this approach is difficult, really difficult.
You need to be able to find discounted properties (below market value). You need to be confident in your ability to add value to your property.
And you need to have good financial advice, regarding mortgage products.
But more than that, you need to be in a position where you can move quickly. The faster you can go, the less it’s going to cost you.
Refurbishment projects can be/are very expensive and unless you have deep pockets you are going to have to find that money from somewhere.
One possible answer is to partner with another investor. Joint venture projects are common in this industry, where one partner supplies the money and the other, the expertise and the graft.
This is what we are going to look at today.
To do so, we have asked for help from Richard Scull from Affirmative Finance, who has kindly agreed to run through the following 7 facts about using bridging loans for property development projects.
As always, nothing here should be taken as financial advice. Always seek help from a qualified expert before entering into any kind of financial arrangement.
And before we pass you over, a small tip from us: when you are seeking bridging or development finance you should make every effort to present your deals well.
With that said, it’s over to you, Richard, and it’s over and out, from me.
Best,
7 Things to Know About Bridging Loans for Property Development
By Richard Scull
What Is A Bridging Loan?
Bridging loans are useful for those who require fast access to a secured short-term loan, perhaps to overcome a specific issue that they are facing or simply, to be able to complete on a property quickly.
This can make them ideal for property developers and investors who often need to make quick purchases on properties, which they intend to sell (using a flip strategy) or re-finance, within a limited time frame.
Bridging Finance – 7 Facts
1. Bridging Loans Are Quick
Property bridging loans are a way of getting quick access to capital.
When you find the perfect property for your portfolio, you may only have a small window of opportunity within which to complete the sale.
This is particularly true when the property you have in mind is on the market for a great price – something you don’t want to miss out on.
This means, that with a bridging loan, you can access funds quicker than you could if you were using other forms of borrowing.
And this way, you can ensure that you have the funds you need within the deadline you are given, and able to secure that perfect property.
In certain circumstances, it might even be possible for you to raise 100% of the purchase price, purely through a property bridging loan.
Tip 1 – Talk to the Bridging Loan Provider
When you are looking for a bridging loan provider, make sure they know the time-frame you are working to and check that they are able to deliver in that time.
Don’t waste your time with a provider who won’t be able to deliver.
2. Bridging Finance Is Flexible
Bridging finance can be much more flexible than high-street lending or traditional mortgages.
Mainstream lenders will often require more information from you than bridging finance lenders.
They will need a lot of information about your income and credit history before they will agree to a loan. And, if you do not meet their criteria, then they will not give you the money.
Bridging finance lenders, on the other hand, will need to know about the property, as it is the property that is used to secure the loan (the sale of which is your exit strategy for the loan repayment).
The repayment terms can often be amended to suit you. However, you are usually required to pay back the loan within a year, so that’s important to keep in mind.
Tip 2 – Have an Exit Strategy
Bridging finance is intended to be quick short term finance, and although the flexibility of this lending method is fantastic, having an exit strategy in place is crucial to avoid running into difficulty.
3. A Bridging Loan Can Be Used For (Almost) Any Type Of Property
You can secure a bridging loan for any type of property.
When you are applying for a bridging loan, the property (that it is being secured against), is one of the most important factors.
Luckily, these loans can be used to purchase all types of property, including houses, flats and apartments, commercial units, land and shops.
So whether your strategy is investing in serviced apartments, investing in buy-to-let or in an HMO, then a bridging loan is an option that is open to you.
This also means that you can access finance for a new addition to your property portfolio regardless of the type of property you want to secure the loan against.
In other words, you can secure the loan against a property you currently own, rather than the one you are using the loan to buy.
Tip 3 – Secure Finance On Properties You Already Own
If you own properties already that are unencumbered (without any finance secured against them already), then this will give you more options when it comes to securing a bridging loan.
But, this isn’t to say that you can’t secure a loan against a property that has finance against it already.
4. Financing Property Development
Bridging loans can support you throughout a property development project.
This can be essential for property developers and traders.
Should you be looking to buy a property to develop and then sell on in a short space of time, it may be that you cannot access the finance that you require at the time it is most needed.
This may mean that you are unable to complete the work that you would like to do on a property.
Or it might mean that more time is unnecessarily spent on the development, or that you end up holding the property for longer than you wanted to.
A bridging loan allows you to access the financial help you need quickly and can provide money in stages throughout your renovation project.
This means that you can complete the work according to your ideal deadlines and the loan paid back when you sell or refinance.
Tip 4 – Property Development Is All About Careful Planning
If you own properties already that are unencumbered (without any finance secured against them already), then this will give you more options when it comes to securing a bridging loan.
But, this isn’t to say that you can’t secure a loan against a property that has finance against it already.
5. Renovating Uninhabitable Houses
Bridging finance can make those big renovation projects, possible.
Most high-street lenders will not provide finance for property investors to renovate uninhabitable properties as these types of project are seen as high risk.
Although you might be able to see amazing potential in a property, it might be difficult for you to secure the funds that you require.
Properties which do not have running water, bathrooms or kitchens may appeal to those who would like to start a renovation project from scratch; but most mainstream lenders will simply not lend money for these types of properties.
In which case, one answer is to take out a bridging loan to cover the costs of repairs and renovations until the property has reached a habitable condition.
Following this, you would be able to take out a mortgage or sell the property, using the profit to help fund your next project.
Tip 5 – Big Renovation Projects
Renovating uninhabitable properties can be a great strategy but experience matters.
If you have not undertaken this kind of project before then at very least, you need to sure that you find the best builder you can for the work.
And you will need a good contingency plan so that you don’t get hit with large, unexpected development costs.
More Articles about Renovation Projects:
6. Adding Value To Your Investment with Planning Permission
Planning Permission can help you to achieve planning gain on the property and add significant value.
If you have found land or a rundown property for sale which does not have planning permission granted, it may be that you struggle to find finance due to the risks involved.
This can be frustrating when you can see the potential worth of the land or property.
To overcome this issue, you can apply for a bridging loan which will allow you to purchase the land or property in question and then apply for planning permission and once this is granted.
Then, you can sell the property on for a profit or develop it yourself.
Bridging finance allows you to do these types of deals, effectively.
Tip 6 – Talk to a Planning Expert
Check with the planning office and/or a local planning expert, what the potential to gain planning is on the project you are considering.
You don’t want to get stuck with a deal, where planning permission is unlikely to be granted.
7. Financing Purchases At Property Auctions
A Bridging loan can help you to fund auction purchases, which require a very quick completion and instant exchange.
This opens up a new market to buyers and auctions can be a great place to find hidden gems to add to your property portfolio; at a great price.
Also, you do not have the worry that you will lose the property at some point during the process, as, when you win the auction the contracts are exchanged.
However, you have to be sure you can get your finance together, in time to complete (usually within 28 days).
But this process removes a lot of the stress which usually comes with buying a property.
And it means that you can focus on making decisions about the alterations or renovations that you would like to make, straightaway.
Tip 7 – Buying a Property at Auction
Should you buy a property at auction without having the required finance in place, you can apply for a bridging loan to cover the cost at short notice, which can get you out of any tricky situations and is a much better use of quick finance than high street mortgages.
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