Bridge Loans: Fix and Flip, Hard Money
What is a Bridge Loan?
A bridge loan is a loan used to purchase an asset such as real estate for a short period of time. In real estate, the bridge loan bridges the period of time between purchase and sale (i.e. flipping a house for a profit) or purchase and refinance (i.e. rental property investing).
Hard Money vs Private Lender
The term hard money is often associated with lenders who charge excessively high interest rates. The fact is that hard money simply means a loan that is backed by a hard asset. There is no difference between hard money and private money, as someone who calls themselves a hard money lender offers effectively the same financing programs as someone who calls themselves a private lender. The market determines the interest rates, borrowers are free to compare terms and select the most attractive terms. This is why borrower education is so important. For more education, read The Ultimate Guide: Real Estate Private Lenders.
In summary: hard money lenders and private lenders are one in the same. Both provide private loans backed by hard assets such as real estate.
As a matter of public relations, in an effort to shed the connotation of unfair interest rates and predatory business practices, many executives in the private lending industry are championing a discontinuance of terminology including "hard money", "hard money loan", "hard money lender" in favor of the terms "private money", "private loan", "bridge loan", "fix and flip loan", "private lender".
Fix and Flip Loans
Bridge Loans are commonly referred to as "Fix and Flip" loans or "Hard Money" loans. As stated above, these are all the same concept. They're short term loans used by real estate investors to purchase and rehab investment properties. We do not prefer the term "fix and flip" because it is not just fix and flip investors who use this important form of financing. Rental investors use these loans as part of the BRRR strategy of buying, rehabbing, renting and refinancing a property in an effort to
Bridge Loan Interest Rates
With terms typically just 3 to 18 months depending on the scope of work to renovate a property, interest rates for bridge loans are based on the 6 month treasury yield and the 2 year treasury yield which are charted below.
Private lenders typically price bridge loans at the 6 month or 2 year treasury + 5% risk premium. Some lenders price higher than a 5% risk premium based on borrower experience or because they want to maximize returns perhaps due to limited capital or limited competition in their market.
6 Month Treasury Yield
2 Year Treasury Yield
Bridge Loan Terms (Single Family)
| Guidelines: | Single Family Bridge Loans |
|---|---|
| Interest Rates | 2 year Treasury + 5% |
| Origination Fees | 1 to 2 points (% of loan amount) |
| Property Types | Single family (1 - 4 units), townhomes, PUD, warrantable condos |
| Loan Amounts | $50,000 - $25,000,000 |
| Maximum LTV, ARV | 75% |
| Maximum Loan To Cost | 90% of purchase and 100% of rehab |
| Term Length | up to 18 months |
| Minimum Guarantor FICO | 620 |
| Ownership | LLC or Corporation |
| Recourse | Full recourse |
Bridge Loan Terms (Multifamily)
| Guidelines: | Multifamily Bridge Loan |
|---|---|
| Interest Rates | 2 year Treasury + 5% |
| Origination Fees | 1 to 2 points (% of loan amount) |
| Property Types | 5-20 unit properties |
| Loan Amounts | $500,000 - $25,000,000 |
| Maximum LTV, ARV | 75% |
| Maximum Loan To Cost | Purchase: 80% of As-Is Value and 100% of rehab, Refinance: 75% of As-Is Value and 100% of rehab |
| Term Length | up to 24 months, with 6-month extensions |
| Minimum Guarantor FICO | 680 |
| Ownership | LLC or Corporation |
| Recourse | Full recourse, Limited recourse |
