Bridge loans are a great tool that allow real estate investors to expand their position in the market with more leverage. They can also be used to give investors access to opportunities that otherwise wouldn’t be available to them. However, if you plan to use a bridge loan to finance an investment property, you should be familiar with how they work in order to avoid any potential downsides. There are many benefits to using this form of financing, but you will need to have a solid plan in place so that you can maximize your returns. Continue reading as we cover the pros and cons of using bridge loans for real estate investments.
Pros of Using Bridge Loans
Bridge loans come with many beneficial features that you don’t get when using other types of loans. These include:
- Quick access to funding: The main benefit of using a bridge loan is gaining access to funding quickly. If you work closely with your chosen lender, funds can be delivered in as little as 10 days. Bridge loans can help investors secure deals in competitive markets where speed is key.
- Flexibility acquiring properties: Bridge loans allow investors to make purchases even when their funds are tied up in other investments. They can also be used to fund more diverse types of investments, such as auctions or foreclosed homes.
- Funding fix and flips: Unlike traditional mortgages, bridge loans can provide additional funds to cover renovation costs for home flipping. This opens up more investment opportunities for investors along with the potential profits that flipping provides.
- Non-contingent offers: Some sellers aren’t willing to wait for a home offer contingent on the sale of another property. A bridge loan allows you to make a non-contingent offer on a property and repay the loan after you have completed the sale.
- Increased leverage: Bridge loans allow investors to work on multiple projects simultaneously. Or, if you’re looking to increase your investment in a specific deal, a bridge loan can be used to boost your leverage while giving you time to secure more permanent funding.
- Short-term commitment: Bridge loans are typically issued for periods of 6-24 months, as opposed to the 15 or 30-year commitments of a bank loan. This makes them more suitable for short-term deal scenarios.
Cons of Using Bridge Loans
There are some potential downsides to using bridge loans that you should be aware of so you can plan how to mitigate or avoid them. These include:
- Higher interest rates: Due to their short-term nature, bridge loans come with higher interest rates than standard mortgage loans from a traditional lender, like a bank or credit union.
- Higher qualifications: Bridge loans are asset-based loans, which means the property must make good financial sense in order to qualify for financing. Many lenders require a good debt-to-income (DTI) ratio on the part of the borrower as well.
- Higher risk: Market fluctuations can impact the profitability of your deal or your ability to secure long-term financing. When using a bridge loan, you don’t have the benefit of waiting out market dips or downturns.
- Need for a good exit strategy: Bridge loans are short-term loans, which means if you plan to sell a property that you acquired with a bridge loan, it will need to happen before the end of the loan period. Otherwise, you will need to secure long-term financing for the property, which can be a challenge of its own.
Bridge loans can be incredibly beneficial for acquiring properties and expanding a real estate portfolio, but they must be used carefully in order to maximize results. Thorough due diligence and a well-defined strategy will be key to finding success when using this type of financing. Your ability to show lenders you are well prepared will also help with your chances of being approved for a loan.
Do you have a real estate project you would like to obtain financing for? 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.