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Investors have long been using bridge loans to help streamline their real estate projects. Bridge loans give investors access to fast funding, and the ability to participate in a wider range of deals. Their flexibility also allows investors to tailor the loan’s terms to meet their financing needs. Are you interested in using a bridge loan for your next real estate project? Continue reading to learn all about them, along with some tips on how you can maximize the effectiveness of a loan.
Bridge Loan Basics
Bridge loans are different from traditional mortgages because they are much shorter in length, often ranging from 6 to 24 months as opposed to 15 or 30 years. The shorter timeline makes these loans suitable for temporary financing scenarios, and also quick projects like home flips. Although they do come with higher interest rates due to their short-term nature, they have much more flexible approval criteria and can be used for a larger variety of purposes.
The other important thing to know about bridge loans is that they’re secured by collateral, which is often the property being financed. This is what allows bridge lenders to be more lenient with approval, as it reduces some risk on their side, and also why they can be customized to fit your specific deal scenario.
Benefits of Bridge Loans
Bridge loans provide many benefits to investors that become incredibly useful in real estate ventures. For example, they can be used to purchase a new property before closing on the sale of a previously owned home. This allows you to move forward with an opportunity that may be time-sensitive, and repay the loan once you have more permanent funding in place.
Bridge loans are known for their speed, and if you work closely with your chosen lender, funds can be delivered in as little as two weeks after submitting an application. It’s another thing that makes bridge loans perfect for fix & flip investments, and they can provide additional funds to cover renovations unlike traditional mortgages.
Tips for Using Bridge Loans Effectively
In order to ensure the effective use of a bridge loan, you should assess your project and determine if this financing program is a good fit. First, ensure that you have a clear exit strategy that involves either selling the acquired property, or repaying the loan through other means. Next, be prepared to budget for the higher interest rate that comes with bridge loans and understand how it might affect the profitability of your investment. Creating a detailed budget and plan helps keep your project on track and will show lenders that you are well prepared, increasing your chances of loan approval.
Tricks for Maximizing the Benefits of Bridge Loans
We also want to provide some helpful strategies for making the most of a bridge loan project. As mentioned, bridge loans require collateral, but this doesn’t necessarily need to be the home being financed; an investor can bring valuable property or even equity in another home to the table as a collateral payment. You should also take the time to explore programs from multiple different lenders, that way you can acquire the loan that best fits your project’s needs. Bridge loans are most effectively used for short-term investments like home flips, so having a solid plan for a project with a quick turnaround time will minimize holding costs and maximize your ROI. Finally, it may be a good idea to keep cash reserves in the case that unexpected issues or delays increase your project’s total expenses.
Common Mistakes to Avoid
As with any other large investment, there are some risks to be aware of when using a bridge loan. Overleveraging refers to borrowing more funds than what can realistically be repaid. It’s quite easy to find yourself in an overleveraging scenario with bridge loans, as they often have lower loan requirements than standard loans. In today’s high interest rate environment, it will also pay to perform due diligence before diving into an investment. Be sure to research the market you’re investing in just as thoroughly as the property you’re purchasing. Changing market conditions can affect your returns, so you will want to make sure you’ve invested in an area that has healthy demand or that’s predicted to grow over time.
How to Choose the Right Lender
There are all sorts of lenders that offer short-term financing such as hard money loans and bridge loans. In order to ensure you are working with a reputable lender, there are some key signs you should take notice of. A trustworthy financial institution will have a proven track record of delivering funding and completing projects. You can also take a look at reviews from previous customers to get an idea of their process. The best partners to work with are those that will go above and beyond, offering additional services or real estate connections to help you find success with your project.
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.