Bridging the way to stronger returns.
Rents may be increasing across the country, but interest rate rises and higher operational costs and a larger tax burden have combined to encourage many landlords to investigate new ways of improving their returns.
Three of the main ways of improving profitability at the current time are (i) property refurbishment, (ii) buying at auction and (iii) investment in semi-commercial property – and bridging finance can help in each case.
Making good
As many landlords are selling up at the moment, there are some good deals to be had, but it may well require the investor to move quickly. Using bridging finance, the buyer can secure the property much more quickly than if they were applying for a buy-to-let mortgage.
The opportunity to make improvements to a property should be considered for a number of reasons. The property should be available at a discounted price and the buyer may be able to leverage economies of scale with materials and/or labour to do the work more cheaply, while post-refurbishment, the landlord will be able to charge a higher rent. This may also have the effect of attracting a better quality of tenant, who may be more likely to look after the property, therefore potentially reducing maintenance and decorative costs moving forward.
By leveraging a refurbishment bridging loan, landlords have the opportunity to acquire the financing necessary for the property purchase as well as the essential renovation work. Once these improvements are completed, they can confidently reintroduce the property to the market. This upgraded property is likely to stand out among competing homes and flats, ensuring a profit whether the intention is to sell or to retain it as a buy-to-let investment.
Moreover, a significant deadline looms for landlords in 2025. By this time, every buy-to-let property initiating a new tenancy must meet an Energy Performance Certificate (EPC) rating of 'C' (existing tenancies are given until 2028 to meet this requirement).
Buy-to-let investors who want to raise money and are currently with a favourable fixed-rate buy-to-let mortgage may be reluctant to remortgage as this will result in higher fixed-rate buy-to-let mortgage. In such situations, a bridging loan can prove advantageous. Landlords can use this loan to finance the necessary energy efficiency enhancements to their current properties and choose to remortgage at a time that suits them. The enhanced value of their upgraded properties can then be used to secure a low rate.
Hammer time
Of course, auction houses are the place where many properties in need of improvement can be found. Bridging finance is usually the first financing option investors should consider when they spot a property they want to quickly purchase, as is often the case with auctions. This financing method allows not only for rapid property acquisition but also for any necessary renovations.
Auction finance is a bridging product specifically structured to accommodate the strict timelines associated with auctions.
Traditional mortgage financing is impractical given that full payment is typically required within 28 days of the auction's conclusion. Auction finance is particularly useful for the purchase of properties deemed unmortgageable or uninhabitable.
Mixed-use market
Meanwhile, semi-commercial properties continue to attract significant investor interest due to their potential for higher yields and their tax benefits. Bridging loans can be used for the acquisition of semi-commercial property, which again can be found at auction.
A semi-commercial property integrates both commercial and residential features. Such a property usually contains a commercial space on the ground level with residential units situated on the upper floors. Shops or offices with apartments above them or pubs or restaurants with accommodation on the higher levels are typical examples of semi-commercial properties.
Investors may have multiple reasons for considering an investment in a semi-commercial property. These properties provide exposure to both commercial and residential market conditions, allowing landlords to diversify their portfolio and modify their risk profile.
Furthermore, the combined commercial and residential nature of semi-commercial properties can mitigate vacancy risks, as the property can draw income from both commercial and residential tenants, so even if one element is vacant the other may not be, so still creating some income.
Landlords are by and large not making huge profits from their properties, regardless of what much of the press might have you believe. We need a healthy private rented sector in the UK and landlords require all the help they can get to improve their yields; that’s why they need to know how bridging finance can play its part in improving landlord profitability.
Marios Theophanous, Credit Manager at London Credit
