Why Bridge Loans Are Popular With Rental Property Investors
When your real estate investments focus on rental properties, chances are that bridge loans haven’t factored into your financing strategy. Yet.
Still, the realities of the rental market in 2023 and the challenges investors face — along with the many features of bridge loans — are making them a surprisingly reliable and strategic source of funding for rental investors.
Here’s what you need to know about how bridge loans work and why they might be your next (and best) secret weapon for your next rental property.
Understanding bridge loans: the basics
Bridge loans are short-term loans designed to give real estate investors quick access to capital without some of the barriers and red tape associated with traditional real estate loans.
Hard money lenders consider the property’s value and income-generating potential into account during the bridge loan application process, so investors don’t have to rely on personal finances and assets to secure the loan.
Here are some of the basic features and advantages of a bridge loan:
Short-term financing
Bridge loan terms may be as short as weeks or months or up to two years, depending on the specific terms of the loan.
Quick access to funds
Bridge loans are specifically created to provide real estate investors with quick access to funds when time is critical, whether to purchase a property or rehab and make repairs.
Some bridge loans take as little as a few days or weeks to approve and disburse funds to investors, which is one of the main distinctions between bridge loans and traditional real estate loans.
Traditional lenders usually take much longer to approve real estate loans and have more stringent application and approval standards.
Interest-only payment options
Bridge loans have interest-only payment options depending on the loan's terms, allowing investors to repay the principal after the property is sold or long-term financing options have been secured.
Due to the convenience and quick turnaround time, bridge loans usually have higher interest rates and fees than traditional real estate loans as they may involve more risk for the lender.
Why bridge loans make sense for rental investors
Rental investors face unique challenges in the real estate market: from an increasingly tight and competitive marketplace to difficulties accessing adequate funding for acquiring and refurbishing properties.
According to industry data, by the fourth quarter of 2021, more than 75% of all investment properties were acquired in all-cash deals[1].
While factors like interest rates, inflation, and consumer behavior all affect the real estate market, as a rental investor, your ability to act quickly and access the capital you need to acquire a property is arguably the most critical factor.
That’s where hard money loans come in.
The good news is that there are lots of advantages of using a bridge loan to fund a rental investment:
Quick access to funding
Timing is often everything when it comes to acquiring new properties in a competitive market, especially when most buyers are increasingly paying for acquisitions in all cash transactions.
Bridge loans give rental investors fast and streamlined access to short-term funding.
Upgrade and rehab properties
If you’re not purchasing a turn-key property, hard money loans can also be used to make needed improvements and upgrades to rental properties. Investing in a fix-to-rent project that requires a remodel or refurbishment can increase your rental investment’s ROI by generating higher rent and increasing overall property value.
Diversify your real estate investments
A bridge loan allows you to leverage existing investment properties to acquire new ones to diversify your portfolio and increase your earning potential.
Close funding gaps
Securing long-term financing for rental properties usually takes time. It can be a complicated and drawn-out process that hinders your ability to jump on a new property before a competitor closes the deal.
Bridge loans temporarily close the financing gap between buying the property and securing long-term real estate loans.
What to expect when taking a bridge loan
As a short-term solution, bridge loans are designed for specific transactions like acquiring a new property or investing in renovations and upgrades to existing real estate projects. Bridge loans are technically secured loans, guaranteed by the property’s value, income potential, and equity.
It’s essential to have a cohesive exit strategy and repayment plan in place, especially with rental properties more susceptible to market factors like location, regulations, economic and employment factors, and demand.
Hard money loans are typically more accessible than traditional real estate loans. Still, they have approval criteria which may include your track record as a real estate investor with previous projects, a well-defined development plan for the property, and sufficient equity to secure the bridge loan.
Sources:
1 Dana Anderson and Sheharyar Bokhari. "Real Estate Investors Are Buying a Record Share of U.S. Homes," Redfin. April 6, 2022.