Dan Vinokurov


Bridge Loans

Bridge Loans

Bridge loans are also referred to as bridge financing, interim financing, swing loans, or gap financing. They’re a short-term financing tool that lets you borrow against your current asset. Homebuyers often take out a bridge loan against their current home to finance the down payment on their new home. Bridge loans typically let you borrow money for up to a year. Interest rates on bridge loans typically fall between 8.5% and 10.5%, which means they’re more costly than traditional forms of long-term financing. In this article, we’ll explain how bridge loans work, who offers them, the pros and cons, and whether they’re a good option for your financing needs. Different Types of Bridge Loans Bridge loans aren’t classified into specific categories. The differences between bridge loans often center around repayment method, loan term, and interest rate. For instance, there are different ways to repay the interest on your bridge loan. Some lenders prefer lump-sum payments at the end of the loan term. Others prefer monthly payments. Pros of Bridge Loans Although they’re more expensive than other forms of long-term financing, bridge loans present multiple benefits. Short time frame Bridge loans are a strictly short-term financing option. Unlike mortgages or college tuition loans, bridge loans require you to pay back your debt over a short amount of time. During that shorter period of time, it’s less likely that you’ll suffer financial hardship that makes it impossible to repay your loan. Speed The application and underwriting process for bridge loans is generally faster than it is for traditional loans. Additionally, it’s relatively easy to qualify for a bridge loan, assuming you qualify for a mortgage to purchase a new house. Flexible repayment options Bridge loans let you choose your repayment option. You can either repay your entire bridge loan before or after securing your permanent financing. If you repay your bridge loan before securing your permanent financing, your payments will be structured in a way that lets you fully repay your loan over a certain time period. Assuming you make your payments on time, your credit rating will improve, and you’ll qualify for long-term loans you’d otherwise be ineligible for. If you repay your bridge loan after securing your permanent financing, then a portion of your long-term funding will go towards repaying your bridge loan. Non-recourse Bridge loans are non-recourse loans, which means the lender can only seek repayment of the loan through the actual property. As the borrower, you’re not personally liable for repaying the outstanding loan balance. If you can’t repay your loan, the lender will only be able to claim your property as collateral. Cons of Bridge Loans Despite their benefits, bridge loans present a few disadvantages. Large payments Bridge loans require you to repay your loan over a shorter period of time than a mortgage or other long-term financing. That means you’ll pay back your bridge loan over larger payment installments. Bridge loans also tend to come with higher interest rates than long-term financing solutions. Less flexibility from lenders Because bridge loans are short-term loans, lenders are likely to be less flexible when it comes to payments. If you’re behind on your payments, be prepared for higher late fees and steeper penalties. Relies on more permanent financing Bridge loans rely on more permanent financing—they’re not a long-term financing solution. However, long-term financing isn’t always available. For instance, if the housing market collapses, you’ll be left without funding, scrambling to repay your bridge loan. Cost Last but not least, bridge loans can be expensive. In fact, bridge loans usually cost more than a traditional mortgage. Interest rates on bridge loans depend on i) your credit score and ii) the size of your loan. More on this below. Sound finances Lenders typically approve bridge loans if you present both strong and stable finances. Oftentimes lenders require a minimum credit score (the exact number might vary) and a certain debt-to-income ratio. Overall, if your financial situation isn’t solid, you’ll struggle to qualify for any type of bridge loan. Bridge Loans for Businesses Yes! Bridge loans aren’t just for private homeowners. Businesses can also use bridge loans to immediately purchase real estate or fund a short-term cost. Just like regular bridge loans, business bridge loans typically come with higher interest rates, but they allow quick access to capital than traditional financing. Some situations where your business might use a bridge loan include: To cover operating expenses while your business finalizes long-term financing. To obtain funds for an immediate real estate purchase. To capitalize on limited-time offers on business resources, inventory, etc. Bridge Loans Lenders You can obtain a bridge loan through a variety of different lends: banks, credit unions, and other financial institutions. That said, it’s most common to secure a bridge loan from your current mortgage provider. If you’re interested in a bridge loan, make sure you call your lender first. Additionally, while you search for a financial partner, avoid lenders who promise quick access to capital, lenders who charge high fees, or lenders who don’t have a quality track record. Bridge Loan Costs Bridge loans aren’t cheap. Although they’re a great way to obtain temporary financing for your new property, remember that bridge loans usually cost more than a traditional mortgage. Interest rates on bridge loans depend on i) your credit score and ii) the size of your loan. Overall, interest rates on bridge loans range from the prime rate (3.25%) to 8.5% or even 10.5%. Interest rates on business bridge loans range even higher, typically from 15% to 24%. In addition to your interest rate, you’ll need to pay legal and administrative fees, along with closing costs. Closing costs and fees for bridge loans hover around 1.5-3% of the total loan amount. These costs often include the following: Loan origination fee Appraisal fee Administration fee Escrow fee Title policy costs Notary fee Before you commit to a bridge loan, remember to consider all the associated costs! Bridge Loan Alternatives If you can’t access long-term financing, bridge loans can

