Entering the property market can be an excellent way to both build wealth and develop a variety of skills. Properties can be purchased for rental purposes, developed to increase value for a later sale, or flipped for a quick profit. But, the property market is competitive and volatile, and proper navigation of this market is required to make a profit. Obtaining an appropriate form of finance is one key priority.
Bridging loans are one of the most commonly used loans in the property market. These loans offer several key benefits that make them perfect for such a fast-moving, competitive market, ranging from speed of raising finance to flexibility. But, are they any good when trying to flip property?
In this article, we will discuss bridging finance, its benefits when used in the property market, and whether a bridging loan can be used to flip property.
What is a bridging loan?
A bridging loan is a type of secured loan that specialises in the provision of finance over a short term. This term rarely exceeds a year, though most bridging loans last only a few months. As a secured loan, bridging loans require the borrower to put forward physical assets for use as collateral. The bridging loan will be secured against a collateral asset, raising a similar amount of money compared to the value of the asset. While the requirement of collateral does generate some benefits, it equally results in borrowers assuming additional risk. Lenders will place a lien on any collateral assets, allowing them to seize said assets in the event the borrower cannot make repayments. As such, bridging finance is not always the best solution for borrowers who cannot sustain this additional risk.
Can a bridging loan be used to flip property?
Bridging loans are more than suitable for use in purchasing and flipping properties. When used in the context of property flipping, bridging loans are often referred to simply as “fix-and-flip” loans. Despite the different name, these loans are functionally the same as any other bridging loan.
Bridging loans are not only an option for flipping property, but are often an ideal solution. This is due to the key benefits provided by bridging loans. When used to flip property, bridging loans can quickly raise funds for a purchase, are often high value, and can be repaid quickly upon the sale of the property. This tends to make bridging loans an excellent option for flipping property.
How bridging loans are used when flipping property
Bridging loans can be used to quickly raise a good chunk of cash, perfect for flipping property. If you intend to use bridging loans to fund your foray into property flipping, you can do so following a certain process.
The first step to using bridging finance for any purpose is the application. Applying for a bridging loan is fairly simple, requiring much less time and information than traditional loan applications. Most lenders will ask for some personal and financial information, such as ID and proof of income, but the majority will only place serious emphasis on your proposed collateral assets and how you plan to make repayments. You will also need to specify the Loan-To-Value (LTV), or a percentage of the property’s value you’re asking for. For example, if you’re able to put forward 30% of the property’s value, your LTV will be 70%. When proposing an asset for use as collateral, you will need an official valuation conducted by a professional. Assuming your assets are of sufficient value, and your plan to make repayments is sound, your application is likely to be accepted.
Purchase property
With the funds in hand, your next step will be to purchase your chosen property. Given the quick raising of funds, you’ll be able to make an early cash offer on the property, something quite appealing to a seller. Should your offer be accepted, as is likely with a swift cash offer, you can begin the next step. This step will either consist of developing the property to increase its value, or giving it a quick brush up and getting on the market as soon as possible. Any costs incurred are usually covered out of the buyer’s pocket or using other forms of finance; a bridging loan is typically reserved only for the purchase of the property. Once the property is sold, you can move on to repayment.
Repaying a bridging loan is done using an “exit strategy”, or a clearly defined means of repayment. When flipping property, this exit strategy is likely to be the proceeds of the sale, once the property has been successfully flipped. Other exit strategies can be used depending on circumstance, and include the sale of an asset owned by the borrower, or the refinancing of the bridging loan with a long-term form of finance.
Advantages of using bridging loans to flip property
Bridging loans offer borrowers a host of noteworthy advantages when used to flip property. These advantages include the following:
- Speed – Bridging loans are near-unparalleled in their ability to raise cash quickly. Given the streamlined application process and requirement of collateral, borrowers can receive their funds in as little as a few days.
- Flexible – Bridging loans are extremely flexible in a variety of ways. They can be used for a wide array of purposes, obtained using a range of assets, and even repaid in several different approaches. This not only makes bridging loans an effective form of finance, but an accessible one.
- High loan value – Bridging loans can be used to raise large amounts of capital, often limited only by the value of a borrower’s assets. If you have enough of a portfolio, it is more than possible to obtain a bridging loan well into the millions.
Wrapping up
Bridging loans are a perfectly viable method of raising funds for a property flipping endeavour. The key benefits boasted by the loan type make them ideal for such a purpose, allowing borrowers to raise large sums of money at the drop of a hat. In such a tumultuous market, these benefits are invaluable. However, using bridging loans does come with a degree of risk. They require borrowers to put forward assets as collateral, entitling the lender to seize said assets if borrowers default. As such, it is important to consider your financial situation and obtain professional advice before taking action.