Here’s What Every Real Estate Investor Needs to Know About Bridge Loans

In today’s highly competitive real estate market, investors need access to quick and reliable funding to help them secure the lucrative opportunities they come across. Bridge loans are a viable solution for investors looking to fund their deals, as they offer more speed, flexibility, and leverage than traditional financing methods. However, there are still not enough investors that utilize this powerful financing tool. It might even come down to just not being informed enough about this type of financing. That’s why we’ve put together this small guide to help you get up to speed with the ins and outs of bridge loans.

What is a Bridge Loan

Let’s start with the most basic definition of a bridge loan. These are short-term loans which typically range from 6 to 24 months in duration, and are offered by private lenders as opposed to traditional lenders, like banks or credit unions. They differ from traditional mortgages because of their shorter timeframe, but they are also secured by collateral, which gives them more flexibility with loan approval. Unlike mortgage loans, they have a less stringent application process which means funds can be delivered in as little as two weeks after applying. Conversely, their shorter term also means they come with higher interest rates than traditional loan options, so you will have to compensate for these higher costs when estimating your returns.

When Should Investors Consider a Bridge Loan

There are a few key scenarios where a bridge loan can be the perfect financing solution. Bridge loans are known for their speed, which gives investors the ability to seize time sensitive opportunities in competitive markets. They are also often used to secure the purchase of a new property before selling an existing one. Using bridge loans, you’re able to close on a deal immediately, and then repay the loan once you’ve sold your existing property or obtained more permanent financing. Bridge loans are also great for fix and flip projects, since they can provide additional funds to cover renovations, and their shorter timeline is more suitable for flipping.

Key Benefits of Bridge Loans

Let’s go over some of the key advantages of bridge loans:

• Flexibility: Unlike traditional mortgage loans, bridge loans can be used for a wider variety of purposes, have more customizable terms, and can provide additional funds for renovation projects.
• Speed: The loan application process for a bridge loan is much less intensive because they are secured by collateral. This means loans can be approved sooner, which is important in time sensitive scenarios. It also means you can still qualify for a loan even if you have a less than stellar credit history.
• Leverage: Bridge loans allow investors to utilize additional leverage on properties they are already invested in. For fix and flip projects, you can fund renovations with a bridge loan. Or if you own a rental property for example, you can use the loan to make improvements and help boost its income potential, giving you a better opportunity to secure long-term funding.

Risks and Considerations

There are some risks to be aware of if you’re planning to use a bridge loan for your next investment. First, understand that these loans come with elevated interest rates, which is typically 2-3 percent higher than the standard mortgage interest rate. The shorter term also means you should be well prepared to repay the loan in full once the loan period ends. If you aren’t confident that you’ll be able to secure permanent funding before that time, you may be better off avoiding this type of financing. Finally, it is always important to have a clear exit strategy in real estate, but especially so when using a short-term bridge loan. It may even be worth having a contingency in place to ensure your ability to repay the loan.

Steps to Secure a Bridge Loan

If you’re planning to obtain a bridge loan for your next investment, here are a few steps you should follow. First, take a minute to assess your investment scenario to determine if a bridge loan is needed, or if traditional options could work. Then, prepare all necessary documents and obtain accurate estimates for the deal; this will show the lender that you are prepared and fully ready to move forward with the project.

When it comes to actually selecting a lender, you will want to look into the track record and customer reviews for each potential option. Be sure that your chosen lending partner has a proven history of delivering short-term loans for real estate, and that they have good communication channels set up to support you in the case that something goes wrong. You should also take time to compare various lenders and loan options, so you can find the program that best fits your deal scenario.

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.