Delaware Limited Liability Company – Real Estate Guide

Most lenders require real estate investors to form a Delaware LLC specifically for the property or properties on the loan or line of credit. A Delaware LLC protects both the borrower, lender, and the assets. Most private lenders will require borrowers to form a new business entity. Especially private lenders that deal with large real estate loans. The most recommend business entity by lenders is a Delaware LLC.

Individual vs Entity

Real estate investors applying for a mortgage on a single property aren’t required to form a business entity when going through the bank. However, individual investors can’t seek a loan through a private lender as most
private lenders will require a newly formed business entity.

Entity Types – Real Estate Guide

Real estate investors can benefit tremendously from the formation of a business entity such as an s-corporation, limited liability company, and special purpose entity.

Capitalization Rate (CAPR) Definition

The capitalization rate is a metric in the form of a percentage used to reveal the rate of return of the investment property over a one-year time span. The CAP rate is shaped by the net operating income and the appraised value of the property.

Industrial Real Estate

What is Industrial Real Estate? Industrial real estate consists of properties used to produce, store and distribute goods produced such as warehouses and fulfillment centers. What should you know about investing in industrial real estate? Pandemic: Industrial real estate was one of the greatest performing asset classes throughout the COVID-19 pandemic. E-Commerce: Investors have benefited tremendously from the rise of e-commerce as warehouse development has increased exponentially. People are increasingly shopping online which increases the demand for warehouse space to store and distribute these goods. Vacancy: Investors have seen historically low vacancy rates in this asset class since the rise of e-commerce. E-commerce will only continue to grow, and industrial real estate will benefit from this growth. Appreciation: E-commerce has been the leading contributor to industrial real estate’s rapid appreciation growth. The U.S. didn’t have nearly enough warehouse space available which made space scarce and property values high. How can you invest in industrial real estate? Real Estate Investment Trusts (REITs): REITs make owning real estate accessible to the average investor. REITs are companies that focus on acquiring and managing real estate investment properties. Certain REITs focus on acquiring and managing industrial real estate. An investor can purchase an industrial real estate focused REITs shares in the stock market and become a partial owner. The shareholder will benefit from the property’s appreciation and rental income through the stock’s growth and dividends. Examples of Industrial Real Estate focused REITs Duke Realty (DRE) is a REIT that invests in industrial real estate. The trust’s market capitalization sits at $15.6 billion with 534 properties (majority warehouses) and tenants such as Amazon and UPS. DRE offers a 2.43% dividend yield. Terreno Realty (TRNO) is a REIT that invests in industrial real estate. The trust’s market capitalization sits at $4.05 billion with 222 properties in New York City, New Jersey, San Francisco, Los Angeles, Miami, Seattle, and Washington D.C. TRNO offers a 1.97% dividend yield. Innovative Industrial Properties (IIPR) is a REIT that invests in industrial real estate. The trust’s market capitalization sits at $4.12 billion with operations in 17 states. IIPR offers a 3.06% dividend yield.

Non-Owner-Occupied Investment Property

What is a non-owner-occupied investment property? Non-owner-occupied means the owner of the investment property doesn’t live in one of the units nor uses it as their primary residence. Lenders use the term non-owner occupied when analyzing 1-to-4-unit investment properties. Non-owner-occupied investment properties require insurance before the landlord can move tenants into the property. Why do lenders care if an investment property is owner occupied? Lenders want to ensure that the property is cash flowing at its maximum potential. If the owner of the property is occupying one of the units then the property is missing out on a unit that could be producing recurring rental income. This classification helps lenders issue the correct interest rate as they want to be properly compensated for the risk they take when lending money to a real estate investor. How is non-owner occupied seen as a negative? Although lenders want to see an investment property cash flow at its maximum potential to limit the risk of lending to this investor, when an investor lives at the investment property, the probabilities of defaulting on a loan decrease. Therefore, the lender’s risk decreases, and the borrower’s interest rate decreases. Properties that are non-owner occupied have a higher probability of defaulting which is followed by a higher interest rate for the borrower. Occupancy Fraud Due to the fact that interest rates are higher for non-owner-occupied investment properties, investors will attempt to classify their property as an owner-occupied investment property to try and achieve a lower interest rate. This is considered occupancy fraud and the borrower, loan and property can face serious consequences such as large fees. Benefits Non-owner-occupied investment properties allow for a greater cash flowing property, increase in diversification, and return on investment. In turn, the investor will be able to pay off the property much faster than if the property were not cash flowing at its maximum potential.

