How To Determine if a Short-Term Bridge Loan is the Right Move for You

When investing in real estate, it is important to know all the options that are available out there. The two most common loan products that are offered are long-term rental loans as well as short-term loans for purchase and rehab (fix and flip). However, at RCN Capital we have a few more options including a very helpful product known as the short-term bridge loan.

A bridge loan is a 1–3-year loan commonly offered for investors that need a little more time deciding what their long-term plan will be for their property. They have the ability to start making money off the property with this shorter-term option and use that time to research their options. Borrowers can also use this short-term loan to complete rehab on the property, but this will have to approved by the lender first. Some lenders will also require the borrower use their own money for rehab funds if that’s their plan for the property. The third option would be for the borrower to take advantage of any existing equity that they have in the property by taking out the loan for a cash out refinance.

Be sure to speak with your lender about the qualifications and guidelines in order to qualify for the bridge loan. For instance, at RCN Capital some of those requirements include a minimum 620 FICO score, an as-is value of $75k for the investment property as well as clarifying if the property will need rehab, be a rental or if it is already cash-flowing. These are good things to discuss with your lender right away to avoid any deterrents later in the loan process.

Now that I’ve broken down just exactly a bridge loan is when it comes to real estate investment properties, lets go over some of the pros and cons of this loan product.

The biggest advantage of a bridge loan is the flexibility. When it comes to your real estate investment properties, rushing into a decision just to make a quick buck can sometimes backfire. A bridge loan allows you to keep your options open for 12-36 months while you learn more about the industry and gain a better understanding about what your next move should. Based on the market and the location of your property, you can refinance into a long-term rental loan and take advantage of a cash flowing property for up to 30 years. If the market is not forecasting long-term success in the area, take the opportunity to speak with your lender about doing any necessary rehab to make the home more desirable. You can maximize your profits on the property and be able to move on to your next investment.

Another big plus is how quickly an investor can get cash from a lender to secure a real estate investment property. Borrowers don’t have to necessarily know what their long-term plan is, but they can get the cash in a timely manner for a rehab property. Getting this cash quickly can also lead to making money quickly. A lot of lenders prefer these properties to be in rent ready condition meaning that it is ready for a tenant to move in right away if one is not already in place. This benefit can go unnoticed, but it is a way to motivate you as the investor to start making money on your property with a short-term bridge loan.

Other positive aspects of a bridge loan, especially with RCN Capital, is the great leverage you can expect from your lender. For example, the short-term bridge loan at RCN Capital can get borrowers up to 80% LTV. You still have plenty options with the short-term bridge loan and can still get great leverage.

On the other hand, there are certain aspects of a short-term bridge loan that don’t make them the right fit for every investor.

Bridge loans are much shorter than your average rental loan, and with that they come with a higher interest rate than your standard 30-year loan. The rates for a short-term bridge loan are much closer to that of a fix and flip loan so if there are any plans of renovation, bypassing the bridge loan for a fix and flip loan would be the preferred option. On the flip side to that, if the property is in rent ready condition in a great market, take advantage of a long-term rental loan and a low interest rate and start creating that passive income through your investment property.

Another reason that short-term bridge loans can seem a little less appealing is the fact that they can come with prepayment penalties. For instance, at RCN, our short-term bridge loans have a six-month prepayment penalty. This differs from RCN’s short-term fix and flip loan, a product that has no prepayment penalties and can be paid off by the investor as quick as possible. Six months is not that long of a timeframe over the course of a 1 to 3 year loan, so don’t let this deter you. It is just something to be aware of before committing to the short-term bridge loan.

This would be another perfect opportunity to speak with your lender about your long-term goals for the property. If you know you want to make renovations at some point your lender will direct you to the fix and flip product. Ultimately though, if you are unsure with what your next steps will be for this particular property, the bridge loan is a perfect alternative that allows you to make money while you decide. There are so many options out there for you as an investor it is important to know all of them before deciding on a specific property that could affect your entire investment portfolio. The bridge loan is there to help give people a little more time before taking that important next step and has proven to be extremely beneficial to investors. If you have any further questions about whether the short-term bridge loan product is right for you, don’t hesitate to reach out to RCN Capital to continue this discussion.