Bridge loans, or hard money loans, are short-term loans that are secured by a real estate property. Because these loans are funded by private investors (as opposed to a traditional financial establishment) they are often referred to as private money loans. More often than not, these private money deals are based on the value of the property (rather than a credit score or financial history.)
When determining the value of these loans, the dollar amount is ascertained by the loan-to-value ratio, or LTV, which essentially is the loan amount divided by the value of the property used as collateral. Even though this type of loan is faster and more obtainable than the conventional loan process, potential borrowers still need to go through an underwriting process and meet certain terms.
How Bridge Loans are Used for Fix-and-Flip Funding
Investment properties of all kinds can benefit from bridge loans but are often used for fix-and-flip projects. Because of the already tight timelines fix-and-flip projects operate on, these loans – which usually have 6-12 month terms and are usually non-extendable past the five-year mark – are perfect for the short-term financing needs of fix-and-flip projects.
Monthly payments on these loans are made in the form of interest-only or interest + principal, and the terms and requirements vary greatly from one lender to another. Factors that impact the terms of these loans include an investor’s previous experience and the property type in question.
How to Qualify for a Bridge Loan
What exactly are the requirements for a bridge loan? As previously mentioned, professionals on the lending side are mainly concerned with the value of the property serving as collateral. At the end of the day, however, terms will depend on the lender you choose to work with, circumstances surrounding the loan, and previous experience with whatever project requires a bridge loan.
Other factors that could impact the terms of a hard money loan include your geographic location, number of homes you have flipped, and property type (multi-family dwelling, condo, etc.)
Finding the Right Hard Money Lender
Now, more than ever, the web gives borrowers more tools to sift through the sheer number of lenders available in a given area. Along with online research, asking other property investors for input always helps (especially when preparing your first or second bridge loan.) Possible questions for a lender could include: will you cover rehab costs associated with a property? How much of the LTV will you allow me to borrow? What are the turnaround times associated with the loan?
Asking the right questions of your lender is an important first step for blossoming and seasoned investors alike. Once you and your team find the right lender, there are opportunities to build long-term relationships; as you continue to build a rapport, your loan terms could be loosened as a track record is established.
Common Applications of Bridge Loans
Refinancing is among the most common use for a bridge loan. Loans for small businesses are typically handled by the SBA (Small Business Association.) There are times, however, when an investor does not qualify for SBA loans (which could be because of damaged credit or a non-qualified property, which thwarts a property owner’s access to equity in their property.)
In commercial real estate, bridge loans are used for a host of reasons; whether you are starting a business, expanding payroll, or buying out a partner, these loans can provide a wide variety of professionals with the funding necessary to get from point A to point B. The journey to profitability can often be rife with pitfalls; when faced with the bridge loan process, however, these pitfalls can be more easily managed.
Tying It All Together
This journey from point A to point B, at least in terms of investment properties, could also mean stabilizing a property. It is very common for banks to require a history of tenant payments – but it is also true that property owners are interested in transforming and renovating the property (in order to attract new tenants.) Bridge loans allow real estate professionals to make these property-related updates in a timely manner.
Traditional sources of funding are limited to providing capital under a strict set of conditions – bridge loans do not often adhere to these stringent guidelines. Investment properties can greatly benefit from the utilization of bridge loans in a wide variety of circumstances.
The team at Park Rock Capital is highly experienced at originating innovative, quick commercial bridge loans (alternative and hard money loans) for real estate investors’ time-sensitive projects. If you have any lingering questions about the bridge loan process, don’t hesitate to contact us.