One of the biggest challenges for any real estate investor — myself included — is managing cash flow. Let’s say you’re juggling multiple properties … there may be times when you need some extra funding to finance an upcoming transaction.
I’ve learned that a bridge loan can be an effective solution in this scenario. And while bridge loans are often marketed to traditional homeowners, here’s the truth: they can also be very beneficial for real estate investors like yourself. Here’s how to use a bridge loan to invest in real estate.
What is a Bridge Loan and How Does It Work?
A bridge loan is a loan that provides the borrower with cash during a transitional period. Typically, the borrower uses the bridge loan to pay for a new home while waiting to sell their old one.
Here’s how it works for real estate investors: you can use bridge loans to purchase new property and expand your portfolio while waiting to find the right buyer for an existing property. You can also use bridge loans to fund property renovations in some scenarios.
Bridge Loan Requirements
To qualify for a bridge loan, you’ll need to meet specific income and credit requirements, just as you would with a traditional loan. The exact terms will depend on the amount of money you are borrowing and your specific investment strategy.
Bridge loans have higher interest rates than standard mortgages, and they also need to be repaid quickly, often within just a few years. You will need to prove that you are financially able to make these payments.
The lender will typically also use one of your existing properties as collateral for the loan. There are a few possible structures for a bridge loan. One option is to use the entire bridge loan as a down payment for a new property, and continue to pay the mortgages on your existing properties.
The other option is to use a portion of the bridge loan to pay off the mortgage on the property you want to sell, and then put the remainder toward a down payment. The advantage of this option is that you don’t need to continue to pay an existing mortgage for a property you’re looking to sell. Make sense?
Advantages of a Bridge Loan
The biggest advantage of using a bridge loan is that it gives you the extra cash flow you need to fund new investments, without having to worry about selling another property first. The application and approval process is usually much faster for a bridge loan than for a traditional loan, allowing you to make these important decisions faster.
For example, if you find a new property that is the perfect fit for your portfolio, but the market is competitive, you can use a bridge loan to make the purchase quickly. This can also be helpful if you need to sell a specific property to cover the cost of a new investment, but aren’t able to make the sale in time.
Bridge loans provide the flexibility that investors often need to make achieve their long-term goals. In addition to offering a fast approval process, some bridge loans have payment deferral options, so you won’t need to start paying the loan back right away.
Disadvantages of a Bridge Loan
Although bridge loans have many advantages, there are some disadvantages to keep in mind as well. Most notably, bridge loans have higher interest rates than traditional mortgages, which means you’ll end up paying more in the long run if you use this strategy. They also come with additional closing costs and fees that you wouldn’t see with other loan options.
How to Use a Bridge Loan to Invest in Real Estate
Like I said earlier, bridge loans can be a very helpful funding tool if you’re looking to expand your portfolio. Here’s how.
- Find a local lender that offers bridge loans at reasonable terms.
- Identify the property you’d like to purchase with your bridge loan and the property you want to use as collateral (ie. the property you plan to sell).
- Decide how you want to use your bridge loan — do you want to put it entirely toward your down payment or use it for your mortgage?
- Once approved, use the bridge loan to invest in your property of choice.
- Sell the other property and use the money to pay back the loan.
Other Ways to Fund Your Real Estate Investment
You may be reading this thinking “a bridge loan isn’t for me … but I still need to find a way to fund my real estate investment. If this is you, consider:
- Standard bank loan: These loans come with an extensive approval process, but come with lower interest rates than other funding options.
- House flipping loan. That’s right: if you’re looking to flip houses, you can try and obtain a loan specific to this REI method. Learn more about it with this guide.
- Home equity loan or HELOC: If you already have an extensive portfolio, you can use equity from other properties to fund another purchase.
- Hard money loan: A hard money loan is a short-term alternative to a bridge loan that doesn’t require you to sell one of your other properties.
- Private loan or partnership: In this case, a family or friend helps fund the new investment.
The Bottom Line: Bridge Loan With Real Estate Investing
While they do come with high interest rates, bridge loans can help you achieve your investment goals and fund new purchases. If you’ve read through this guide and you’ve learned that bridge loans aren’t right for you and your real estate business, check out the other funding alternatives so that you can obtain the funding you need.
