Every savvy real estate investor knows what a bridge loan is, but do you know how to use one in your portfolio? Whether you are a new investor or one with far more experience, a bridge loan can be used in many ways to put you ahead in the real estate market. Here’s how to leverage a bridge loan in your portfolio.
What is a Bridge Loan?
A bridge loan is a type of short-term loan typically used by an investor looking to secure funding for a new property while still in the process of selling their current property. Bridge loans are backed by collateral from the investor, whether that be the new property’s value or the inventory of their business. A bridge loan stays true to its name, as it bridges the financial gap between selling your current property and purchasing your new one.
The most common use for bridge loans is in real estate, although, many investors use them in their private businesses as well. Since bridge loans are short-term loans, they generally have higher interest rates than other conventional loans. Bridge loans are great for providing short-term cash for an investor, but the higher interest rates can be an eye raiser for some. In addition, these loans generally do not have repayment penalties, meaning if you pay it off sooner than the term date you will not be charged any additional fees.
How to Leverage a Bridge Loan in Your Portfolio
There are many reasons an investor might chose to leverage a bridge loan in their portfolio, the most common reasons being:
They Provide a Quick Close
Investors leverage bridge loans for their quicker closing times, as these loans require less documentation and have a simpler underwriting process. In a seller’s market, bridge loans are useful to secure a property since there is high competition for buyers. Bridge loans leverage an aggressive real estate investor since they can close your deal faster than other types of loans offered on the market.
Fixed Interest Rate and No Early Repayment Penalty
Many investors leverage bridge loans for their fixed interest rates and zero early repayment penalties. Having a fixed interest rate allows a strategic investor to better plan their budget, leaving more capital for unexpected costs. For a savvy investor that wants to pay their loan off early, bridge loans offer no early repayment penalties unlike other types of commonly used real estate loans. Avoid getting locked into a loan for its full repayment term by leveraging a bridge loan in your portfolio.
Ideal for Fix and Flips
Fix and flips are generally short-term projects, making them perfect for acquiring a bridge loan. Even for investors with enough capital for a project, using a bridge loan is ideal for fix and flips because it allows you to keep your cash and other liquid assets on hand and take a smaller cash stake out of your project. With more cash handy, you can support a larger volume of acquisitions, which overall gives you access to more fruitful opportunities in the market.
How to Qualify for a Bridge Loan
For those looking to qualify for a bridge loan, it’s suggested to first have basic fundamentals down like a low debt-to-income ratio as well as credible equity in your current property. Lenders want to know you can responsibly handle the oncoming debt while still managing to sell and buy property in the current real estate market. In some instances, lenders will consider your credit history when determining if you qualify for a bridge loan. Once it’s determined you qualify for a bridge loan, they may also use your credit history to determine your overall interest rate. Investors with a healthy credit history, low debt-to-income ratio, and adequate equity in their current property are the most qualified for obtaining a bridge loan.
RCN Capital offers short-term and long-term financing options for real estate investors. Whether you are looking to fix & flip properties or hold properties for rental income, RCN has flexible options that are suited to your needs. Connect with us today to discuss your next real estate investment.