There are many ways to fund real estate acquired for business or investment purposes. You could reach out to partners for help, fund it 100% yourself, or use a loan. But there are different types of debt available, including permanent, mezzanine, senior, and short-term. A bridge loan is a type of short-term debt.
What They Are
A bridge loan is financing you put into place until you’re able to either secure longer-term debt or pay off an existing obligation. You might use a bridge loan in a situation in which you might need funds quickly. Or you might use that loan for value-add property that isn’t stabilized.
As mentioned above, bridge loans are short term, lasting between six months and one year, on average. Collateral is typically used to secure a bridge loan. In other words, the asset you own (or are about to buy) could be used as collateral to acquire the debt.
A bridge loan’s potential upside is that it can give you quick funding to take advantage of immediate opportunities. There can be less red tape involved than with obtaining a more traditional loan or line of credit.
But keep in mind that bridge loans also tend to carry a higher interest rate—and might require more fees—than permanent loans. This financing is considered riskier and more time-consuming to underwrite than more traditional financing methods.
Where to Get Them
Bridge loans are fairly common; you can find bridge-loan offerings at local banks and credit unions. You can also arrange bridge financing with online lenders and hard money lenders. A hard money loan is a bridge loan that is offered by private lenders. In addition to the collateral you have to back the loan, a bridge loan lender will want to take a look at your track record and credit history. Furthermore, most lenders generally don’t go higher than a 70% loan-to-value (LTV) ratio. This means you need to maintain at least 30% of equity in your asset with a bridge loan.
With so many bridge loan sources out there, what’s the best way to choose the right one? It’s a good idea to find a credible lender with a solid record that can help you close quickly and with confidence. If the lender you’re interested in can’t give you performance figures, then move on to another one. Your best bet in finding a reputable bridge loan lender is through a referral by friends or family.
The Best Option?
Bridge loans can be an ideal strategy if you need immediate cash to buy and/or fix up real estate. But keep in mind that this is short-term financing and it can be more expensive than a traditional loan. If you decide to go the bridge-loan route, plenty of institutions offer this type of funding. It’s important to research potential lenders carefully, so you can borrow with confidence.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure.
All investments have an inherent level of risk. The value of your investment will fluctuate with the value of the underlying investments. You could receive back less than you initially invested and there is no guarantee that you will receive any income.
There is no guarantee that the investment objectives of any program will be achieved.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
