Bridge Loan Basics for Real Estate Investors

Investing in real estate just got a little easier. Bridge loans are becoming an increasingly popular option for those who want to quickly acquire property without having to worry about taking out a traditional loan. Want to learn more? Here are all the bridge loan basics for real estate investors.

What is a Bridge Loan?

Real estate bridge loans serve as an important tool for investors. When an investor is in the process of selling a property, it can be hard to come up with enough cash to buy another property. A bridge loan “bridges the gap” in funding between selling and buying a property, giving you access to the necessary funding for your next big project. When the need to finance a new deal on a short timeline arises, investors can gain access to funding by taking out a short-term bridge loan. Bridge loans are not just for investors, in fact, many homeowners use bridge loans to purchase a property before they have sold the property which they currently live at. Bridge loans are most commonly used when funding is needed fast to close on a deal, considering these loans can close in as little as a few days.

Benefits of a Bridge Loan

There are many benefits to using a bridge loan, these benefits include, but are not limited to:

  • Structural Flexibility - The structural flexibility of a bridge loan is unmatched, you can use one to pay off loans on an existing property, or as a secondary loan on top of an existing mortgage.
  • Remove Contingencies - A bridge loan removes contingencies from purchase deals, accelerating the rate at which they close. Forget having to wait for your old property to sell, simply use a bridge loan and instantly remove contingencies from your deal.
  • No Immediate Payments - The nice thing about a bridge loan is that you do not have to start making immediate payments on the loan. Many lenders offer interest-only options, so you can choose to wait months before making your first payment.
  • Fast and Flexible Approval - Bridge loans are approved in as little as a few days. On top of their fast approval rates, lenders often have more relaxed lending guidelines since they do not have to comply with federal regulations.
  •    Adapt to Market Shifts - There may be instances that the market shifts and placing bids on a property becomes very competitive. A bridge loan helps you make the most of a seller’s market; with its fast approval rates and no contingencies, you’ll be one of the first picks for any deal.

Cons of a Bridge Loan

If you’re thinking about using a bridge loan for your next real estate deal, here are some cons you should consider:

  • High Interest Rates - Since bridge loans are short-term loans, they generally have higher interest rates than traditional long-term loans from conventional lenders.
  •   Prepayment Penalties - Depending on your contract, your loan may be subject to prepayment penalties. Since bridge loans are subject to higher interest rates, it’s natural for an investor to want to pay it off as soon as possible. A prepayment penalty prevents this from occurring, adding some security on the lender’s side.
  • Property Collateral - When taking out a bridge loan, you typically use your current property as collateral. If you were to default on the loan, the lender would then own your current property.

When to Use a Bridge Loan?

A bridge loan can be a great way to give yourself an extra boost in the market to acquire a new property. In a competitive seller’s market, you’ll be up against multiple bids on a property, meaning the seller is going to choose the deal that best fits their financial criteria. Bridge loans are notably resilient in a seller’s market, making them the preferred way of lending when there’s multiple lucrative bids. With that in mind, there are several other instances where it might be useful to apply for a bridge loan. Bridge loans may be a good fit for those who:

  •   have found a property in a competitive seller’s market
  • aren’t able to negotiate a home sale contingency into their impending purchase of a new property
  • can’t afford the down payment on a property
  • want to purchase a new property but are still in the process of selling the old one

RCN Capital

RCN Capital offers short-term and long-term financing options for real estate investors. Whether you are looking to fix & flip properties or hold properties for rental income, RCN has flexible options that are suited to your needs. Connect with us today to discuss your next real estate investment.