The real estate market is an exciting one, especially as home values are growing across the nation. If you’re new to real estate investing or have an itch to make a profit flipping houses, you might be gearing up to make some serious financial moves.
Buying, fixing, and then selling homes at a higher price point can be extremely lucrative, but you may need a little influx of cash to help you dive into this real estate practice.
Enter bridge loans, short-term loans which can really come in handy when you need cash fast to snatch up a fixer-upper or pay for upgrades.
There are also some downsides to using bridge loans for house flips. This guide will walk you through ins and outs of bridge loans for real estate investors as well as some bridge loan alternatives for investors.
Can You Use a Bridge Loan to Flip Houses?
Yes, you can absolutely use a bridge loan for flipping houses. In fact, it’s sometimes referred to as a fix-and-flip loan.
A bridge loan is a short-term loan that helps fill the gaps between access to other types of financing. For example, a bridge loan can allow you to purchase one property while you’re in the process of selling another.
There are a few features of bridge financing you must know before determining if they’re the best choice for your house-flipping situation. Bridge loans:
- Provide quick cash access
- Last up to one year
- Typically have high interest rates
- Often use your home as collateral
So, while bridge loans might be an excellent option for some situations, that doesn’t mean they’re right for you.
How to Use a Bridge Loan to Flip Houses
Bridge loans for house flippers are designed to give extra cash flow to help move a house off the market, into a makeover montage, and back on the market again. Because this is a risky investment for lenders, this loan is typically done in stages:
Stage 1: The Purchase
Bridge loans can come into play right at the beginning of your house flipping journey.
This part of the loan process looks pretty much like every other home loan application.
- Complete an application for a loan
- Provide necessary documents such as ID, bank statements, tax returns, and proof of income
- Order an appraisal of the house you want to flip
However, if you want to use this loan to flip a house, you’ll need to also add in a business plan for your lender to review. This should include the details of your renovation project, a well-thought-out timeline for completing the renovations and repairs, and a thorough list of expenses in order to carry out your plan.
From there, the lender will do some calculations and factor in:
- Loan-to-Value (LTV) – The after-repair value
- Loan-to-Cost (LTC) – The total cost of the renovation project.
- Additional rates and fees – Depending on where you are, this can encompass anything from property taxes to deed fees.
Stage 2: The Fixing Up
Now that you own the property, it’s time to break out the toolbox and start renovating. But what’s your lender’s involvement in the fixer-upper process?
You’ll typically have to front the funds for materials and labor yourself. But once you’ve completed a certain stage of renovations (pre-discussed between you and your lender), you can get those funds back.
Here’s how that works:
- Let the lender know your fixer-upper is all fixed up – When your project is completed, you can reach out to the lender and request a “construction draw,” which allows you to be reimbursed for the funds you infused into the project within the scope of your loan. But before you can access those funds, the lender has to see for themselves that the upgrades have been completed according to the business plan.
- Inspection and reporting – Your lender will send an inspector to the space to report on your work. This inspection can take up to 72-hours to complete. From there, the inspector writes up a report and sends it to the lender.
- Review – The lender will take a look at the inspector’s report and decide whether to release the funds from your loan.
Things to Consider When Using a Bridge Loan to Flip Houses
To help you determine if bridge financing is the best option for your house flip, be sure to review the pros and cons of bridge loans and some key considerations. Asking yourself the following questions may help you discover whether or not it’s wise to apply for a bridge loan:
How Much Money Will You Need to Access?
If a bridge loan is going to help you, it must provide the cash you need to complete your home flipping project. Hard money lenders will typically assess your loan eligibility based on one of two sums:
- Loan-to-cost ratio – Loan-to-cost divides the hard money loan amount by the anticipated construction cost to determine the amount of risk the lender is assuming by offering you financing. The higher the number, the riskier the loan. A riskier loan may have a higher interest rate and stricter repayment terms that you’ll need to meet. The private money lender may also not be willing to loan you a large sum of money.
- After repair value – If you believe the property’s value is going to increase significantly after you repair and sell it, you may qualify for a little more funding. Many lenders will approve loans between 65 to 70 percent of a property’s projected value after repairs are complete. So, if you buy a property for $50,000 and anticipate that you’ll need to spend $50,000 more to repair it but can sell the home for $175,000, a private money lender might agree to loan you $122,500 for the project.
Will You Be Able to Complete the Flip Before the Loan Is Due?
Bridge loans are also very short-term solutions. If you use the equity in the home where you and your family live as collateral, there’s a significant risk to you. You must be able to complete the house flip and sell the home to pay back the bridge loan. While you might be confident you can do all of the work in time, many issues can creep up during a house flip, including:
- Construction delays
- Supply chain issues
- Unexpected damage that needs repair
- Illness or injury if you’re doing the work yourself
- Title problems
- Unforeseen expenses
- Problems during an inspection
This answer isn’t meant to frighten you, simply to remind you that real estate flipping is a tricky business that rarely goes precisely as planned. As a real estate investor, you need to be able to adjust and accommodate for any unexpected issues.
Are There Other Revenue Streams You Can Access Instead?
House flipping can be quite profitable when done correctly. As an investor, you know you should explore your options before committing to any type of financing. Make sure you do your homework to see if you can find alternative loan solutions that might:
- Offer lower interest rates
- Come with less personal risk
- Give you more flexibility
- Have a longer repayment time frame
In many cases, you can find several loans to compare and then decide which is the best for your situation. For example, it might be worth comparing a bridge loan vs. HELOC or a bridge loan vs. home equity loan.
An Alternative Solution for Real Estate Investors
Bridge loans for investment property come with risks for investors. You might not finish your house flip in time due to unforeseen delays. Making extra payments can stretch your finances to uncomfortable limits. If you wish to avoid these risks, there might be alternative options you can utilize.
EasyKnock offers solutions that help you convert the equity in your current home to cash for house flipping or other needs, all while you get to remain in the home. Our options might be better suited to your needs than a bridge loan. Contact us today to learn more about our process.
If you’ve considered the pros and cons of using a bridge loan for flipping houses and are still unsure as to whether or not it is the right option for you, speak with a financial advisor to to learn more about alternative options. As an investor, you know you should explore all of your options before committing to any type of financing so that you know you’ve chosen the path that will be the most profitable and maintainable for you.
This article is published for educational and informational purposes only. This content is based on research and/or other relevant articles and contains trusted sources, but does not express the concerns of EasyKnock. Our goal at EasyKnock is to provide readers with up-to-date and objective resources on real estate and mortgage-related topics. Our content is written by experienced contributors in the finance and real-estate space and all articles undergo an in-depth review process.
Forbes. Is a Bridge Loan Right for You? https://www.forbes.com/advisor/loans/bridge-loan/
Investopedia. Loan-to-Cost Ratio. https://www.investopedia.com/terms/l/loan-to-cost-ratio-ltc