A bridge loan is a type of gap financing used to cover short-term financial obligations until more permanent financing can be secured or cash becomes available. Lasting anywhere from a few weeks to a year, bridge loans are useful for ensuring cashflow during periods of relative illiquidity.
In real-estate, bridge loans are typically used when a property owner needs or wants to buy one property before their current property has sold. Bridge loans can be a fantastic way to jumpstart a deal when cash is tight and time is of the essence. Continue reading to learn more about the many benefits of bridge loans.
Useful for underperforming multifamily properties
If you’re investing in an underperforming multifamily property, bridge loans can be an attractive option. Traditional lenders prefer more stabilized properties, which makes it challenging to obtain financing to increase occupancy, make renovations or improve management. In these situations, a bridge loan from 12-24 months can give investors the opportunity to tackle any problems necessary for stabilizing a property to the satisfaction of traditional lenders.
By their nature, bridge loans can be secured more quickly than a traditional mortgage. This fast turnaround can be crucial during real-estate deals where the offer is contingent on the sale of another property. The buyer gets cash on hand to make an offer or a down payment, which will reduce the likelihood of that deal falling through or going to another buyer. And, as the saying goes, a bird in the hand is worth two in the bush! Fast financing lets the buyer take advantage of favorable market conditions that may not always be available in the future. This is what makes bridge loans so useful – they provide a quick cash injection and give the buyer options when other forms of financing aren’t viable.
Get a bridge loan against currently listed real estate
Usually, bridge loan lenders are in the business of offering short-term loans and will provide bridge loan mortgages for real estate that is currently listed for sale. On the other hand, most institutional lenders will not consider a loan against a property that is currently listed for sale. These types of lenders do not want to go through the process of approving, underwriting and funding a loan only to have the loan be paid off within a few months.
Bridge loans are also appealing because of the borrower’s ability to choose repayment options. Payments may not be required for a few months and a borrower can opt to repay the loan before or after long-term financing is found. A borrower can improve their credit rating by making payments on time, thereby improving the odds of qualifying for long-term loans with favorable terms. If the bridge loan is to be paid off after long-term financing is secured, part of that financing can be applied to repay the loan.
Only savvy, well informed borrowers should consider using bridge loans to finance a property. Bridge loans are especially useful for newer, large multifamily properties in stable or improving markets with solid and expanding employment opportunities. Speaking with a financial advisor can help you assess whether such financing is worth pursuing.
Bridge loans are an essential aspect of the real estate industry, from fix-and-flips to rental properties and everything in between. Regardless of their prominence, it’s crucial that you know if and when a bridge loan is the best financing option for your situation. If you’re interested in learning more about a bridge loan, but you’re unsure whether or not it would be the right fit for you and your project, talk to the experts. The team here at RCN capital will be glad to help you find the best option for your project goals. Please contact us today for more information.