Bridge loans can be an incredibly useful tool in a real estate investor’s toolbox. These short-term loans are great for investors who need financing quickly and don’t want to jump through the hoops of applying for a mortgage. They also allow investors to acquire properties in scenarios where traditional loans aren’t a viable option. Bridge loans help you maximize your investment returns by providing fast funding tailored to your deal scenario. Continue reading as we cover 5 things you’ll need to know about using bridge loans for real estate.
#1: When to Consider a Bridge Loan
There are a few cases where a bridge loan can be the perfect solution for funding an investment. In time-sensitive scenarios they are ideal: their low turnaround time means funds can be delivered faster, allowing you to seize lucrative opportunities. Also, their shorter term makes them more suitable for fix & flip investments where you will be offloading the property shortly after acquiring it. Bridge loans can also provide funds to cover renovations, unlike traditional mortgage loans.
Another great use case for bridge loans is acquiring distressed properties. Banks may deny your loan application if a property is in too rough of a shape, as they’ll view the investment as too risky. But bridge lenders are more flexible when it comes to the properties that qualify for loans. They will be willing to fund your deal so long as it makes sense as a good investment.
#2: What Applying for a Bridge Loan Looks Like
Applying for a bridge loan starts with finding a private lender that offers them; ideally one that operates in the real estate space already. We already mentioned how bridge loans are often more flexible with their eligibility criteria, and this is because they are asset-based loans. Your personal credit history is less of a factor for approval, but lenders may still ask for your credit score to determine interest rates. Having proper documentation detailing your finances, the property, and what you intend to do with the loan will also help speed the process and increase your chances of being approved.
#3: Bridge Loan Interest Rates and Fees
If you’re going to be using bridge loans to finance investments, then you should familiarize yourself with their associated fees and interest rates. First, you should know that these loans often have higher interest rates than conventional mortgages due to the short-term nature of the loan. You can expect a rate 2-3% higher than the rate of a standard 30-year loan issued by a bank. You should also know that these loans come with origination fees, similar to closing fees in a mortgage, but they’re often a fixed amount that isn’t dependent on the value of the property.
#4: Loan Terms and Repayment Options
The beauty of using bridge loans is that they can be customized to fit your exact deal scenario. Lenders are more flexible when it comes to loan terms, repayment, and the exact length of the loan. Most lenders issue loans from periods of 6 months to 2 years, but will not charge you any fees for paying the loan off early. It is important, however, to have a solid exit strategy in place so that you don’t exceed the length of the loan.
The other great benefit of working with a bridge lender is flexibility with repayment options. Many lenders offer interest-only loans, where you are only required to make monthly interest payments and can then repay the principal amount at the end of the loan. This makes bridge loans perfect for funding fix & flips, as you can focus more of your resources on completing the project at hand.
#5: Tips for Success with Bridge Loans
Finding success with a real estate investment comes down to careful planning, research, and proper execution. The more time you spend preparing beforehand, the less time you’ll have to scramble when you come across any issues. With a bridge loan, it’s important to negotiate favorable terms suited to your deal, and to have a contingency plan in case you aren’t able to follow through with your first strategy. Partnering with experienced professionals (real estate agents, contractors, and a good lender) will also make your investment more likely to succeed.
Do you have a real estate project you would like to obtain financing for? RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. If you are looking to finance an investment with a bridge loan, RCN Capital has competitive loan options available. Connect with us today to discuss your next real estate investment.