Why short-term bridge financing matters for fix-and-flip investors

Short-term bridge loans let investors move quickly on undervalued or distressed properties when conventional financing is too slow or restrictive. They focus on speed and collateral (the property), not long credit histories, and are structured for short holding periods—typically 3–24 months. In my practice helping flippers and small portfolio investors, I’ve seen bridge financing convert time-sensitive leads into completed profitable flips when an exit strategy is clear and conservative underwriting is used.

Sources and regulation: every investor should review consumer-protection guidance and tax implications before borrowing. The Consumer Financial Protection Bureau has resources on mortgage and high-cost lending practices (CFPB), and the IRS provides tax rules that affect how flip profits are reported (IRS). Always verify lender licensing and state-specific rules for nonbank and hard-money lenders.

Key terms every investor must understand

  • ARV (After Repair Value): The expected resale price after completing renovations. Lenders base maximum loan size on ARV or on loan-to-cost (LTC).
  • Loan-to-Value (LTV): Loan amount divided by the as-completed value (often ARV for bridge loans).
  • Loan-to-Cost (LTC): Loan amount divided by total acquisition-plus-rehab cost. Many bridge lenders prefer LTC because it aligns incentives for rehab control.
  • Points/Origination Fees: Upfront fees expressed as a percentage of the loan amount (commonly 1–3% but can vary).
  • Interest Rate: Annual rate; short-term bridge rates commonly range from about 6% to 15% depending on lender, borrower profile, and market (rates vary by state and lender).
  • Draw Schedule: How and when rehab funds are disbursed—lump sum at closing vs staged draws tied to inspections.
  • Exit Strategy: The plan for repaying the loan (sale, refinance to permanent financing, or paydown using other capital).

How lenders underwrite short-term bridge loans (what they look for)

Lenders evaluate three basic things: collateral (the property and ARV), borrower capacity/track record, and the exit strategy. Expect diligence to include:

  • A proposed scope-of-work and detailed rehab budget (line-item costs).
  • ARV support: recent comps and an appraisal or broker price opinion (BPO).
  • Proof of funds for initial equity or a deposit.
  • Contractor bids or estimates and a timeline.
  • Clear exit: sales comps, pre-listing plans, or a permanent loan pre-approval if refinancing.

Some private and hard-money lenders accept weaker credit if the borrower shows strong experience and adequate equity; others require higher FICO and additional guarantees.

How to compare bridge loan offers — a practical checklist

  1. Total cost of capital: calculate interest + points + fees + appraisal/title/escrow costs. Use a single-period comparison for your expected hold time.
  • Example calculation: 12-month loan, $200,000 loan amount, 10% annual interest, 2 points origination (2% of loan).
    • Interest (approx): $200,000 × 10% = $20,000 for the year.
    • Points: $200,000 × 2% = $4,000 paid at closing.
    • Effective cash cost (ignoring other fees): $24,000, which equals a 12% of-the-loan effective cost for that 12-month hold.

  1. Loan structure: does the loan require interest-only monthly payments, rolled interest, or deferred interest (which capitalizes)? Deferred or rolled interest increases payoff and risks compounding costs.

  2. Draw control: staged draws tied to inspections reduce misuse of funds and protect your profit margin. Lump-sum draws shift rehab risk to you.

  3. Loan cap on rehab vs ARV: lenders that use LTC (e.g., 65–75% LTC) may offer better alignment for rehab projects than lenders who lend strictly on ARV.

  4. Prepayment penalties and extensions: check whether early repayment is penalized and how extensions are priced if your sale is delayed.

  5. Coversion/refinance options: if your plan is to refinance into permanent financing, confirm timing and underwriting requirements.

  6. Personal recourse: many bridge loans are recourse loans (borrower personally liable). Non-recourse options are less common and cost more.

  7. Speed to close: if you need to move fast, confirm true closing timelines and required documentation.

Common fee lines and how they affect returns

  • Origination points (1–3% typical): immediate hit to cash-on-hand.
  • Underwriting or processing fees: $500–$2,500, common with private lenders.
  • Daily interest: some lenders calculate interest on a daily basis; that can matter when closing dates move.
  • Inspection and draw fees: charged per draw or inspection and add to project costs.
  • Servicing or exit fees: charged at payoff or sale.

Ask for a Good Faith Estimate or fully itemized fee sheet and include these numbers in your pro forma.

Red flags and lender warning signs

  • Vague or missing loan documents that don’t state default remedies or fees clearly.
  • No written draw schedule or a lender unwilling to provide inspection reports backing draws.
  • Promises of unusually low rates that lack supporting underwriting or an unrealistic quick close promise without verifying title/reviews.
  • Lenders asking for deposit checks made out to individuals or requiring nonstandard escrow handling.

If you see these signs, pause the deal and consult counsel or a seasoned investor.

Example underwriting comparison (quick math)

Scenario: buy for $150,000, rehab $60,000, projected ARV $300,000, plan to hold 9 months. You receive two offers:

A. Lender A: 65% LTC, interest 9% (interest-only monthly), 2 points, staged draws.
B. Lender B: 75% ARV, interest 12% (deferred interest capitalized at payoff), 1 point, lump-sum draw.

Loan sizes:

  • Using LTC: max loan = (150k + 60k) × 0.65 = $136,750 (Lender A)
  • Using ARV: max loan = 300k × 0.75 = $225,000 (Lender B) — but Lender B’s basis for rehab control may be weaker.

Why this matters: Lender B offers a larger loan but with deferred interest and higher rate—if the project is delayed, interest compounds and can erode profit. Lender A demands more owner capital but gives staged draws and predictable monthly interest. Depending on your cash availability and contractor reliability, the safer option may be A.

Taxes and accounting considerations

Flip profits are typically treated as ordinary income by the IRS, not capital gains, because the activity is considered inventory for a dealer (see IRS guidance—consult a tax professional). Keep disciplined records for acquisition cost, improvement costs, carrying costs, and closing costs. Track interest expenses and fees: some are deductible under business expense rules; others factor into inventory/cost of goods sold. Check IRS rules and consult a CPA for transaction-specific tax treatment.

Operational tips and best practices (from my practice)

  • Build a conservative budget with a 10–20% contingency on rehab estimates.
  • Verify contractor licenses, insurance, and lien releases at every draw.
  • Order title insurance at closing and resolve any title exceptions before you borrow.
  • Pre-vet exit options: interview local buyers’ agents and get comps before you close on financing.
  • Use a project management tool to align contractor milestones with lender draw inspections.

Useful internal resources and further reading

  • For a primer on how bridge loans work in real estate, see our guide on how bridge loans work for real estate: how bridge loans work.
  • For help structuring the exit and timing the refinance or sale, read: structuring the exit.

Final checklist before you sign

  • Confirm the total cost for your expected hold period (interest + points + fees).
  • Ensure draws align with contractor milestones and that inspections are defined.
  • Verify lender licensing and obtain the final loan agreement for attorney review.
  • Confirm the exit strategy with backup options (short-term rental, partner capital, or refinance).
  • Build a contingency fund and document all estimates, bids, and permits.

Professional disclaimer: This article is educational and reflects my professional experience helping fix-and-flip investors evaluate short-term financing. It is not individualized financial, legal, or tax advice. Consult a licensed lender, real estate attorney, and CPA about your specific situation. For consumer protection and federal guidance, see the Consumer Financial Protection Bureau (CFPB) and the Internal Revenue Service (IRS).

Authoritative sources: Consumer Financial Protection Bureau (consumerfinance.gov), Internal Revenue Service (irs.gov), and relevant industry commentary (Investopedia).