November 7, 2019
For property developers of all sizes, bridging loans offer a useful way of plugging a funding gap. These are short-term loans secured by property as collateral and can be put to work in a wide range of ways. If your client needs an injection of capital to fund refurbishment, overcome planning issues, or to ensure a property is made fit for rental or resale, bridging finance may offer the solution.
Especially in light of the arrival of the 3% Stamp Duty surcharge, the challenge for any developer is to find ways to add value to their investment. Now more than ever, this can involve looking beyond ‘basic’ Buy-to-Let purchases and towards the likes of holiday lets and Houses in Multiple Occupation (HMOs). Where your client’s project involves making significant alterations to a property, it can be highly useful to have a fast, dependable means of accessing funds at your fingertips. Bridging finance can directly address this issue.
Here, we’ll take a closer look at how bridging finance can help your clients in a range of renovation scenarios.
Providing they have the know-how to fix significant damage, sometimes the “worst” properties offer property professionals the greatest opportunities to add value and increase profit.
Let’s say a property developer identifies a dilapidated property which they feel has massive potential, but it’s in a poor state and will require a lot of work. They approach their High Street Bank for a mortgage application, and everything appears to be on track - until the property fails to meet the criteria to be eligible for a loan. In other words, it’s classed as an ‘unmortgageable’ property.
Common reasons for mortgage refusal include the absence of a working kitchen or bathroom facilities, structural problems, non-standard construction or the presence of significant rot.
The good news for property developers is that bridging finance lenders apply a different ‘rulebook’ to traditional lenders. They are able to consider applications for loans based on the actual value of the property — even if that property is currently uninhabitable or in need of significant work.
Property professionals can use a bridging loan to fund the purchase of an uninhabitable property. Under these circumstances, here are two common exit strategies for paying back the loan:
Depending on its location, condition and the state of the market, the most effective way of realising a property’s true potential may involve changing its use. Examples may include converting a commercial block into student accommodation, a large residential dwelling into retirement flats or a barn into holiday apartments.
Bear in mind that change of use developments almost always requires planning permission from the relevant local authority. If the long-term plan for the property involves obtaining that permission, traditional lenders are often unable to approve a mortgage unless and until that permission is in place.
Let’s say your client has spotted a property that seems perfect for repurposing. They have made initial enquiries regarding planning — and are very confident of securing full permission for their plans over the next few months. What’s more, they also have a backup plan for resale in case a problem arises. The current owner is keen to sell. In the absence of a mortgage offer, one option may be to use a bridging loan to fund the initial purchase and then switch to a traditional mortgage once permissions are in place.
Not all development is focused on swift resale. Property professionals who combine their developer expertise with a solid understanding of what tenants are actually looking for, can go a long way in building a profitable Buy-to-Let portfolio.
To give a property strong rental potential and attract high value tenants, development projects may involve significant layout remodelling, such as adding extra bedrooms and bathrooms.
Suppose an aspiring property professional with a chunk of capital to invest, identifies a run-down property with plenty of scope to create a profitable long-term rental prospect. But they’re new to both property development and to buy-to-let investing. Due to the High Street lender’s rigid criteria, they are unable to release funds based on the property’s current state.
In this scenario, it may be possible to use a bridging loan to cover the additional capital needed to cover the purchase — and to fund the planned renovations. Your client’s exit plan would be to place the property on the rental market and to switch to a Buy-to-Let mortgage once the work is done.
The best development opportunities often have at least one thing in common: they do not tend to stay on the market for very long. This is where Enterprise Finance can help, with access to a full range of specialist property finance options. If you’re interested in finding out more, head over here to speak to Enterprise today.