The Beauty of Bridging Finance
This is my favourite form of investment for 2010, in particular my favourite way to be involved in property investing, ahhh to be the lender.
What is a bridging loan?
A short-term loan, usually at a higher rate of interest taken out by people who have bought a house (or can be used for a venture capital, investment project, short term business loans) while waiting for theirs to be sold, or when a normal mortgage and their savings fall below the asking price.
Or in the case of short-term business loans an example would be an import company needing extra cash to bring in a shipment. They will have the money in two months once supplies sold, but it’s time critical they have the money now.
The Pro’s and Con’s of Bridging loans
Pro’s
-Normally a very good interest rate 2-4% a month (I have heard of building/business loans as high as 6% a month)
- If done properly should be secured to a property, and an airtight legal contract.
- An investment for a clear time period (can be extended if you like, but normally for 60-90days).
Con’s
- Normally need to have over $100,000+ cash to be involved in a bridging loan.
- Need to organize money fast, within 48-72 hours, you miss the opportunity if you can’t the money fast.
- These are people that can’t get bank loans, let’s not fool ourselves there is risk, this is way important to have the legal contract and secured to a properly. Bottom line worst-case scenario, if they fail to pay, ensure a secured contract so a court will recognize, and ensure repayment of the loan.
- Hard to access these investments in Australian often you need to be defined by ASIC as a Sophisticated Investors under ASIC’s 6.2D rule, check out the different ways they define a Sophisticated Investor: www.asic.gov.au
How any body can offer a bridging loan now
You can offer and proactively set up bridging loans, at the back of newspapers in the classified section in business section, there is builder/construction project looking for finance. Everyday people around Australia are making contact with the next, negotiating an interest rate and out come the property secured contract with their lawyer.
Definitely not an investment to take for granted in this current financial climate. It’s nice cash generating asset class that is the focus of my portfolio this year. Now if I can just get more cash to make it happen, this is my focus at the moment investing with others in bridging loans with rates from 24-36% a year, how do I get my hands on $10,000-30,000 bi-yearly ideally quarterly.
So far I have one bridging loan $15,000 at 36% set up in June (terms are for 60-90days, I have asked it be rolled on further for the period of a year if possible). I want at least one more this year. I am brainstorming how to be resourceful on getting the money beyond my normal strategy of just aggressively saving.
If you are interested in bridging finance, I recommended doing a lot of research to see if it suits you, and you must involve a lawyer in the creation and implementing of a contract.
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