There is a financial tool available to real estate investors that helps them secure more deals and get involved in projects when they don’t have the immediate funds available. Bridge Loans are an incredibly powerful financing program designed to provide quick funding for real estate deals and other business ventures. But unlike traditional mortgages, they are short-term, easier to qualify for, and can be used for a wider variety of purposes. However, there still aren’t enough investors using this tool to supercharge their portfolios. In this piece, we break down the ins and outs of bridge loans and share some ways that real estate investors can use them to fast track their deals.
A bridge loan is a form of short-term financing issued for periods ranging from 6 to 24 months, and backed by collateral. For real estate, the collateral is typically the property being financed by the loan. They were originally created to help business owners “bridge” gaps in their finances, giving them time to secure more permanent funding. They are also incredibly useful for real estate purposes, since they allow investors to participate in projects when they otherwise wouldn’t have been able to. For example, by using a bridge loan, an investor can purchase a new property before selling an existing one.
There are a number of unique benefits that bridge loans provide specifically for real estate. Bridge loans are designed to be approved quickly, with a streamlined application process that gives investors the chance to secure more time-sensitive deals. They are also more flexible than traditional mortgages with the types of properties that can be financed. On top of this, because they are secured by collateral, your personal credit is less of a factor. Finally, due to their short-term nature, bridge loans are the ideal financing tool for shorter fix and flip and value-add projects.
The application process for a bridge loan is somewhat different than when applying for a traditional mortgage. First, you will most likely be working with a private lender that operates as opposed to a traditional bank or credit union. Due to their short-term nature, bridge loans also tend to have slightly higher interest rates than standard 15 or 30-year mortgages. We mentioned how these loans are secured by collateral, which allows them more flexibility in the types of properties that qualify for financing, and the creditworthiness of the borrowers. Although lenders are often flexible with loan terms, such as offering interest-only monthly payment options, loans are expected to be paid in full at the end of the term. You can work with your chosen lender to find a timeline that works for your investment.
Investors have been using bridge loans in a variety of ways to help supercharge their real estate deals. They are most commonly used when funds are tied up in other investments, allowing them to move forward with a purchase and repay the loan once more permanent funding is secured. This allows investors to capitalize on time-sensitive opportunities which might disappear if they aren’t acted upon right away. Bridge loans are also one of the only financing options available for short-term fix and flip investment projects, and many lenders offer additional funds to cover renovations on top of property acquisition costs. Bridge loans can even be a great option for value-add opportunities, like for example, if you own a multifamily property and you would like to make renovations to stabilize or improve your cash flow. There are many creative uses for this type of financing program, and most of the time loan terms can be customized to fit your project’s specific needs.
Here are a few tips for making the most of a bridge loan:
There are also some inherent risks to be aware of with real estate investing, including some that are specific to bridge loans. We mentioned how bridge loans typically have higher interest rates than long-term loans, so you’ll have to factor these extra costs into your budget calculations. There is also the possibility of a market shift which can affect the profitability of your investment. Careful planning and market research is the best way to avoid this type of problem. Along with that, it may help to have a contingency plan for your investment in case your first line of action doesn’t go as planned.
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.