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There’s a way to finance real estate properties that many investors don’t take full advantage of, and that comes in the form of bridge loans. Bridge loans have many different benefits ranging from their quick approval times to their flexible use cases. They can also be used to cover a gap in financing, such as when you need extra time to close a deal. In this piece, we cover some of the advantages of using bridge loans as well as how investors can make the most of this type of financing.
Understanding Bridge Loans
Bridge loans are a flexible method of financing that can be used in a variety of scenarios. They are a form of asset-based financing offered by private lenders, which also means they typically have a simpler application process. These are short-term loans, often ranging from 6 months to 2 years, unlike traditional mortgages. Many investors use these loans to cover or “bridge” a gap in their financing, giving them time to secure more permanent funding. For real estate investing, they can be used to purchase properties while funds may be tied up in other investments.
Advantages of Bridge Loans
Some of the advantages of bridge loans include shorter approval times, along with the ability to finance a wider range of investments. In terms of speed, funds can be delivered in as little as 10 days provided you work closely with your lender. Bridge loans are great since they can be used for investment projects that may not qualify for traditional bank financing. They can be used to fund renovation projects, such as stabilizing the rental income on a multifamily property, and also for fix & flip investments.
Types of Investments Suitable for Bridge Loans
There are certain scenarios where a bridge loan can be the perfect financing solution. As we mentioned, they are one of the few solutions for stabilizing rental income with a multifamily property. They are also ideal for home flipping since they can provide funds for renovations on top of acquisition costs, unlike most bank loans. Bridge loans are conventionally used to cover gaps in your financing, like for example, if you’re in the process of closing on a property but still want to move on another investment. Since these loans offer quick approval times, they can also be used to secure time-sensitive investment opportunities.
How to Qualify for a Bridge Loan
Qualifying for a bridge loan starts with finding a reliable lender that offers this type of financing. They can be easier to qualify for than traditional loans since credit is less of a factor when applying. Bridge loans are asset-based, which means guarantors will be putting up property (most likely the home being purchased) as collateral. This also means investors should already have a property in mind before they start applying for loans. It can be very beneficial to put together a comprehensive plan that outlines what they plan to do with the project. This shows lenders that you are well-organized, and can increase chances of loan approval.
Managing Risk
There are a number of strategies you can use to effectively manage risk when using a bridge loan. First, you should know that these loans generally have higher interest rates when compared to 15 or 30-year mortgages, due to their short-term nature. Be sure to take this factor into account when planning an investment project, and have a solid exit strategy in place that includes either selling the property or securing long-term financing before the loan period ends. It can also be a good idea to have a contingency plan, in case the first strategy doesn’t go as anticipated. Working with qualified professionals, such as an experienced real estate agent and a tax professional, can also help you maximize the return on investment.
If you want to find success when using a bridge loan, it will come down to due diligence, as with any other type of major investment. Being knowledgeable when it comes to bridge financing is just one piece of the investment puzzle. The more time you can dedicate to planning your project and focusing on the finer details, the more likely you are to find success.
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.Connect with us todayto discuss your next real estate investment.