What Is a Bridge Loan? Everything Real Estate Investors Need to Know
In the world of real estate, timing is extremely important. Whether you are upgrading to a new investment, flipping properties, or closing a really urgent deal, you may require short-term funding to bridge those financial gaps. That is where bridge loans step in. The blog will cover crucial details for real estate investors.
What Is a Bridge Loan?
A bridge loan is a short-term loan designed to provide instant cash flow during a transition period, which is often between the buying of one property and the selling of another. As a real estate investor, you use bridge loans to act quickly when opportunities surface before your existing property sells.
How Do Bridge Loans Work?
Your current property typically secures bridge loans, and once it is repaid, the loan is sold or refinanced. The terms range from 6 months to 3 years, and as far as the interest rates are concerned, they are higher than traditional loans due to the short-term risk lenders take.
Here, lenders usually offer up to 80% of a property’s value; the figure depends on the worthiness of the credit, loan structure, and equity. For the payment part, it may be interest-only during the loan term, with a balloon payment at the end.
Why Real Estate Investors Use Bridge Loans?
Bridge loans are a famous tool for real estate because:
Allow Quick Purchases
The loan allows quick purchases in competitive markets.
Permits Value-Adding Improvements
You are permitted to do renovations or value-adding improvements in the property before resale or long-term financing.
No Missed Opportunities
The bridge loan prevents you from missing out on opportunities while waiting for funds from other property sales.
For instance, if you come across a great deal on a property that requires major changes, but you are finalizing the sale of another, a bridge loan offers the cash you need to make that deal yours.
Pros and Cons of Bridge Loans
As much as the bridge loan seems like a promising opportunity, it has both pros and cons. They are as follows:
Pros
Speed
Fund availability doesn’t take that much time and is usually there within days.
Flexibility
The conditions can be customized for fix-and-flip, buy-and-hold, or commercial projects.
No Need To Sell First
The loan lets you purchase new property without waiting for a sale.
Cons
High Interest Rates
The bridge loan comes with her interest rates, typically 7-12% or more.
Be Clear With Exit Strategy
You need to be clear with an exit strategy.
Fees and Closing Costs
The fees of the loan and closing can add to the total cost of borrowing.
Contact Mass Hard Money
If you need any kind of assistance with a bridge loan, then Mass Hard Money is here to help you. Give us a call at (617) 892-9099 to get started today!