If you’ve been in the real estate game for a while you may have heard of bridge loans. As the name suggests, these are short-term loans designed to bridge the gap between an investment opportunity and the ability to secure long-term, permanent financing for it. Bridge loans can be a great tool when they’re used properly, allowing investors to jump into lucrative opportunities when otherwise the timing wouldn’t be right. However, they also have some features which make them not ideal for every situation, and it can end up costing you if you didn’t know better. In this post, we’re going to go over some of the best use cases for a bridge loan, as well as when not to use one, to help you decide whether this loan is right for you.
When your cash is tied up in other investments
A prime example for using a bridge loan is when a real estate investor finds a valuable, time-sensitive opportunity that they want to capitalize on, but their funds are tied up in other properties and investments. Let’s say you found a great, undervalued home that you want to secure funding for as soon as possible, but you’re also in the process of selling another property so you don’t have the cash just yet. In this case, a bridge loan would be the perfect solution. It can provide you with the funds needed to acquire the new property, and you should be able to easily repay the loan once your other property has sold.
When a traditional loan can’t cut it
When you apply for a bank loan, there’s usually a lengthy application process along with certain requirements that your investment may not meet. For example, you may be looking to invest in a distressed multifamily property that requires renovations, with the end goal of increasing the property’s rental income. The bank may consider this a risky investment, and will not be willing to approve any loan for the property. Instead, a bridge loan can help you fund the investment and give you the chance to get the property into better shape, after which you’ll be in a better place to secure long-term funding. Traditional loans also take longer to close on, which can be a killer for time-sensitive investments. Bridge loans are known for their quick turn-around time, and can help you get in on an opportunity before it’s gone.
Not when you’re unsure you’ll be able to repay the loan
Just like how there are situations where a bridge loan is perfect, there are also certain situations where you will want to avoid them. Because of their short-term nature, bridge loans tend to have higher interest rates which can add up quickly with other expenses. Let’s go back to our first example, where you’re looking to sell a property to repay the bridge loan. If you’re unable to sell before the end of the loan’s term, you could be stuck paying mortgages on both properties on top of the bridge loan’s payments. Bottom line, if you’re unsure of your ability to repay the loan in a timely manner, you should not go with a bridge loan.
Not when your investment property is too risky
Commercial bridge loans are designed to help investors get funding for properties until they’re able to secure long-term funding. That also means you should be confident in the ability to obtain funding for your property. If the investment is deemed too risky by lenders, you will be stuck paying the bridge loan’s higher interest rates. In the worst cases, this could even lead to foreclosure since bridge loans typically require physical collateral (usually in the form of owned real estate property). If you believe your investment will be considered too risky to obtain long-term funding, you may be better off avoiding a bridge loan on it.
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 need Bridge Loan funding on a property, RCN Capital has competitive loan options available. Connect with us today to discuss your next real estate investment.