Bridge loans are a great way to acquire properties to grow your portfolio. Learn how bridge loans work and how you can use them as a tool to invest in more properties.
What to Know About Bridge Loans
Bridge loans are a very useful tool to build your portfolio. It allows you to purchase properties within weeks and provides rehab funds to improve the property.
What is a bridge loan?
A bridge loan, also knows as a “short-term bridge loan”, “fix and flip loan” or “hard money loan” are short-term, high interest only loans. They are primarily based on the value of the property in its current state and after being rehabbed (“after-repair value”).
Typically, the interest rate, origination and closing fees are higher than a regular mortgage. Bridge loans are typically obtained from private lenders such as LendSimpli. Traditional lenders such as banks, credit unions, and mortgage brokers, do not issue hard money loans.
What kinds of bridge loans are there?
There are two ways a bridge loan is structured and it depends on the lender and program. One way is using loan to cost (LTC) ratio to determine the total loan amount. The second is based on the after repair value (ARV) of the property.
Here are the difference of the two:
Loan-to-cost (LTC) bridge loans calculates the total costs of purchasing and rehabbing the property as the foundation of the loan. Usually, LTC ratios are between 70-85% of the total costs.
For example, a property that costs $100,000 and needs $25,000 worth of renovations and improvements in order to sell for $200,000. The total costs of the project would be $125,000. The lender offers you 75 percent of $125,000, which is a total loan of $93,750. You have to provide the remaining $31,250 yourself. If you sell the home at the projected price, you’ll have made $75,000, minus origination fees, closing fees, and interest.
After-repair-value (ARV) bridge loans are based on the projected selling price of a rehabbed property, and usually amounts to between 70 and 75 percent of that price. The selling price is verified by an appraisal and takes your rehab budget into account. If you purchase a property at $100,000 and need $50,000 in rehab funds to sell it for $200,000, then a lender could offer you 70 percent of the selling price for a total loan amount of $140,000. You’ll only need to add $10,000 of your own money for the project to make a profit of $50,000 (minus interest and loan costs).
What types of properties can you finance with a bridge loan?
Bridge loans can be used to purchase single family and multifamily residences. However, these must not be owner-occupied. Meaning, you cannot live there. Real estate investors use bridge loans to purchase properties that meet their investing criteria. Typically, they are undervalued and need rehabilitation. Both single family and multifamily residences can be held as rentals, which means that the real estate investor will refinance the bridge loan as soon as possible to acquire a lower interest, longer term loan. If the real estate investor wants to follow the BRRRR (buy, rehab, rent, refinance, repeat) strategy, they may perform a cash out refinance.
Hard money loans can be an integral part of your real estate investment financing strategy. Just remember to always take the time to research your options before you commit to the terms of any loan.
Interested in getting started? LendSimpli offers a variety of loan products including fix & flip, rental and multifamily. Real estate investors will find the same great benefits using a private lender on all their deals thanks to our easy application process, speedy closings, and superior customer service and dedication to helping our borrowers grow their businesses. Start your application today!