There’s a financing tool available to real estate investors that can be very beneficial in securing lucrative opportunities, renovating homes, and increasing financial leverage. The tool we’re referring to is commonly known as a bridge or bridging loan. Bridge loans are great because they bring speed and flexibility to real estate investing, meaning you can grow your portfolio further and faster than when using most other types of financing. If you’re considering using a bridge loan for your next real estate investment, you should take some time to learn all about their ins and outs. In this piece, we take a deep dive into the world of bridge loans so you can maximize their effectiveness for your investment portfolio.
Bridge Loan Basics
Let’s start with the basics of bridge loans. Unlike traditional mortgages, these are short-term loans which range from 6-24 months in duration, and since they are asset based are often easier to qualify for. They’re commonly used to “bridge” a gap in funding, allowing the borrower to secure more permanent financing in the meantime. Business owners also like to make use of bridge loans to cover operating expenses until they’re able to get into a better financial position. The main benefit of bridge loans is their speed, since they can close in as little as two weeks after applying, and they have the ability to finance a wide range of investments as well.
Understanding Loan Terms
Besides their short-term nature, there are few more aspects of bridge loans you should be familiar with before using one for your next investment. Let’s start with the loan-to-value (LTV) ratio, which is the percentage of the property’s value that is being financed. A typical LTV with a bridge loan lies between 65-80%, which means borrowers are expected to bring a down payment of at least 20% to closing. We mentioned that one of the big advantages bridge loans have are their flexibility, which is reflected in the borrower’s ability to structure loan terms according to their needs. Also, most lenders are lenient when it comes to prepayment, with penalties either being non-existent or very reasonable.
Bridge loans are asset based, which means they are backed by owned property as collateral, often the property being financed. Since bridge loans are asset based, you may be able to qualify for one even if you have less than stellar credit. Your scores may be used to determine loan terms or interest rates, but are less of a factor when it comes to loan approval. The main thing lenders will be focusing on is the property itself and whether it makes for a good investment.
Loan Interest Rates
The short-term nature of bridge loans often means that interest rates are higher than you would find standard bank mortgage. Typically, this rate is about 2% higher than the 30-year fixed mortgage rate at the time, but it can vary depending on market conditions and your chosen lender. Many lenders will also offer buy-down options, where you can pay upfront to lower the interest rate over the life of the loan. Some lenders will offer interest-only options, where the borrower makes interest payment throughout the life of the loan, with the principal amount being due at the end of the loan period.
Bridge Loan Use Cases
There are various scenarios where a bridge loan makes perfect sense as a financing solution. First, they allow borrowers to finance investments while their funds are tied up in other investments, such as being in the process of a home sale. Also, their speed is key in securing lucrative time-sensitive opportunities that don’t stay on the market for long. Their flexibility also means you’re able to fund a wider range of investments, such as fix and flip projects. Certain bridge lenders will even offer programs that include additional funds for renovations along with covering purchase costs.
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.