A bridge loan is an incredibly powerful tool that can be used for a variety of business and investment purposes. Business owners will often use these loans to cover or “bridge” a gap in their expenses until they’re able to secure more permanent funding. A lesser-known fact is that they may also be used for the acquisition and renovation of real estate property. The short-term nature of the loan and its expedited funding process make it a preferable financing option in many investment scenarios. Continue reading for our comprehensive guide on bridge loans, and how you may be able to use one for your next real estate investment.
What Are Bridge Loans?
Let’s begin by breaking down the basics of bridge loans. Bridge loans are a method of financing offered by private lenders as opposed to a bank or other traditional lender. They differ from standard mortgages because they have shorter terms, often ranging from 6 to 24 months depending on the use case. Bridge loans may be used to cover a gap in financing, and are commonly used by real estate investors in scenarios where a traditional loan doesn’t fit the bill, like for fix and flip projects. They may also have higher interest rates due to their short-term nature, but lenders are generally more flexible when it comes to loan terms and repayments.
Advantages of Using Bridge Loans
There are many advantages to using bridge loans to finance real estate investments. These loans are known for their expedited funding process, and most lenders can deliver funding in as little as two weeks provided you work closely with them. This advantage allows investors to secure lucrative investments opportunities as soon as they come across them, even in competitive markets. Another huge benefit of using bridge loans is their flexibility. Bridge loans give you access to a wider variety of investment opportunities, and you may be able to tailor loan terms to the length of your project to eliminate any unnecessary costs.
Scenarios Where Bridge Loans Shine
A bridge loan can often be the perfect financing option for a number of real estate scenarios. Bridge loans are ideal for fix and flip projects due to their short-term nature, and they can include funds for renovations unlike standard mortgage loans. They may also be used to acquire distressed properties which may not qualify for bank financing. You may even want to use a bridge loan to develop a property you already own to help boost your rental income. But one of the most useful cases for using a bridge loan is when your funds are tied up in a property sale or another investment. Bridge loans allow you to move forward with an investment opportunity while also giving you time to secure permanent funding.
Risks and Challenges
If you plan to use a bridge loan for your next investment, you should also do your due diligence to fully understand this financing tool. Bridge loans tend to have higher interest rates than standard mortgage loans, so you will need to factor these higher expenses into your budget calculations. You should also ensure that you have an exit strategy in place by the end of the loan period, whether that means selling the property being financed or finding a more long-term funding solution. The profitability of your deal will also come down to the lender you choose to work with, so be sure to compare different solutions and find a reputable lender with a proven track record in the real estate space.
How to Apply for a Bridge Loan
Securing a bridge loan begins with finding a private lender that offers this type of financing. A good lender should be willing to work with you to customize the loan to fit your deal’s needs. Along with reviewing your personal finances, they will also want to review the property in question to ensure the profitability of your investment. You should be prepared to share detailed documentation on the property as well as bank statements and income verification for yourself. Lenders may also run your credit to determine loan terms, but the property being financed is a more important factor in determining loan eligibility. Throughout the process, being communicative and responsive will let the process go smoother and help improve your chances of approval.
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.