Investing in Bridging Loans: A Beginner’s Guide
Investing in bridging loans doesn’t necessarily mean you must own the lending company. The idea with this type of investment is that they allow you to invest in something where you can act quickly to take advantage of a great investment opportunity.
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Let’s dive into bridging loans and how to use them to your advantage.
What is a Bridging Loan?
A bridging loan – like one arranged by bridgingloans.co.uk – is a short-term loan usually from a specialised lender. It’s often beneficial to use a broker to find a selection of bridging loan lenders as there’s not a long list of them in the UK.
The loan could be to purchase a property at an auction which has to be completed in just under a month. It might be used to cover one-time property expenses until funds come through to repay the short-term loan. Making a significant conversion or buying a property currently without a bedroom or a bathroom might deter regular mortgage lenders, but not a bridging loan provider once they understand the development goals from an experienced property developer.
How Can Using Bridging Loans Turn a Profit for You?
Let’s look at buying a property at auction. If an existing property hasn’t sold yet – the conveyancing is dragging on because there’s a long chain – then ready funds might not be available to pay the full price for a property at auction. In which case, putting down a 10 percent deposit and agreeing to cover the other 90 percent in the next four weeks isn’t going to be possible. You lose the deal and the investment opportunity.
However, what if you have the 10 percent deposit funds available and you go ahead with the auction purchase? That’s okay unless your property sale needs more time to get finalised and you have the auction purchase to pay for?
In the above scenario, a bridging loan might be useful to complete the auction purchase in time. This prevents you from missing out on a terrific investment and the bridging loan is profitably used. Many investors bemoan that “if I only had two weeks more, I could have gotten the deal done” when in fact, bridging loans can often cover for this sort of issue.
How to Avoid Losses with Bridging Loans?
Losses occur on property deals when using a bridging loan and not having a secure plan for the repayment side of it. Unless a plan and terms agreed cover the full purchase, renovation, and flipping of the property post-renovation, then most bridging loans are finite and must be repaid in a timely manner.
Have a plan A and a plan B to secure the longer-term funding if you plan on repaying a bridging loan is important. This way, you project out the costs of the bridging loan and the long-term loan into the investment plan before starting. Overpaying on capital funding because your plans fell through is a sure-fire way to lose money or reduce your investment return. Accordingly, develop multiple plans to repay the bridging loan if that’s what your planning calls for.
Bridging loans are increasingly being used within investment properties. The faster availability of funds for investment projects allows buyers to move quickly when the right type of investment comes to market or at auction. Smart property investors look at 100 deals and maybe invest in one. Using bridging loans, investors can make them profitable by getting some of the better properties, snapping them up before other investors can get their funding together. The higher returns on well-located properties bought at a reduced price more than covers the cost of the bridging financing.
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