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Bridge loans are a powerful tool that you can use to your advantage if you’re a real estate investor. These are short-term loans, secured by owned property, which are used to “bridge” the gap between an investment opportunity and securing more permanent financing for it. Bridge loans are generally utilized by experienced real estate investors who already have a plan for a specific property. They know that there are certain times when bridge loans can be very useful, and other times to avoid them on a property. In this post, we cover what a bridge loan is in detail, and how you can properly make use of one for your next investment property.
What is a bridge loan?
Before you begin to utilize bridge loans for your investments, you should understand exactly what they are and how they work. As mentioned, a bridge loan is a short-term real estate loan, generally issued for 6 to 18 months, and secured by property such as an existing piece of real estate. Bridge loans can be used as a temporary funding method for an investment, giving you the time to find long-term funding. Let’s say you have come across a lucrative real estate deal, but you’re in the process of selling another property so your funds are tied up. A bridge loan can provide you with the funds to invest in this project, and you can pay the loan back after closing on your first property.
When should I use one?
A savvy investor knows bridge loans should only be used when you are confident in your ability to repay the loan. You need to be careful when you decide to take out a bridge loan, otherwise you can end up paying two mortgages at the same time. The most common use for these loans is to invest in time-sensitive deals that you know will provide a good return. They are known for their quick turnaround time when compared to traditional loans, allowing you to jump on an opportunity you would have otherwise missed out on.
Another good time to use a bridge loan is when you or your property won’t qualify for traditional bank financing. Bank loans are known to have high requirements, and if your credit denies you the ability to secure this form of financing, you may still be able to qualify for a bridge loan. Lenders will be more interested in the property itself and whether it makes a good investment than your personal credit history.
You can also use a bridge loan when you want to stabilize the income of a property in need of renovation. For example, if you would like to invest in a neglected multifamily property with the intentions of repairing it, you may have a hard time securing financing from a bank. They will likely consider the investment too risky for their financing programs. A bridge loan can give you the funding needed to bring the property’s rental income to a stable level, after which you can obtain long-term financing or sell the home for profit.
When should I avoid a bridge loan?
Just like there are great opportunities for using a bridge loan, there are certain cases where it will not be the best option for you. If you’re using a bridge loan to fund a purchase while you sell an existing property, you need confident you’ll be able to sell that property before the end of the loan period. If you can’t, you will end up having to pay two mortgages on top of the bridge loan’s payments.
You should also avoid bridge loans if you’re renovating a property but don’t think it will qualify for financing afterwards. Investors use bridge loans for renovations with the intention of refinancing the property at a lower interest rate. In order to do this, the home will need to be in good enough shape to qualify for long-term financing. If there are any items that may hold your property back from obtaining funding, they need to be dealt with before you apply for a new loan.
RCN Capital
Do you have a real estate project you’d 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 acquire a Bridge Loan on a property, RCN Capital has competitive loan options available. Connect with us today to discuss your next real estate investment.