Getting into real estate investing can be challenging if you don’t know where to start. Thankfully, bridge loans are ideal for both novice and experienced investors. So before you pay sky-high interest rates on hard money loans, here’s everything you need to know about bridge loans:
What Is a Bridge Loan?
A bridge loan is a temporary financing solution that’s used to purchase real estate. It can be used to either finance residential or commercial real estate. Bridge loans are designed to bridge your financing gap until you can secure permanent financing. As a result, bridge loans usually come with short terms that range from six to 18 months.
How Do Bridge Loans Work?
Bridge loans work differently for investors than they do for homeowners. Typically, homeowners use bridge loans to make more competitive offers on new homes that aren’t dependent upon them selling their current homes. Similarly, investors also use bridge loans to make more competitive offers on properties.
For instance, many investors choose to borrow the total cost of the property in a bridge loan instead of using their own cash for the down payment. Investors can also use bridge loans to help them build a real estate portfolio with multiple investments at the same time. Finally, investors can also use bridge loans to help cover the costs of improvements and renovations to their new properties.
What Are Bridge Loan Interest Rates and Fees?
Interest rates and fees are important components of bridge loans that you need to know about before moving forward. While interest rates vary depending on the lender and your qualifications, you can generally expect to pay anywhere between 6 to 10% in interest.
In terms of fees and closing costs, you can generally expect to pay anywhere between 1.5 to 3% of the value of the loan at the time of closing. However, if you do not want to pay these fees at the time of closing, some lenders are willing to include them in the loan instead.
Why Are Bridge Loans Good for Investors?
Bridge loans are great for investors because they are accessible, flexible, and efficient. Let’s learn more about some of these benefits and how you can take advantage of them as an investor.
For starters, bridge loans are more accessible than many other types of loans because the requirements for bridge loans are often less stringent. You do not need a perfect credit score to qualify for a bridge loan. You do not need substantial income or tax history in the United States to qualify for a bridge loan.
In fact, bridge loans are considered to be “low documentation” loans — meaning that you don’t need to provide piles and piles of documents including bank statements, tax returns, income statements, investment account statements, etc.
In contrast to traditional lenders like big banks, bridge lenders may not have set qualification requirements either. Instead, they are more willing to work with borrowers to meet their needs. For instance, say your credit score isn’t the best but you have a substantial income and down payment. Or say you don’t have substantial income but you do have a great credit score. Bridge lenders are willing to work with a variety of different financial situations.
Furthermore, bridge loans are extremely flexible in terms of repayment. Bridge loan terms can range anywhere from six to 18 months depending on what you’re looking for. Some lenders are even willing to extend their terms, if necessary.
Your repayment options are more flexible as well. Some lenders don’t require payments for the first few months or only require payments on interest. Make sure to discuss repayment options with your bridge loan lender before closing.
Finally, bridge loans are incredibly efficient — something that is more important than ever in today’s fast-paced real estate market. If you want to compete with cash offers as an investor, you need a quick financing option that won’t take forever to close. With bridge loans, you can usually get your money in a matter of days rather than weeks — allowing you to compete right along with all-cash investors for the best real estate deals.
How to Get a Bridge Loan as an Investor?
Clearly, bridge loans are a great option for investors — so how do you get one? Here are the three simple and straightforward steps you need to follow:
Step 1: Find a Lender
The first step to getting a bridge loan as an investor involves finding a lender. Many traditional lenders like big banks do not offer bridge loans. Instead, you may have to go with a more specialized lender that offers this specific type of loan. No matter what lender you choose, make sure that you’re getting the best possible rate by approaching different companies. Also, make sure that the lender prioritizes customer service, transparency, and efficiency throughout the entire process. Vaster is a premier bridge loan lender that offers all of these qualities with competitive rates.
Step 2: Apply for the Loan
Once you’ve found the right lender for your bridge loan, it’s time to apply. While application requirements vary based on the specific lender, you should expect to provide them with documentation as a part of your application. For instance, you may be required to provide income tax returns, income statements, bank statements, and more. The lender will also run your credit history to check your credit score and look for any potential red flags.
Step 3: Get Approved and Close on the Loan
After applying, hopefully, the lender will approve your application. From there, you can move forward with the closing process. Just be prepared to pay any and all closing costs based on your agreement.
Repaying a Bridge Loan
There are a few different ways that you can repay a bridge loan as an investor. If you’re involved in fixing and flipping properties, you can pay off the remaining value of the loan once you sell the property. You could also approach other lenders for more permanent financing options with longer terms that can extend anywhere from 15 to even 30 years. These options also typically come with lower interest rates — but they can take time to secure, which is why many investors like to start off with bridge loans.
Building a Real Estate Portfolio With Bridge Loans
There are countless ways that you can build a real estate portfolio with bridge loans. You may want to consider fixing and flipping, BRRRR, and CRE. Here’s what you need to know:
Strategy 1: Fixing and Flipping
Fixing and flipping is a particularly popular method of building a real estate portfolio these days thanks to shows on HGTV that involves buying run-down properties, fixing them up, and selling them for a profit. That being said, bridge loans are perfect for fixing and flipping. They allow you to make a competitive offer and make little to no payments until the property is sold and the loan is paid off. Bridge loans are a more beneficial alternative to hard money loans that are frequently used in fixing and flipping.
Strategy 2: BRRRR
The BRRRR method stands for “buy, rehab, rent, refinance, repeat.” Again, bridge loans are perfect for this strategy. You can buy the properties you want with a bridge loan and even rehab them using funds from the same loan. Before the end of the loan term, you can refinance — effectively paying off the bridge loan and replacing it with a longer term loan. Bridge loans provide BRRRR investors the flexibility they need to improve and rent out these properties to maximize profits.
Strategy 3: CRE
Bridge loans aren’t just used for residential properties — they’re also used for commercial properties as well. Just be aware that commercial real estate, or CRE, is a completely different ball game — which can actually be a good thing since you’re dealing with businesses rather than individuals.
When investing in CRE, it’s always a good idea to find your niche — whether it be retail space, office space, industrial space, or multifamily complexes. Whatever your niche is, commercial bridge loans can be used to finance these larger and more expensive projects so that you can continue building your CRE portfolio.
Wrap Up on Bridge Loans for Investors
No matter your strategy or approach to real estate investing, bridge loans offer a unique solution with a whole host of benefits. Reach out to the experts at Vaster for tailored financial expertise regarding both residential and commercial real estate investing.