At different times, an investor may find they are in need of special financing to help complete a real estate purchase or new construction project. Two types of loans are most useful for these: a bridge loan and a new construction loan.
These types of loans can help in the purchase of land or structures for investment purposes, but which one is best for the investor depends on the length and status of the project.
A bridge loan is generally considered a shorter-term financing option for an investor planning to purchase a property quickly. This loan allows an investor to move quickly, but it typically has a shorter term, meaning they may have to arrange longer-term financing later.
New construction loans are longer-term financing options used by investors who want to buy land to build on or property with a structure that will be torn down for development. These projects already have construction plans, necessary zoning, and permits issued so the building can begin as soon as possible after the loan closes.
Bridge loans help act quickly, but have limits
While the bridge loan set up before an investor is ready to make an offer to purchase allows quick action, it has its limitations. For example, a bridge loan allows for the purchase of land or property, but often they do not finance construction costs. Investors who set up a bridge loan to buy property will pursue construction financing separately as a long-term solution.
Construction loans cover building costs, long-term financing
Construction Loans are used to finance the cost of building structures, such as multi-family and single-family housing, commercial buildings, offices and industrial developments. Investors with the required documentation to begin construction, such as building permits, can often close quickly on a construction loan. Once the loan is closed, lenders allow the borrower to make construction draws to help cover the costs of building.
Construction bridge loans offer additional financing to complete project
A construction bridge loan provides money for investors who are starting or working on a construction project and need more money for the work. This financing is attractive because it can usually be accessed quickly and allows investors to continue work on an ongoing project.
This is short-term financing used to cover building expenses. The amount of the loan can be based on what is needed to complete the project.
Other factors to consider about financing
Some lenders offer construction bridge loans that provide short-term financing to cover the difference between when a construction loan comes due and when long-term financing is available. Consider a lender that bases the financing on the completed value of the construction project, and not some other value. This can reduce equity and cash requirements, making it easier and less expensive to borrow.
You may also want to find a lender that has experience with broken construction loans, or financing that becomes due before the planned building is completed. In that case, a lender can provide financing for the completed value of the project, rather than the value of the unfinished project. Most lenders will calculate the value based on a structure’s current state, even in its unfinished form. This will make financing more expensive and will likely require an investor to come up with more cash for the project.