Bridge Loans vs. Traditional Financing: What to Know and When to Use Them

Bridge loans are a powerful tool investors use to acquire just-in-time funding and get access to more ways to grow their real estate portfolios. These loans have more flexible terms because, unlike conventional financing programs, they are backed by collateral, usually the property being financed. This flexibility allows investors to secure financing faster and use the loan for a wider variety of scenarios. While bridge loans are an incredibly powerful tool, it’s important that you understand all their different aspects to maximize their effectiveness. Continue reading as we dive into how bridge loans differ from traditional financing options along with the best times to use them for real estate investing.

What is a Bridge Loan?

Let’s start by exploring the basics of bridge loans. Instead of a traditional mortgage which typically comes in 15 and 30-year varieties, bridge loans are shorter in duration, ranging from 6 to 24 months. They were originally designed to help businesses “bridge” gaps in their finances giving them time to secure more permanent funding, and real estate investors still use bridge loans in a similar way today. Due to their short-term nature, bridge loans tend to have higher interest rates than their conventional counterparts. However, since they are secured by collateral, they can be approved faster, give investors more flexibility, and generally have higher leverage amounts.

When Should New Investors Consider a Bridge Loan

Bridge loans are the perfect solution in a few key real estate scenarios:

• Buying a new property before selling an existing one: The most common use case for a bridge loan is acquiring a property before closing on an existing one. If you’re looking to purchase a home but haven’t received the proceeds from an ongoing sale, you can use a bridge loan to finance the acquisition, and then repay the loan once you have the available funds.

• Fix and flip projects: Bridge loans are perfect for fix and flip projects because along with having a shorter timeline than traditional loans, they can also provide investors with additional funding to cover renovation costs.

• Closing on time-sensitive opportunities: In today’s competitive real estate environment, investors need access to quick financing to help them secure lucrative opportunities they know won’t last long on the open market. Bridge loans can be approved much faster than traditional loans, with funds delivered in as little as 10 days after submitting an application.

• Value-add projects on existing homes: If you’re looking to make updates to a property you already own, a bridge loan can help finance the improvements, putting you in a better position to secure long-term financing for the property.

Key Benefits of Bridge Loans

Investors choose bridge loans because they offer significant benefits over conventional financing options. First and foremost, they have unmatched speed, with a much less intensive application process that is streamlined so you can get funding fast. Their flexibility is also a massive benefit, allowing you to finance properties that banks may not be willing to lend on. Plus, bridge lenders are more willing to customize loan terms, so you can maximize the effectiveness of the funds you receive and eliminate unnecessary interest fees and holding costs. Bridge loans can even provide you with additional leverage for projects so that you don’t have to dip into your own personal funds for investment capital.

Risks and Considerations for New Investors

If you have never used a bridge loan before, there are some risks you should be aware of before seeking out financing. Bridge loans often come with higher interest rates than traditional mortgage options because of their short-term nature. This shorter term also means that you should be prepared to repay the loan or secure long-term financing for your property before the loan period ends. It’s important to have a clear exit strategy for your investment, and it might also be a good idea to have up a backup plan in case you encounter unfavorable market conditions.

Steps to Secure a Bridge Loan

Securing a bridge loan is not too different from the process of applying for a mortgage from a bank. Being prepared with income documentation, a property appraisal, and a written plan for the investment will be necessary. However, the key difference is that lenders will examine the property closely to determine whether it makes for a good investment. Additionally, you will want to compare different financing options from multiple lenders to find the best fit for your project.

There is something to be said about the reputation of your lending partner too. Look into customer reviews, and ensure they have a good track record of delivering financing for real estate projects. A quality lender will have a trusted reputation and be able to provide you with resources and real estate connections to help you find success with your investment.

RCN Capital

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.