How to Use Hard Money to Close Quickly or as Gap Financing (aka Bridge Loan)
In the world of real estate investment, how do you solve the problem of missing new opportunities or projects due to short-term cash flow restraints because of existing real estate investments or projects?
Definition of a bridge loan
Bridge Loans are a financial tool that can address this unique problem of timing when transitioning from one project to the next. The maximum amount of a bridge loan is usually 60%-70% of the combined value of your current property and the property you want to purchase, although standards vary with every lender. For instance, if your rental property is worth $365,000 and the property you want to buy is worth $470,000, the maximum bridge loan amount is: ($365,000 + $470,000) x .70 = $584,500.
How to use a bridge loan
You can use this type of loan to purchase another property before selling the old one. The bridge loan “bridges” the span between the two transactions, and acts as a cushion until financing is solidified from your sale. A Bridge loan is also an effective tool to use if traditional or long-term financing cannot be obtained in the short time frame in which you need to close, or if issues with the new property preclude traditional or long-term financing on the front end.
In a tight housing market, a bridge loan may also help you get a leg up over other buyers. If a seller is involved in a quick sale, they might be more likely to make a good deal for a buyer who can close easily.
How to repay a bridge loan
Bridge loans by their nature are short-term loans, and typically must be repaid within 12 months or less. One strategy is to pay off the bridge loan with money from the sale of a current property. However, there are other repayment methods, including refinancing your loan with traditional sources once the property is stabilized or improved.
In the example above, when discussing a rental property, if that property is stabilized with a tenant, or if defects with the home are fixed, that property becomes more attractive to potential traditional financing partners. Bridge loans can be arranged in several different ways, but they usually involve a balloon payment at the end of term, when the full amount is due by a given date.
If you have questions about the process, or whether this type of loan is right for you, call us today.