Despite what people might think, most successful real estate investors do not start out with loads of cash they can put into that first property. In fact, investors are more likely to finance new acquisitions rather than paying cash for them. One tool for doing so is bridge funding.
A bridge loan is a specific kind of loan designed to meet short term financing needs. Where real estate is concerned, traditional mortgage brokers used to be heavily involved in bridge financing back in the 1990s. Thanks to the 2007-2008 housing crash, it is now pretty difficult to obtain a bridge loan for a residential purchase. But bridge loans are still alive and well in the commercial investment property arena.
If you are new to real estate investing, give bridge loans a good look. Here are some of the basics to get you started:
1. Bridging the Gap
Bridge loans are so named because they are intended to bridge the gap between an immediate financing need and future income or funding. Let us say you wanted to purchase a multi-building apartment complex. A conventional lender denies your application due to a lack of confidence in your ability to keep the units rented.
Meanwhile, a private lender agrees to provide a bridge loan. You get a 12-month interest only loan that buys you the time you need to get the units rented so that you can start generating income. You are then able to secure a conventional loan just as you had originally planned. The conventional loan pays off the bridge loan.
2. Much Shorter Terms
The example of a 12-month loan is actually pretty typical. Bridge loans are short term loans that rarely have terms longer than a year. They are more likely to have terms of just 6 months. This is an important detail inasmuch as you have to have a solid exit plan in place to secure bridge funding.
Actium Partners, out of Salt Lake City, UT, explains the exit strategy as the borrower’s plan to repay a bridge loan. Actium says that a lender needs to have confidence in a borrower’s exit plan before a loan will be approved. Given the short-term nature of bridge financing, it is in a borrower’s best interests to line up the most solid exit plan possible.
3. Simplicity and Flexibility Are Earmarks
Simplicity and flexibility are two earmarks of the bridge loan. In terms of simplicity, private lenders do not require a ton of documentation. Their underwriting process is about as simple as it gets. Underwriting is simple even in tight markets that tend to encourage conventional lenders to make things more difficult.
In terms of flexibility, private lenders have the ability to tailor their bridge loans to the unique needs of each borrower. On the other hand, conventional lenders are very limited in what they can do. They need to follow the formula.
4. Get to Closing Quickly
The most important reason to consider bridge funding as an investor is arguably speed. Because underwriting is simple inflexible, private lenders can get from application to funding in a matter of days. You get to closing in less time than it takes some conventional lenders to offer pre-approval. That is big in highly competitive markets where investors are fighting over the most lucrative properties.
As a new real estate investor, you are going to learn that you have a variety of funding options. Keep bridge funding on your shortlist. A strategic and well-structured bridge loan could be your secret weapon for building a portfolio of high value properties with significant ROI potential.