Residential Transition Loans (RTL Loans)

by Asset Based Lending | Dec 20, 2024 | Cash Out Refinance, Fix And Flip, New Construction

Investing in real estate is a great way to build long-term wealth. But unless you buy a turnkey property, it usually involves some transitional work, such as renovation or construction.

Fortunately, you can finance capital-intensive construction projects with residential transition loans (RTLs). In this article, we’ll cover what they are, when to use them, and how to get one.

What Is a Residential Transition Loan (RTL Loan)?

A residential transitional loan (RTL loan) is a short-term bridge loan designed to bridge the gap between when a property is first purchased and when it is resold or leased 12–18 months later.

Typically, investors use this time to construct or rehab a home while making interest-only payments. That’s why it’s often called a fix-and-flip loan or new construction loan.

Once the loan balance is due and the project is complete, the loan is paid off or refinanced.

When to Use a Residential Transition Loan

A residential transition loan can help in many scenarios:

Fix and flips: Renovating a distressed property to sell for a profit
New construction: Building a new house on vacant land
BRRRR strategy: Renovating a distressed property to rent out
Cash-out refinance: Extracting equity from an existing property to invest elsewhere (e.g. other property purchases or renovations)
Time-sensitive acquisitions: Securing property quickly to beat the competition while you arrange for long-term financing

Benefits of Residential Transition Loans

Residential transition loans have many benefits:

Fast and Flexible Funding

RTL lenders process loans faster than traditional banks. This is because they face fewer regulations and prioritize the value of the collateralized property over the borrower’s income or credit (though these may still be factors).

For example, ABL pre-qualifies borrowers within a day and funds them in as few as three days, making it easier for borrowers to seize deal opportunities before they disappear.

Scale Your Portfolio

RTL loans let you scale your real estate portfolio faster. Instead of waiting to buy your next property until you have enough cash, you can secure it for a fraction of the cost.

Then once you’ve stabilized the property, you can put the property’s rental income or equity toward another down payment and repeat until you’ve amassed a real estate empire.

Maximize Potential Returns

A residential transition loan can boost your investment returns. For example, assume a fix-and-flip property costs $100,000 and resells at $200,000 after $50,000 in renovation costs for a $50,000 profit.

By financing the deal with an RTL loan, you can earn a $50,000 profit while risking less money. Instead of paying $150,000 upfront, you could pay only $30,000 (20%), increasing your return on investment.

How to Get a Residential Transition Loan

Now that you know the main benefits of residential transition loans, here’s how to get one:

1. Pre-qualify: This is a preliminary step to see if your planned project meets a lender’s basic criteria. It involves filling out a pre-qualification form with important details about you and the project. ABL offers 100% confidential pre-qualifications with no obligation or effect on your credit.

2. Apply: Once pre-qualified, you can fill out a loan application. This involves providing a more detailed investment and exit plan along with additional documents, such as property records, income statements, credit reports, etc. The lender will also likely commission a property appraisal.

3. Close: If approved, you can close on the RTL loan. This typically happens at the same time you close on the property purchase. Carefully review all the closing documents before signing on the dotted line.

4. Collect: Finally, it’s time to collect loan funds—either as a lump sum or in installments according to an agreed-upon draw schedule (often tied to construction milestones). Meanwhile, you’ll be expected to make regular (interest-only) loan payments before paying off the loan at maturity.

Best Practices for Residential Transitional Loans

Here are some tips to get the most out of RTL loans:

Use a Loan Calculator

A real estate project’s viability depends on many variables. Use a loan calculator to estimate the investment’s return assuming certain project costs, loan terms, and an after-repair value. Be careful not to overleverage your position by taking on too much risk.

Find a Reputable Lender

Shop around for an RTL lender with positive reviews from past clients. For example, ABL has over 500 5-star reviews from satisfied borrowers.

Compare Loan Terms

RTL loans can vary widely in their loan terms, interest rates, down payment requirements, fees, etc. To ensure you get the best deal, compare options. For example, some lenders may charge a prepayment penalty, while others like ABL don’t.

Have a Clear Strategy

Lenders want to see that borrowers have a clear exit strategy, i.e. a plan to sell or refinance the property once the RTL loan matures. By providing a detailed exit plan (or plans), you’re more likely to get approved for a loan with favorable terms.

Prepare for Setbacks

It’s not uncommon for real estate projects to get delayed or run over budget. To avoid running out of funds or time, give yourself a cushion. Create a contingency budget and plan to finish the project before the loan matures in case you run into unexpected roadblocks.

Work with Experts

Take advantage of the expertise of professional contractors, real estate agents, and private lenders like ABL. They can help steer you in the right direction and set realistic expectations for project costs, timelines, after-repair values (ARVs), etc.

Partner with a Trusted RTL Lender Like ABL

Make your next real estate deal a success by partnering with a trusted RTL lender like ABL. We offer asset-based loans for fix-and-flip, new construction, and cash-out refinance projects. Loan terms are 12 months, with loan sizes ranging from $100,000 to $3.5 million or more.