What Are Bridge Loans?
If you are a real estate buyer in Portland, Bend, Eugene, or Seaside, you need to move quickly when you’ve found a potential house. As we all know, the housing market is incredibly tight throughout most of Oregon. When you need to move fast, a bridge loan can be a useful tool to help make your buying process successful.
When you need to move fast, a bridge loan can be a useful tool to help make your buying process successful. But to make the most of the opportunity, you need a clear understanding of bridge loan pros and cons, and how to best leverage a bridge loan for your investment property.
What is a bridge loan?
There are a variety of conventional mortgage options available, from fixed-rate and adjustable to VA loans. Bridge loans, another mortgage option, are short-term loans used to cover a financing gap. These loans have a higher interest rate and are usually paid off within 12 months. The reason for the higher interest rate is due to the short-term nature of this loan. Lenders are unable to make long-term revenue from bridge loans since there isn’t a lengthy monthly payment. To make this loan worthwhile, more interest is charged upfront. Borrowers also pay the same type of fees as in a traditional mortgage, including closing costs, escrow, a title policy, and an origination fee based on the amount being borrowed.
Bridge loans for investment property
Bridge loans can be a smart tool for those investing in real estate. What if a fix-and-flip property has been completed and listed for sale, but then the borrower finds another property to purchase? A bridge loan helps the borrower purchase and start the new project while the first home is still being finished or is still on the market.
The funding process for hard money bridge loans is much faster than it is for traditional loans. Although bridge loans have short terms and higher interest rates, they’re still an ideal option for professionals who need fast, streamlined funding.
Pros and cons of bridge loans
There are some advantages and disadvantages to bridge loans. While homeowners may want to think carefully if it’s a good option for them, flippers usually find that the drawbacks are worth it.
- Quick financing: Like AIC’s hard money loans, bridge loans are easy to apply for. Processing the paperwork and closing on the property is also fast and streamlined.
- Flexibility: A bridge loan can speed up your timeline if you’re finished flipping one property but you’ve found another house you want to start working on. Bridge loans give you the flexibility you need to move on the next opportunity you find. Plus, without needing any contingencies – like selling the prior project first – your offer is more attractive to sellers.
Cons: The cons are more pronounced for homeowners. For a real estate professional, handling the higher interest rates and origination fees are generally considered part of the process and again, worth the added flexibility and ability to move quickly.
How can AIC use a bridge loan to advance your project?
Once we assess your situation, we’ll determine the best way to structure your bridge loan. This might mean putting a lien on both properties and using the sale proceeds from the first property to pay down the loan on the second property. If there is enough equity in the property that’s on the market, we often lend the full purchase price of the new property. AIC usually takes a first or second lien position on the property being sold while taking a first lien position on the new property that’s being purchased.
If you’re working with a 1031 exchange, you have a short window to role over the sale of an investment property into another property in order to qualify for tax exemptions. Reverse 1031s are sometimes considered a type of bridge loan, as they help buyers purchase a new property before a current property is sold. In these situations, AIC will make the loan on the property being sold to make funds available to purchase a new property. We’ll work with a third party to ensure the tax preparation piece of the transaction is accurate and adheres to current regulations.
Seeking an investment partner?
Do you need to apply for a bridge loan? Are you wondering if a bridge loan is right for your project? AIC has been bringing together Oregon real estate opportunities and private money since 1984. Our clients span from Portland metro down to Medford and over to the Oregon coast. Our personalized, hands-on approach gives them the confidence and knowledge they need to achieve success in the industry. Contact us at 971.224.5145 or use our form and we’ll get back to you soon!
Questions? Give us a call!
Categories: Investing Strategies