They say it takes money to make money, which certainly rings true in the property development arena.
Getting a new property development business up and running in the first place can seem like a near-impossible task. All types of property development and construction projects call for major capital investment. Established developers have the luxury of various development finance products to choose from, enabling them to cover up to 100% of all project costs.
By contrast, aspiring developers may find it difficult to get their development finance applications through the door.
This is where bridging finance can provide an accessible and affordable lifeline for newcomers to the sector. Bridging loans can be taken out by anyone with adequate security (collateral) and a viable exit strategy (when and how the loan will be repaid).
Bridging finance is a strictly short-term facility, typically issued over a term of 6 to 24 months. During which, interest is ‘rolled up’ into the final balance, and no monthly repayments are necessary.
This is exactly the kind of flexibility new property developers need to get their first projects off the ground.
How First-Time Developers Use Bridging Finance
Bridging finance can be used for almost any legal purpose, but is most commonly used by aspiring developers in the following ways:
Purchasing Property at Auction
One of the best ways to pick up any kind of property for significantly less than its true market value is to buy at auction. Property purchases at auction come with the caveat of requiring full payment within 28 days. This renders traditional loans and mortgages completely unviable, whereas bridging finance can be arranged in less than two weeks. The buyer simply needs to come up with an initial 10% deposit, and the rest can be covered with an affordable bridging loan.
Property Renovations and Sales
The same also applies to the purchase of homes and commercial properties outside the conventional market. Off-market sales almost always attach an element of urgency, as the owners look to offload assets for cash as quickly as possible. Such properties never appear for sale via mainstream channels, and cannot be purchased through conventional mortgages. Upon purchasing such properties, investors have the opportunity to renovate them to the required extent, before selling them on for profit. At the time of the sale, the funds generated are used to repay the bridging loan and the investor retains the rest.
Purchasing Land Without Planning Permission
It is not uncommon for an investor (established or otherwise) to identify potential in an asset that has not been leveraged. A typical example of this is a plot of land, which could be used to construct a home, a commercial property or an extensive development for profit. Buying land for which planning permission has not yet been obtained can be difficult. But it can also open the door to lower purchase costs, such as land with planning permission always sells for significantly more. As bridging finance can be secured against most types of land, with or without planning permission, it provides an affordable entry point to these types of investments.
Purchasing Non-Standard Commercial Property
Mainstream lenders in general are hesitant to lend against ‘non-standard’ commercial property. This could include structures that comprise non-standard building materials, properties not in a habitable state at the time of the application, business premises used for a variety of purposes (commercial and residential etc.) and so on. Such properties are rarely listed on the conventional market, due to the difficulties that would be encountered in financing them. As such, they have a tendency to sell for less than their ‘true’ market value, and can be purchased with affordable bridging finance.