How Do Residential Bridge Loans Work?


It is not uncommon for a real estate investor to seek out a new project while another is already underway. But obtaining the capital for a second investment can be difficult, especially when you’re waiting for the sale of another property to finance the purchase of a new one. However, there is a loan designed to get you over that hump: the bridge loan.
 What is a Bridge Loan?
A bridge loan — also known as a swing loan, short-term financing and gap financing — is exactly what it sounds like: a bridge from one investment to the next. It is a short-term solution (typically 6 to 12 months) to a common problem, giving real estate investors the money they need to get ahold of a new property while another property is awaiting a buyer.

Essentially, a bridge loan is like borrowing your down payment for a new property. Real estate investors can borrow against their existing property while waiting for long-term financing to become available. Another use for this kind of loan is when a landlord has finished renovating a rental property but is waiting to secure tenants to generate a positive cash flow. 

What Are the Benefits of a Bridge Loan?
Obviously, if you see a deal on a property that is too good to give up, it doesn’t have to slip through your fingers. A bridge loan will get you from point A to point B, helping you secure that property before someone else snatches it up, even though you’re experiencing a negative cash flow.

As soon as the original property sells, the investor’s obligation to their lender is fulfilled, and they’ve achieved what they set out to do: sell one property while beginning work on a second. In other words, a bridge loan can close the gap on properties, so that there’s no gap in your investment timetable.

Does a Bridge Loan Have Any Risks?
In truth, all loans have risks, and a bridge loan is no different. The first thing to keep in mind when seeking a bridge loan is that, if it is approved, you’ll now have two loans you’ll need to repay — and the equity of the bridge loan is tied to the sale of the existing property. If the investment property doesn’t sell as quickly as forecast and the developer fails to pay off the loan, he or she risks losing both properties at the same time.

You can also expect higher rates and points with a bridge loan, as they are extremely flexible and have a short duration. But if the bridge loan helps a real estate investor secure another great investment or avoid a foreclosure, the risk could be well worth it.

A Short-Term Loan for Long-Term Results
In a nutshell, if your project cannot meet a traditional lender’s requirements, or if you need to get ahold of capital quickly to take advantage of a great deal, a bridge loan may be right for you.

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