A bridge loan is an incredibly powerful tool that investors can make use of to simplify the process of financing a home flip. They are easier to qualify for than traditional mortgages, provide additional funds for renovations, and have shorter timeframes that are more suitable for flipping. Although they are great to use for fix & flips, there are still not enough investors who know about them or make use of them in their portfolios. In this piece, we want to cover the ins and outs of bridge loans to help you find success by utilizing them in your next home flip.
The basic definition of a bridge loan is a type of short-term financing offered by private lenders and secured by collateral, such as the property being financed. They’re called bridge loans because they were originally designed to “bridge” gaps in financing, giving the borrower time to secure more permanent funding. These days, bridge loans are used for a wide variety of applications, including securing time sensitive deals and funding fix & flip projects.
Bridge loans typically range from 6-24 months in duration which more closely resembles the timeline of a home flip. And since they are secured by collateral, lenders are much more lenient with approval and can fund deals faster.
As we mentioned, bridge loans have a shorter timeline than traditional mortgages which makes them more suitable to home flipping. They are also much easier to qualify for, as lenders are less concerned with your personal credit history. This means loans can be approved faster, and funds can be delivered quicker, which is an incredibly important advantage in a competitive market. Bridge loans allow for more flexibility with financing, and they are one of the only types of real estate loan that can provide additional funds for renovations on top of acquisitions costs. They can even be used to make upgrades to an existing property you’re invested in, allowing you to boost its income potential before seeking out permanent financing.
There are some key considerations to be aware of if you plan to use a bridge loan for your next home flipping project. First, be sure that you have an accurate estimate of your total acquisition and renovation costs before applying for a loan. This way, you can avoid the issue of borrowing more or less than the amount you actually need. Just be sure to consider all associated expenses in your estimates including loan interest, taxes, insurance fees, and other holding costs.
You will also want to ensure you have a good exit strategy in mind before seeking out financing. If you aren’t confident in your ability to sell the property or secure permanent funding before the loan period ends, you are better off avoiding this type of loan. It will be worth having a contingency plan in place if your initial exit strategy doesn’t go as planned. However, it’s important to note that you can mitigate many of these risks by dedicating an appropriate amount of time to due diligence and research before diving into an investment.
We want to provide you with some real life examples of investors that have found success with bridge loans in real estate. RCN Capital funds a variety of investment deals, including home flips, and we like to highlight deals from time to time on our recent loans webpage. We had a great example of an investor who found success flipping a house recently with a property located in Kenmore, NY. Despite having to make repairs to the home’s foundation, an issue that’s typically a costly fix, this investor was able to complete the deal and still take in a hefty return of 14%. It just goes to show you how due diligence and finding the right property can make all the difference in home flipping.
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.