Real estate investors focusing mainly on value-added opportunities must be extremely careful about financing. Spending too much on finance can defeat the purpose of going after value-added properties. The best funding tool for initial acquisition is often a bridge loan.
Salt Lake City-based Actium Partners describes a bridge loan as a short-term funding tool that provides access to quick cash to bridge the gap between a current funding need and future financing. Actium says that bridge loans help real estate investors close faster, even in tight markets where conventional lenders are more reluctant.
The Investor Sees the Value
The biggest financing hurdle when it comes to value-added investments is perspective. The investor can see the future value of the property being acquired. As for the conventional lender, not so much. A conservative lender might look at a high-risk property and see little value. Yet the investor sees what that property will become down the road.
This difference in perspective often means the difference between successful funding and application denial. Conventional lenders will likely deny funding if they struggle to see future value. Private lenders with bridge loans on offer are different.
Bridge Loans Are Short Term Loans
A bridge loan is a short-term loan with a typical 6-12 months term. As such, private lenders are uninterested in potential property value three or four years later. They are putting their money into a deal for no longer than 12 months. To make an underwriting decision, they need to know two things:
- The value of the property now; and
- The borrower’s exit strategy.
If a lender is comfortable with both, things are smooth sailing. Underwriting typically takes just a few days. The funding follows shortly after that. The investor is off to closing and then on to whatever his strategy is for adding value to the property.
Interest Only Loans
Another advantage of the bridge loan is that it is usually structured as an interest-only loan. Score a competitive bridge loan with a fixed interest rate, and a real estate investor could get into a new deal even with limited equity. Meanwhile, the loan itself buys some additional time for the investor to work out long-term financing.
The interest-only nature of the bridge loan means a borrower’s exit strategy needs to be solid. An exit strategy is a plan to pay off the loan on its maturity date. Lenders can be confident in getting approved for a bridge loan or sling without a plan. But the opposite is also true. A solid plan that inspires confidence in the lender will seal the deal.
Borrowing to Make Money
Investing in value-add properties, he is rooted in the fundamental principle of paying as little as possible, improving the property, and then turning the improvements into profit. Whether it is a quick fix or flip, a multi-year rehab plan, or a more conventional landlord plan that builds equity over long periods, value-add properties are the seeds of very profitable portfolios.
Investors borrow to make money. That’s the thing to remember about bridge loans. They might be more expensive than conventional loans, but you need to spend money to make it. The speed, flexibility, and simplicity afforded by bridge financing pays for itself through value-added properties capable of returning and outstanding ROI.
If you are into real estate investments, consider private lending. You might discover that the bridge loan is your best choice for obtaining value-added properties.