Multi-Unit Rentals (Duplex, Triplex, Fourplex)

What are multi-unit (2-4 unit) investment properties? Multi-unit investment properties are residential assets with two to four units in a single property. For example, duplexes are two-unit properties, triplexes are three-unit properties and fourplexes are four-unit properties. What are duplexes, triplexes and fourplexes? Duplexes are multi-unit rentals with two to four units under one rooftop. Each unit has a private entrance. The living spaces are typically split equally with a similar square footage. Tenants tend to favor 2–4-unit rental properties over apartment buildings as they offer more privacy since these properties only house up to four tenants. What is the difference between a duplex, a triplex and a fourplex? These three property types fall under a multi-unit (2-4 unit) property type. The three different property types don’t differ significantly. The biggest difference is the increase in income sources per property. As income sources increase, diversification, profitability and return on investment increases, all while risk decreases. Investors are attracted to this real estate property type as it offers more than one passive income source under one roof. What is house-hacking? New investors favor these three property types as they can house-hack the property. House-hacking means the owner lives in one of the units and rents out the remaining units. The owner is essentially living on the property for free as long as the other units generate enough rental income to cover the monthly mortgage alone. House-hacking also allows first time buyers to secure a lower interest rate and lower down payment as they will be living on the property. This is an easy and affordable way for new investors to get started in real estate. Where can investors find these investment opportunities? Investors can find duplex, triplex and fourplex investment opportunities through numerous sources such as: Zillow Redfin MLS Opendoor Wholesalers

Special Purpose Property

What is a special purpose property? A special purpose property is a property that has limited options for use. A special use property may be designed and built for only one specific purpose. A few examples of special purpose properties: religious buildings, public and private schools, hospitals, and railways for a transportation system. What do investors need to know about a special use property? Investing in a special use property is a long and difficult process as convincing a city to approve a proposal and acquisition is challenging. Investors should be aware that a special use property could require a significant amount of investment to adjust the property to the investor’s intent. This could decrease the return on investment, the profitability of the project and increase the project’s duration and risk. Lenders view these projects as high-risk deals and demand a higher interest rate. Pricing the property Special use properties don’t typically have any comparables to accurately price the property. The appraiser will have to approach the project with a unique strategy to try and give the most accurate price possible. The appraiser will value the land, building, equipment on the property, and intangible assets separately. Eminent Domain Investors should also be aware of the government’s right to seize private property for public use. Investors run the risk of the city demanding the previously special use space back. Historically, the government has paid owners below market value prices when exercising their right to eminent a property. For example, let’s say your home is in an area where the city needs to put a metro system. The city can eminent domain the property and purchase your home to build the metro system. Additional Examples of Special Purpose Properties Amusement parks, car wash properties, cemeteries, sports arenas, wineries, marinas, golf courses, gas stations, funeral homes with crematoriums, all types of health or medical facilities, farms, dormitories, railroads, and cold storage facilities.

Raw Land

What are the types of raw land investments? Investors can buy raw land that will be used in the future for residential development, commercial development, grow crops, mineral production, timberland, livestock-raising, orchards, recreational land, vineyards, vegetable farmland, industrial development, parking spots, etc. Why should investors purchase raw land? Purchasing land can produce a tremendous return on investment. Why? Land is scarce. For example, think about the previous owner of the land the Staples Center sits on. Imagine the payout that owner received when the Staples Center approached him with the intention of buying his land for development. The goal is to buy land in a prime upcoming market with population growth and metrics that show signs of future economic prosperity. Why? This will allow the investor to get in at a discounted price and benefit from the value of the land appreciating over time. How to invest in raw land? Investors can invest in raw land with numerous different strategies. The first strategy is called buy and hold which means investors will acquire a parcel of raw land and hold it until they can sell it for a higher price. The second strategy is called flipping land which means investors acquire raw land and increase their property’s value by preparing the raw land for a development project. Real estate developers pay big money for raw land that is ready to go for a development project as it saves them time and money. The third strategy is buying raw land to develop the property. This strategy is more common amongst experienced real estate developers. How can small investors invest in raw land? Investors who aren’t capable of allocating the capital to acquire a piece of land can still benefit from these opportunities with the purchase of Real Estate Investment Trust (REIT) shares. As a shareholder, you will benefit from the land’s appreciation and dividends. Real Estate Investment Trusts (REIT) Vanguard REIT ETF (VNQ) offers small investors the opportunity to be invested in a diversified portfolio of raw land developments in different property types. The VNQ ETF offers investors a dividend yield of 4.03%.