Bridge Loans for Investment Properties
Bridge loans are, essentially, a mortgage that is short term and intended for real estate investors. These investors are usually the ones that prefer to restore the property and finance the purchase instead of buying it outright with cash.
What are Bridge Loans?
These loans are also known as fix and flip loans, interim financing, swing loan, or gap financing. What they do is provide investors with money needed to restore an investment. They are usually built on 12 month terms or less. These loans can actually be acquired in just a few days.
Though they can be easier to obtain, they are similar to other property loans in that they require some sort of collateral. This collateral can actually be the expected value of the investment after its restoration. This can be done based on the amount borrowed from the value after the repair or on the ratio of loan to cost. This is just one of many ways to finance your investment properties.
How do Bridge Loans Work?
What bridge loans do is close the distance between a down payment and the mortgage of a new home and that of the investor’s mortgages and loans that they already have. Doing this allows investors to borrow the down payment amount just long enough to restore the property, which are usually homes.
Real estate investors use bridge loans to build a portfolio for growing a business. This loan product enables the investors to be invested in more than one thing at a time.
A bridge loan can assist borrowers find a new tenant, solidify the property’s cash flow, and even fix issues like environmental ones and/or the creditworthiness of the borrower. The loan gets paid back once the investment property is sold or refinanced.
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How Borrowers Use Them
Different types of property require different things. Which means the loans are used in different ways.
If a borrower is wanting to restore a property that is a multifamily building, such as apartments, they can upgrade appliances, counters, flooring, and more. This would allow them to raise rental rates.
In the case of an office building, the borrower may lease the property and use the bridge loan to help tenants utilize their space.
Retail centers can often be bought at a discounted rate. The borrower will then hold the property for a time, such as 2 or 3 years, and then sell it. Borrowers will also buy an industrial building or portfolio to change the space to fit different needs.
A bridge loan can also be used to solidify cash flows of a hospitality property before refinancing it with a more permanent debt.
Why Choose a Bridge Loan?
Bridge loans are good for real estate investors that prefer to take smaller risks with their fix and flip projects. They are also good if they have cash, or money, restrictions. If neither of these apply, a bridge loan is also good for having more than one project going on at the same time. You often hear of bridge loans when referencing hard money fix and flip loans.
In general, a loan like this is closed faster than other ones do. This means you can close on one house prior to actually selling a different house. Which also helps in flipping two properties at the same time. These possibilities help real estate investor grow their businesses.
The draw of bridge loans is that they are a very flexible financing option compare to other loans. It is a short term option for current expenses, close on properties and while still selling another, complete house or building restorations, or even find new tenants.
Another plus is that the majority of these loans are “non-recourse”. A non-recourse loan can only be repaid through the property. This means that the borrower has no monetary requirements to pay off what they borrowed. Even if the property does not sell at the amount needed to clear the balance, the lender cannot continue to ask for repayment.
One thing to worry about when it comes to bridge loans is that their short term structure causes them to rely on take out financing. Take out financing is referring to permanent debt or property being sold. The problem with this is that the marketplace is constantly changing. Availability is not guaranteed.
Financial crisis can cause whatever market the borrower is in to dry up. This makes it harder to actually obtain this kind of take out financing. These crises can lead to delays in conversions, lowered returns, and caused some loans to be defaulted on.
Bridge Loan Rates
Bridge loans may be different than other types of loans, but they are still financial contracts and carry interest rates.
The rate of any bridge loan is determined by the lender. Rates of loans vary quite drastically whether you are borrowing from a bank, from private money, even hard money. The terms of the loan will also vary in the same way.
However, the thing that makes bridge loans so appealing to some investors, is also something that effects the interest rates. Unfortunately, the wiggle room that comes with bridge loans tend to make it come with a heftier price tag.
Compared to more permanent financing options, these loans have higher interest rates. The short terms these loans are structured on cause payments to be higher and it also makes lenders to be less flexible when it comes to late payments.
So, where the loan itself is flexible, lenders are not. This means you will have to worry about fees and penalties.
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Conclusion
All in all, bridge loans are a great tool for real estate investors that are interested in the fix and flip industry. These loans are delivered on a short term basis and can be applied for and acquired in just a few days.
This short turn around gives the investors to renovate properties, restore homes, upgrade apartment buildings, or even just sit on for a few years. Plus, the borrowers are not required to pay back lenders through financial means.
The loan repayment comes from the liquidity of the property itself. Whether or not it sells or is worth the full amount of the borrowed funds.
