There are many different ways in which a bridging loan can support landlords, not only in purchasing property, but also in diversifying their investments. Gavin Diamond explains more
Landlords should look beyond the buy-to-let mortgage when considering financing options, as bridging finance is used every day to help property investors make the most of the opportunities that come their way.
Bridge financing is a short-term loan designed to provide quick access to capital, making it a valuable tool for landlords looking to seize opportunities or overcome temporary financial shortfalls.
In today’s real estate market, landlords often need fast, flexible financing solutions to secure deals, improve their portfolios or diversify income streams. Here I explore the different ways in which bridging finance can be a game-changer for landlords.
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Supporting real estate purchases at auctions
One of the most common uses of bridge financing is to facilitate the purchase of real estate auction.
Auctions typically require buyers to complete transactions within 28 days of the hammer falling, leaving little time for arranging traditional mortgages. Bridging loans offer a quick and effective alternative, allowing landlords to secure their desired home without delay.
Properties purchased at auction often require refurbishment or rough work before they can qualify for a standard mortgage.
Bridge financing can also cover the costs of these improvements, allowing landlords to increase the value of their investments and prepare them for long-term financing or rental.
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Improving the quality of the portfolio
In an era of lower buy-to-let profits, many landlords are turning to bridging loans to tailor their portfolios for higher returns.
For example, converting a standard three- or four-bedroom home into a multi-occupancy home (HMO) with five or six units can significantly increase rental income.
The past year has seen a notable increase in the number of landlords using bridging finance for HMO conversions, either for properties they already own or for new purchases.
In addition, landlords are increasingly finding that they must deal with the complexities of today’s planning environment, where applications are often delayed by additional requirements such as biodiversity studies.
Bridge loans provide the flexibility to continue projects pending formal approval, making them extremely useful.
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Financing property conversions
The versatility of bridging extends to property conversions. Landlords are increasingly using these loans to adapt properties for new purposes, such as converting commercial spaces into semi-commercial or fully residential units.
For example, semi-commercial real estate is gaining popularity among investors due to their ability to diversify risk and potentially offer higher returns.
These properties combine commercial and residential elements and generate income from multiple sources.
Even if one part of the property is temporarily vacant, the other can still generate income, making it a robust choice for landlords.
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Flexible repayment options
Bridging financing offers landlords various interest repayment options to suit their circumstances. These flexible options ensure that landlords can tailor their financing to their cash flow and project needs.
With rolled or retained interest, the interest is added to the balance of the loan and paid at the end of the term, making it ideal for properties that are being renovated and will not generate income during the term of the loan.
Meanwhile, “serviced interest” provides monthly interest payments by the borrower, suitable for landlords with stable income from other sources.
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Innovative financing options
Bridging financing offers options that many landlords may not initially think of. For example, it is possible to secure 100% financing by using existing portfolio properties with low financing rates as additional security, allowing landlords to acquire properties below market value at auction, refurbish them and refinance them at a higher value .
In some cases, refinancing at 75% of the post-work value can pay off the bridging loan and even cover renovation costs, leaving landlords with a surplus of funds.
In addition, some bridging lenders will lend at a second rate, allowing landlords to leverage the equity in their existing properties to fund new ventures.
Some things to consider when using bridging financing
Provide a clear exit strategy
It is important to understand that a clear and realistic exit strategy is essential when applying for bridging finance. Lenders must be able to trust that borrowers can repay the loan within the requested loan period.
Common exit strategies include refinancing the property at a higher value after renovation or selling it outright.
Landlords should also have contingency plans in place in case their preferred exit strategy is delayed. For example, securing a backup buyer or obtaining pre-approval for refinancing can reassure lenders and ensure the project stays on track.
The role of real estate agents
Navigating the world of bridge financing is often best accomplished with the guidance of an expert broker. Real estate agents play a crucial role in the process. They help landlords identify the most suitable products and lenders, structure deals efficiently, explain the nuances of interest payment options and exit strategies, and manage the application process with the lender.
An experienced agent can also uncover opportunities that landlords may not have considered, such as using bridge loans for portfolio diversification or accessing financing for large-scale projects.
Bridging financing is more than just a short-term financing solution; it is a versatile instrument that enables landlords to take decisive action in a competitive real estate market.
Whether securing auction purchases, improving portfolio quality or adapting properties for higher returns, bridge loans provide the speed and flexibility landlords need to succeed.
With careful planning, a clear exit strategy, the support of an experienced broker and choosing the right lender, landlords can unlock the full potential of bridging finance to achieve their investment goals.
Gavin Diamond is CEO of Inspired Loans