Bridge loans can be a great way for investors to scale up their real estate portfolio in the cases where a traditional loan just doesn’t cut it. Their fast approval times and less stringent application process makes them ideal for time-sensitive scenarios where you want to move on a deal quickly. Their short-term nature also makes them great for use with home flipping, where you’ll be reselling the property very shortly after purchasing it. Bridge loans are not ideal for every investment scenario however, and if you plan to use one you should be aware of the risks that come with them as well as how to use them properly in real estate investing. In this post, we cover the ways you can mitigate the risk associated with bridge loans, and how you can maximize your returns when using one for your next investment scenario.
What is a bridge loan?
A bridge loan is a short-term loan, typically issued from 6 to 24 months, that is frequently used to “bridge” the gap in funding between making an investment purchase and securing more permanent funding for it. Bridge loans are known for their incredibly short turnaround times, often delivering funds in as little as two weeks after submitting an application. They also have a less stringent application process, where things like your credit and personal income are less of a factor. Most bridge lenders will be more interested in the real estate property you’re looking to acquire, and whether it makes for a good investment. Bridge loans are also often used for fix and flip projects, where a traditional loan may not be ideal due to its long-term nature and extensive application process.
Benefits of using bridge loans
Bridge loans can be used to maximize opportunities in your real estate portfolio. They give investors access to quick funding so they can move on time-sensitive opportunities, when otherwise they wouldn’t have been able to. For flipping, many bridge loans provide funds to cover renovations along with the cost of acquiring the property. Bridge loans also offer flexibility with shorter loan terms and alternative repayment options. Most bridge lenders offer interest-only loans where the principal amount is only due at the end of the loan term. The unique benefits that bridge loans bring to the table let investors scale their portfolio quicker and offers potential for higher returns.
Risks associated with bridge loans
Before you move forward with a bridge loan on an investment property, you should fully understand the risks associated with them. Although bridge loans do have less stringent application requirements, that doesn’t mean that every property will be worth using a bridge loan for. Some properties are just in too poor of shape to be worth your investment (which is also why traditional lenders may not be willing to approve loans on them). Also, because bridge loans have shorter loan terms, they often have higher interest rates than you would find on traditional or long-term loans, which increases the risk of default or foreclosure.
Mitigating risk when using a bridge loan
The best way to reduce risk when using a bridge loan is by conducting thorough market research before making any investment decisions. You should make sure to have accurate estimates for things like a property’s final sale price, or after-repair value (ARV) and renovation budget if you’re planning a home flip. You can also mitigate the risks associated with bridge loans by working with an established and reputable lenders that operates in the real estate space. A good lender will prove to be very beneficial, since they’ll be willing to work with you on loan terms and repayment plans and can even offer you additional resources to increase your chances of success with your investment. Finally, you should make sure to have a solid exit strategy planned for your investment, along with a contingency plan should your first strategy not pan out as you had expected.
The easiest way to save on your next investment is to obtain financing from a real estate lender that can get you the best leverages and rates. 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 today to discuss your next real estate investment.