Buying a distressed property? It can be a great investment opportunity, but it also often requires some quick action and a significant amount of capital. This is where a hard money bridge loan comes in.
Hard money bridge loans are short-term loans that can be used to purchase commercial or investment properties, including distressed properties.
In this article, we will explore:
- The benefits of using a hard money bridge loan to buy a distressed property
- The considerations you need to keep in mind
- How bridge loans fit neatly into the BRRRR method
By the end of this article, we hope you will have a better understanding of whether a hard money bridge loan is the right choice for your investment strategy.
What is a hard money bridge loan?
Considering purchasing a distressed property, renovating it, then flipping it for a profit?
A hard money bridge loan may be one of the best and most viable financing options for this sort of project.
The following is everything you need to know about hard money bridge loans.
A hard money bridge loan is a special type of short-term loan secured by real estate and is a favorite financial tool for investors to purchase commercial or investment properties, including distressed properties.
Differences from traditional loans
Unlike traditional loans, hard money bridge loans are asset-based and are not based on the borrower’s creditworthiness.
They are also typically interest-only loans, meaning that the borrower only pays the interest during the whole loan term but the principal balance is due as a lump sum at the end of the loan term; often right after you’ve sold your rehab project.
Qualifications for a hard money bridge loan vary by lender, but they typically require a minimum credit score and a certain amount of equity in the property being used as collateral.
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Why a bridge loan can be ideal for buying a distressed property
Distressed properties bought for renovation and reselling purposes can be a great investment opportunity, but they can often require quick action and a significant amount of capital.
That’s why a hard money bridge loan can be the ideal financing option for this situation
Other benefits include:
- Speed of funding: Hard money bridge loans are typically funded much faster than traditional loans, which can be crucial when purchasing a distressed property.
- Flexibility of use: Bridge loans aren’t just for this type of project—they can be used for a variety of purposes, including a straightforward renovation of a property, or even paying off existing debt.
- Ability to fix credit score: If you have a poor credit score, a bridge loan is sometimes used as a way to improve your credit score by making timely payments.
- High approval rates: Because bridge loans are asset-based, they have higher approval rates than traditional loans, which are based on the borrower’s creditworthiness.
By using these bridge loans to purchase distressed properties, you can take advantage of these benefits and potentially turn a great profit on your investment.
However, it’s important to also consider the risks associated with bridge loans, which we will discuss in the next section.
How to incorporate bridge loans into the BRRRR method
The BRRRR method (Buy, Rehab, Rent, Refinance, Repeat) is a popular real estate investment approach that involves purchasing a distressed property, rehabilitating it, renting it out, and then refinancing it to extract equity or cash out in order to move on to the next deal.
Here’s how to incorporate bridge loans into the BRRRR method:
- Buy: Use a bridge loan to purchase a distressed property quickly and with less money down than a traditional loan would require.
- Rehab: Use the bridge loan funds to renovate the property and increase its value.
- Rent: Once the property is renovated, rent it out to generate income.
- Refinance: Refinance the property with a traditional loan to pay off the bridge loan and extract equity or cash out.
- Repeat: Use the equity or cash out to purchase a new distressed property and repeat the process.
By using a bridge loan in the BRRRR method, you can incorporate the benefits of the loans’ unique properties and potentially generate high returns on your investment.
However, it’s important to carefully consider the risks associated with both bridge loans and the BRRRR method before making any investment decisions.
Risks of using a hard money bridge loan
Hard money bridge loans have great potential to be a useful financing option for purchasing a distressed property.
But all financial strategies come with risks so it’s important to be aware of the ones associated with this type of loan.
Hard money bridge loans typically come with higher interest rates than traditional loans from lenders like banks, which can make them more expensive in the long run.
Short repayment terms
Hard money bridge loans are short-term loans, typically ranging from 12-36 months, which means that you will need to repay the loan quickly.
Potential for foreclosure
If you are unable to repay the loan on time, the lender may foreclose on the property used as collateral, which can result in the loss of your investment.
Consider these risks carefully before deciding to use a hard money bridge loan to purchase a distressed property. Make sure that you have a solid plan in place for repaying the loan and that you understand the terms and conditions of the loan agreement.
Conclusion: hard money bridge loans for purchasing distressed property
Purchasing a distressed property for renovation and resale purposes can be a great investment opportunity and hard money bridge loans could be the key for investors.
But it’s always important to carefully consider the benefits and risks before taking the plunge.
While a bridge loan can provide quick funding, the flexibility of use, and the potential to fix your credit score, it also comes with high-interest rates, short repayment terms, and the potential for foreclosure.
Additionally, it’s important to find a reputable lender who is willing to answer your questions, give you the best advice available, and go through the fine print with you so you understand where you stand and how to maximize your profit potential.
Use a hard money bridge loan from Marquee Funding Group to fund your next rehab projects
Understanding the benefits, requirements for qualification, and potential costs associated with bridge loans will enable you to make an informed choice regarding whether this type of financing aligns with your requirements.
If you’re considering collaborating with trustworthy, forthright, and transparent bridge loan providers who can genuinely assist you in achieving your investment objectives, please get in touch with Marquee Funding Group today.
We do not adhere to the same conventional lender restrictions and regulations. Instead, we set lending criteria that are designed to be most advantageous for both our borrowers and ourselves.
Photo by eberhard grossgasteiger