Bridge financing is a critical tool in the kit bag of any flipper and developer aspiring to scale their business.
Some flippers and developers are content to work on one property at a time, redevelop it and sell it before searching for their next project.
But circumstances are rarely perfect and many ideal properties primed for redevelopment come onto the market at inconvenient times.
The most successful flippers and developers are constantly planning ahead.
They know the perfect property for their next project is likely to hit the market at the right price while their money is tied up in the flip they are working on.
It leaves them with two choices:
- Spurn the opportunity and hope a similar property emerges when they are looking for it
- Take out bridge financing to secure the property and grow their flipping empire
What is bridge financing?
Bridge financing, also known as a bridging loan or interim financing, is short-term loan that allows someone to borrow money to purchase a new property before selling an existing one.
It is commonly used by home owners who buy a new house before the sale of their own.
But in the world of real estate development, bridge financing is a valuable weapon to help aspirational flippers and developers grow their business.
It is what separates successful real estate developers on a grand scale from single-property flippers.
It can be used to purchase one or more additional properties to ensure the flipper never misses out on their desired target.
The bridging loan is then discharged as soon as the sale of a flipper’s initial property is completed.
Hard money loan vs hard money bridge financing
Savvy flippers and developers know the smartest way to secure finance for their flipping projects is with hard money rather than via traditional lenders.
Approval can come in as little as 48 hours and is based on a property’s ARV (After Repair Value) rather than the borrower’s credit history.
But how does a hard money loan differ from hard money bridge financing?
The chief difference is that hard money bridge financing is a loan set up over a much shorter term.
It usually entails slightly lower interest rates and fees and a lower LTV (loan-to-value) than the original hard money loan because of the greater uncertainty surrounding the borrower’s exit date and closing of the loan.
Bridge financing is also often issued on the ‘as-is’ value of the property which is typically lower than the ARV.
A hard money bridge financing loan with a well constructed and clear exit strategy is likely to command better terms and a lower interest rate.
Here’s a closer look at how the two loans differ.
Private money (hard money) loan
Typical interest rate: 9-12%
Points/origination fees: 1.5-3.5% of the loan
Term: 1-3 years
Loan-to-value (LTV): 60-75%
Private money (hard money) bridge financing
Typical interest rate: 8.5-11%
Points/origination fees: 1-3% of the loan
Term: 6-12 months
Loan-to-value (LTV): 65-70%
The cost-benefit analysis: When to take out bridge financing
There is a general rule of thumb when determining the merit of bridge financing for flippers.
If the deal is time-sensitive and the cost is less than 30 per cent of the expected net profit of the new flip, it is generally worth it.
When the cost of bridge financing rises above 30 per cent, flippers leave themselves vulnerable to changing market conditions and construction delays.
Either has the potential to eat into or entirely wipe out their profit margin.
Here is a general guide as to when and when not to take out bridge financing.
YES
- When you need cash quickly to secure a bargain property
- When you need cash to buy a new property before selling your current flip
- When permits or your construction loan has been delayed
MAYBE
- When you have little credit but high equity
NO
- When you are holding a property or have an unclear exit strategy
- When you have a tight budget or thin profit margins
Real world scenario
Imagine a flipper has $300,000 locked up in a completed flip that has yet to sell when a new property hits the market.
Bridge financing against the equity in the unsold project allows them to purchase the new property.
Bridge loan: $250,000
Term: 4 months
Interest rate: 10%
Points/fees: 2% ($5000)
Total interest: $8,333
Total bridge financing cost: $13,333
Result: The new flip sells for a profit of $70,000 and the bridge loan is repaid when the first property sells.
Conclusion: The decision to take out bridge financing was comprehensively justified. The actual cost of bridging finance was $13,333 or 19% of the profit generated by the sale of the new flip, leaving a final profit of $56,667.
Common mistakes flippers make when seeking bridge financing
Bridge financing is one of the best ways to grow your flipping empire.
But there are many tripwires that can slash profits and turn the deal into a financial disaster.
Common mistakes include:
- Overestimating After Repair Value (ARV)
- Underestimating selling time
- Having a poor exit strategy or no plan B
- Not accounting for all loan fees and charges
- Underestimating carrying costs such as insurance, property taxes and utilities
- Poor contractor management resulting in costly delays
- Flipping in slow or saturated markets or areas
- Not shopping around for the best bridge financing loan
Need bridge financing? We can help
Bridge financing can be expensive.
But it unlocks the potential for significantly higher profit margins.
It does so by allowing the purchase of desired properties quickly that would not be possible with traditional financing.
What is critical to know is when to seek bridge financing and when to pass and wait for a better deal.
Equidy is like a mentor for flippers and developers in California.
They have an intimate and personal history with all aspects of property development in California and have done so for more than 40 years.
Equidy works closely with their clients to ensure they maximize their leverage and return on investments without putting themselves at unnecessary financial risk.
They do this because they know the business backwards and advise their clients every step of the way to help them eliminate costly delays.
But Equidy is not just a reputable and trusted advisor.
They are also a private money lender who will finance flippers and developers in as little as 48 hours as well as provide bridge financing when new opportunities arise unexpectedly.
They stand by their core belief that anything is possible and they are determined to prove it every single day.
Even in difficult economic times, they love to reward entrepreneurship and strive to help their clients realize their wealth creation dreams.
Equidy enjoys long and established relationships with serious investors, sellers and real estate professionals while leveraging their reputation and trust, using clear communication to minimise the risk to all parties.
Apply now (it only takes a few mins) to book your free strategy call.
