Fix-and-flip is one of several strategies investors lean on to make money in real estate. Among the challenges are financing property acquisition and rehab costs. In the private space, lenders generally have a choice between hard money and bridge loans. Is one better than the other for fix-and-flip projects?
Hard money is generally better in a pure fix-and-flip scenario. On the other hand, bridge loans are more of an edge solution in which an investor is stuck between two assets. Let us look at both and how they apply to the fix-and-flip investment strategy.
Key Differences Between the Two Types of Loans
Hard money and bridge loans are two distinct types of lending despite the terms being used interchangeably. Actium Lending, a Salt Lake City, UT hard money lender that focuses exclusively on commercial real estate, explains that hard money is built for acquiring distressed, off-market, and value-add properties.
Hard money loans are known for fast approvals and funding. They are known for asset-based underwriting, short terms, and higher interest rates.
Bridge loans are designed to cover temporary funding gaps. In a pure fix-and-flip scenario, tying up cash via acquisition and rehab does not create an actual gap. A gap would be more like attempting to obtain a new property while one in the investor’s portfolio is listed for sale.
Why Hard Money Is a Better Fit
Hard money is a better fit in a pure fix-and-flip scenario because it functions more like a conventional mortgage. A hard money loan isn’t a fully amortized 30-year note, but it is a highly structured loan with monthly payments. Most hard money loans are structured as interest-only loans with low monthly payments and the principal payment at the end.
Hard money works extremely well and fix-and-flip for multiple reasons:
- Hard money lenders don’t shy away from fix-and-flips like banks.
- Loans are approved and funded quickly, allowing investors to flip more quickly.
- Loans can be approved without a lot of documentation, thereby increasing speed.
- Some hard money lenders (not Actium) will provide funding for both acquisition and rehab.
Investors essentially have access to the funding they need to move quickly. If you know anything about fix-and-flips, you know how important this is. More than any other type of real estate investment, fix-and-flip relies heavily on speed.
When Bridge Financing Could Work
Bridge loans are not entirely out of the question for fix-and-flip investors. In fact, there are a number of different scenarios in which bridge financing could work in an investor’s favor. For example, consider an investor looking to buy a property that has already been improved. It only needs a few minor fixes here and there. A bridge loan could get him in quickly on a deal that will go to someone else if he doesn’t move fast enough.
Another good scenario for bridge financing is using equity in an existing property to act as collateral for the loan. The investor is essentially cross-collateralizing multiple properties in order to work out an especially lucrative deal. In such cases, the targeted property doesn’t require a lot to get it flipped.
The Lender Ultimately Makes an Offer
Although bridge loans can work in certain cases, a lender ultimately makes an offer based on what is best for its own financial position. Some lenders are happy to provide both hard money and bridge loans. Others will stick with hard-money loans whenever possible. The good news is that lenders have the flexibility to meet almost any investor need if the numbers are right. That is good for fix-and-flip investors who struggle to fund acquisitions conventionally.
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