Bridge loans can provide real estate investors with an interim financing option until they’re able to secure long-term financing. While bridge loans offer several unique benefits, it’s important to understand them fully before diving into the loan.
What are Bridge Loans?
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 an effective means of ensuring ample cashflow during periods of relatively 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. With that said, these short-term loans do not come without risks and there are certain things to take into consideration.
Advantages of Bridge Loans
Helpful 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.
Offers repayment options
With a bridge loan, the borrower has the ability to choose repayment options. For instance, a borrower can choose to repay the loan before or after they’ve found long-term financing. If the borrower opts for the first option, it can improve credit rating by making payments on time, thereby improving odds of qualifying for long-term loans with favorable terms. If the borrower chooses to pay off the bridge loan after long-term financing is secured, part of that financing can be applied to repay the loan.
Beyond that, bridge loans often require less income documentation than conventional loans and close quickly.
Disadvantages of Bridge Loans
Higher interest rates, fees and penalties
It may not come as a shock, but bridge loans feature higher interest rates, fees and penalties as well as requiring a large balloon payment. Closing costs can also be high and can’t be recovered if you find long-term financing sooner than anticipated. Beyond that, bridge loans also require a high loan-to-value ratio (LTV) and put you at risk of losing your property over a relatively small amount.
They’re not necessarily easier to obtain.
While the approval time is quicker than long term mortgages, bridge loans are not necessarily easier to obtain. Your lender will consider your credit-worthiness, debt-to-income ratio, and equity in your existing property. A borrower with a less-than-stellar record may be denied, even if they’re confident their existing property will sell
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 to assess whether such financing is worth pursuing.
Bridge loans are an essential aspect of the real estate industry, from fix-and-flips to new construction projects 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.