Bridge loans play a unique role in real estate investments. Commonly referred to as gap loans or interim loans, they serve immediate and short-term funding needs. If you need to finance a fix-and-flip project, or if you need short-term capital to carry you through to a property sale, a bridge loan can be a fantastic option. Here’s how to get the most out of it.
After Repair Value (ARV) Loans
An after repair value (ARV) fix-and-flip loan is designed to help cover the costs associated with a property that will increase in value after its renovation. These loans are typically warranted when the property value is expected to increase by 50% to 100% of the original purchase price. The bridge loan helps the investor cover the cost of the property (and, in some cases, the cost of repairs and renovations), and then when the property is sold, the investor repays the loan. The remaining funds are the investor’s profit.
In most cases, traditional banking institutions do not provide ARV loans because they require specialized real estate knowledge. Private lenders will compare the purchase price, the estimated renovation costs, and the estimated selling price, then decide how much to lend. For example, if your lender agrees to cover 75% of the ARV, and the ARV is $100,000, you will need to pay $25,000, and the lender will fund $75,000 with the property as collateral. In most cases, bridge loans must be repaid within 12 months.
Loan to Cost Ratio (LTC)Loans
On the other hand, a loan-to-cost ratio (LTC) loan is ideal for any property that will sell at a profit, but not at the 50% to 100% margin that may prompt an ARV loan. If you find a property that will cost $100,000 to purchase and $50,000 to renovate and your research indicates that you’ll be able to sell it for $195,000 after the renovations are complete, most private lenders will consider a renovation LTC loan ranging from 70% to 80%.
In this scenario, your total pre-sale cost is $150,000. If the lender agrees to an 80% LTC loan, they will lend you $120,000, and you will be responsible for covering the other $30,000 to fund the project. When the home sells for $195,000, you can repay the lender, recoup your $30,000, and take home $45,000 in profits.
Finding the Right Bridge Loan
The best way to determine which bridge loan is right for you involves meeting with a private money lender who specializes in real estate investing. No two situations are the same, and unlike traditional banks, these lenders consider much more than your credit history and income. Things like the property’s estimated value and numerous other factors determine the lender’s decision, and if you qualify for a bridge loan, you can have access to your funding in a matter of days.
United Lending LLC provides access to a wide range of bridge loans designed to cover fix-and-flip renovations and other short-term needs. We work hard to provide the best possible interest rates and the most flexible terms, and there’s no proof of income required.