Want to speed up your property flipping projects?
Find out how bridging loans can give you the finance you need to turn derelict houses into gold.
Property flipping has become a hot investment strategy in the UK, with clever investors turning run down houses into cash cows.
In 2023 the average UK house flip made £45,000 profit according to latest industry stats. If you want to get in on this money making market, bridging loans are a valuable tool for you.
In this article we’ll take you through the process of getting a bridging loan for property flipping in the UK, from the basics to maximising profits and minimising risks.
Bridging Loans for Property Renovation
Bridging loans are short term finance, usually 3 to 36 months.
Unlike mortgages which can take weeks or months to arrange, bridging loans can be arranged in days, so perfect for time critical property purchases.
For property flipping there are two types of bridging loans:
- Standard bridging loans
- Refurbishment bridging loans
Standard bridging loans
These are for quick property purchases, often used in auction scenarios or to break a property chain.
Based on the purchase price of the property. Standard bridging loans are for when you need to buy a property fast but don’t need funds for immediate renovation.
Good for below market value (BMV) purchases.
Refurbishment bridging loans
These loans cover the property purchase and provide extra funds for renovation work.
They’re structured to release funds as the refurbishment progresses, based on the increasing value of the property. Refurbishment bridging loans are for investors who plan to heavily improve a property before selling on for profit.
Note: Bridging loans for residential properties that the borrower will live in are regulated by the Financial Conduct Authority (FCA). Loans for investment properties are unregulated.
Light vs Heavy Refurbishment Loans
When you apply for a refurbishment loan the lender will categorise your project as either ‘light’ or ‘heavy’ refurbishment.
This will affect your loan terms and conditions.
Light refurbishment means cosmetic improvements that don’t require planning permission or building regulations approval.
This might include:
- Upgrading kitchens or bathrooms
- Decorating
- Replacing windows or doors
- New flooring
Heavy refurbishment means significant structural changes or major works that require planning permission.
Examples include:
- Extensions or loft conversions
- Changing the use of a property (e.g., from commercial to residential)
- Major structural repairs
In the UK any work that alters the structure of a building or its services will require approval under Building Regulations. You need to factor these in your project timeline and budget.
Lenders view heavy refurb projects as higher risk so may have stricter lending criteria or higher interest rates. But for investors these projects can offer greater returns.
The Property
Property developers will buy run down properties at discounted prices and renovate to sell for profit.
Auctions can be a great source of below market value properties, saving thousands on development projects.
But many of these properties are so bad they are unmortgageable by high street lenders, often due to issues that make the property uninhabitable.
You need to know which properties high street banks consider high risk.
These often include:
- Properties valued under £50,000
- Properties without a kitchen or bathroom
- Properties with structural problems
- Derelict properties
If you have a property that fits into these categories you will need to look beyond high street lenders for finance.
Bridging lenders are flexible and will consider any and all types of property. But remember all loan applications are based on the lenders opinion of the property value.
This valuation will of course take into account the location, condition and saleability of the building.
Steps to Obtain a Bridging Loan for Property Flipping
- Find the Right Property
Start by finding a property with good profit potential after refurbishment. Look for properties in up and coming areas or those that are undervalued due to condition.
- Assess Refurbishment Costs
Get quotes from contractors for all the work. Make sure to include a contingency budget of 10-20% for unexpected costs.
- Calculate Potential Profit
Research the local market to estimate the property’s value after refurbishment. Subtract your purchase price, refurbishment costs and other expenses (including the bridging loan costs) to calculate your profit.
- Prepare Your Loan Application
Gather all necessary documentation, including:
- Proof of ID and address
- Details of the property you’re purchasing
- Your refurbishment plans and costings
- Evidence of your exit strategy (how you plan to repay the loan)
- Choose a Lender
Research different bridging lenders or work with a specialist debt advisory broker (like us) to find the best deal. Look at interest rates, fees and loan to value ratios.
- Submit Your Application
Once you’ve chosen a lender, submit your application along with all required documentation.
- Property Valuation
The lender will arrange for a valuation of the property in its current state and an estimate of its value after refurbishment.
- Loan Approval and Completion
If your application is successful, you’ll receive a loan offer. Once you accept, the lender will conduct legal checks before releasing the funds.
Related reading: Do you need a valuation for a bridging loan?
Exit Strategy
A solid exit strategy is essential when applying for any bridging loan. This is how you will repay the loan.
For flipping this will be by selling the refurbished property.
When presenting your exit strategy to lenders consider:
- Comparable sales data for similar refurbished properties in the area
- A timeline for your refurbishment and sale process
- A backup plan, such as renting out the property if it doesn’t sell quickly
Remember property markets can be unpredictable. Consider market changes when planning your exit strategy. For example if house prices in your target area have been rising steadily consider how your strategy would change if this trend slows or reverses.
Maximising Profits: Refurbishment Tips for Successful Flips
To maximise your profits focus on improvements that add the most value for the money. Kitchens and bathrooms usually give the best ROI.
Consider these high impact, low cost improvements:
- Refresh the exterior for better kerb appeal
- Update old fixtures and fittings
- Improve energy efficiency (a key concern for UK buyers)
- Create open plan living where possible
Don’t over improve for the local market. Research similar properties in the area to make sure your refurbishments are in line with local values and expectations.
When using contractors get multiple quotes and check references. Consider using a project manager for larger refurbishments to keep costs and timelines under control.
Risks and How to Mitigate Them
Property flipping can be profitable but it’s not risk free.
Here are the common risks and how to mitigate them:
Market Fluctuations: Stay up to date with local and national property market trends. Consider pricing slightly lower for a quicker sale if the market slows.
Unexpected Renovation Costs: Build a contingency fund into your budget. Get surveys done before purchase to identify potential issues.
Delays in Selling: Have a backup plan, such as renting out the property short term. Make sure your loan term gives you enough time to refurbish and find a buyer.
Interest Rate Risks: Consider rate increases when calculating your costs.
By planning your project and being flexible you can overcome these challenges.
Alternatives to Bridging Loans for Property Flipping
While bridging loans are ideal for property flipping, it’s worth considering alternatives:
Buy-to-Let Mortgages: If you are willing to rent out the property initially a buy-to-let mortgage could offer lower interest rates. However they are slower to arrange and have more stringent lending criteria.
Development Finance: For larger projects, development finance can offer staged funding as your project progresses. This can be suitable for more extensive renovations or multi-unit developments.
Peer-to-Peer Lending: Online platforms connect investors with borrowers and can offer competitive rates. However loan amounts may be limited.
Joint Venture Partnerships: Partnering with other investors can provide access to more capital and spread the risk. However, it also means sharing the profits.
Each option has its pros and cons, so consider your specific circumstances and project requirements when choosing.
Is a Bridging Loan Right You?
Bridging loans are perfect for property flipping, they offer speed and flexibility that traditional finance can’t.
They allow you to act fast on opportunities and fund both property purchase and refurbishment.
But they’re not for everyone.
The higher interest rates mean they’re best for short term projects where you can be sure of a quick sale. They also require planning and an exit strategy.
Before you apply for a bridging loan for property flipping research your market, get your costs right and have a plan for selling the property.
Use experts, a bridging loan broker for instance to help you through the process.
Need some help?
If you need a short-term bridging loan then a specialist broker is a good place to start. You will get expert help and advice along with a wide range of lenders to choose from.
To speak with a specialist broker, please call us on 020 3556 9137
