Real estate investors typically have to move quickly. They don’t have time to wait around while every duck is arranged in a row. They need a secret weapon that allows them to close deals faster than the other guy. That secret weapon is the bridge loan.
Bridge loans are ideal for supporting the buy-and-hold investment strategy. Buy-and-hold in real estate is similar to a strategy of the same name in the stock market. Investors obtain new properties with the intent of holding unto them for at least a few years. While they hold, they are also collecting income by way of rental payments.
Why the Strategy Is Attractive
Buy-and-hold is an attractive real estate investment strategy for two reasons. The first is residual income. Consider an investor who purchases a commercial office building with dozens of tenants. Each of those tenants pays rent. That amounts to monthly income for as long as the investor holds the property.
The second reason is the potential for increasing property values. Over time, real estate tends to appreciate. So in addition to monthly income, the investor stands to make a profit when he finally does sell. In the meantime, the property also as equity the investor can tap for other purposes.
How Bridge Loans Play Into It
Bridge loans are a real estate investor’s best friend in a highly competitive market. Actium Partners, a Utah hard money lender based in Salt Lake City, says a typical strategy involves obtaining a bridge loan for acquisition and stabilization. After a new property has been acquired, the investor can consider approaching traditional lenders for funding.
Bridge-to-permanent financing is the goal. The bridge loan is a short-term loan payable within 6-24 months. Traditional financing is a more permanent arrangement through which a property could be funded for a decade or longer.
A Step-by-Step Process
Although every investment opportunity is somewhat unique, leveraging bridge loans to facilitate bridge-to-permanent financing tends to follow a three-step process:
Step #1: Rapid Acquisition
An investor turns to a bridge loan to facilitate rapid acquisition. A lender like Actium Partners can get from approval to funding in a matter of days. Approval is based primarily on the value of the property being acquired, so there is no long and drawn-out underwriting process. The investor can act quickly because his lender acts quickly.
Step #2: Value-Add Plan Execution
During the bridge loan’s term, the investor executes his value-add plan. This could mean filling vacancies, addressing improvements, and even executing operational changes. It is all designed to attain stability. With stability achieved, the investor can move on to the next step.
Step #3: Arranging Permanent Financing
Stability opens the door to permanent financing from a traditional lender. Once the property is fully and permanently funded, the investor is free to enjoy the fruits of residual income and increasing equity.
A Solid Return Over Many Years
Pursuing bridge-to-permanent financing gives an investor more opportunities to obtain highly lucrative properties. Each of the properties potentially represents a solid return over many years of ownership. Between residual income and rising property prices, an investor’s return could be substantial. Is there a better way to invest in real estate? That’s up to each investor to decide for himself.
Those who choose to put their money into a buy-and-hold strategy can benefit significantly from hard money and bridge loans. It is in their best interests to develop solid relationships with private lenders offering such loans. Bridge loans are especially attractive because they are perfectly suited to a bridge-to-permanent financing plan that helps grow a portfolio quickly and efficiently.