Short Term Real Estate Loans
Real estate investors need access to large sums of money in short periods of time. Often, traditional loans are not viable options for investment projects, as the process of completing this type of financing can take a long amount of time; additionally, the long term repayment period and the penalties for early repayment are not favorable for investors.
Since traditional loans usually aren’t the best solution when investors are interested in making money on a property they purchase – whether via resale or renting – real e
state investors need to have fast access to the funding they require; that’s where short term financing can become an asset.
What is a Short Term Loan?
Short term financing is a form of financing that is specifically intended for business-related purposes. As the name suggests, this type of financing is obtained for a short period of time; typically, the term is one year or less, however, there are short term loans that can have longer terms, but generally, the maximum amount term is five years.
The funding that short term financing provides can be used as working capital, or money that is needed for the daily operations of starting a business. In regard to real estate investing, working capital would be used to purchase an investment property, repair the property, list it for sale and market it, as well as any other expenses required.
Short term financing is particularly beneficial for real estate investors because it provides fast access to funding, which is essential in this industry. Often, large sums of money are needed on an almost instant basis, and short term financing can provide investors with the money they need much faster than traditional loans can.
Short Term Loan Options
There are several types of short term loan that real estate investors can use. Options include:
- Bridge loans. Bridge loans, also referred to as gap financing or swing loans, are short-term loans that offer almost instant access to funding that can be used to purchase an investment property. Usually, real estate investors use bridge loans to purchase a new property while they are waiting for a property that they already own to sell; for example, if an investor is waiting for a property that she flipped to sell but has found a new property that she wants to purchase and doesn’t have the funding available from the sale of the first property, the investor could use a bridge loan to secure the financing needed to complete the new transaction.
- Mezzanine loans. This type of short-term loan is similar to a bridge loan, but often, it also comes with an equity position, or a second mortgage. It’s considered a hybrid of debt and financing and the funding that it provides can be used to finance a new project. For instance, a real estate investor could use the funds to expand a property that he already owns; to repair an apartment building or expand the size of a condominium complex or commercial space. Very little or no collateral is needed; however, interest rates are usually very high.
- Hard money loans. This is the most commonly used type of short term financing. It’s an equity driven loan that is based on real collateral, such as the property that the investor is seeking the funding to purchase. For example, an investor can use the financing from a hard money loan to purchase a bank-owned home, fix it up, sell it, and then use the money made by the sale to repay the hard money loan. There are various types of hard money loans, including construction, multi-family, fix and flip, and owner occupied.
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