Bridge Loans: Identify Opportunities for Short-Term Financing
If you want to be competitive in commercial real estate investment, you need to know how to be nimble when purchasing properties. This is a challenge, because real estate lending tends to be slow, since most property purchases are viewed as long-term investments. This attitude also makes lenders prefer to extend this financing to buildings in good repair, because they are a good risk. If you’re buying properties to rehabilitate them, you need loans that are designed for the short-term, and that don’t make stipulations about the property’s condition. Bridge loans are designed for just those opportunities.
The important thing to remember about bridge lending is that it doesn’t have to be strictly used for short-term investments. While it’s optimal for property flips, it can also be helpful if you need to rehabilitate a building before it will qualify for long-term loans. Plenty of investors use bridge products to buy property that needs redevelopment and to execute the improvements, with a plan to refinance into traditional commercial lending instruments at the point where the building is opened to tenants.
There are a few different structures for bridge loans to consider, and they each have their benefits and drawbacks. The most commonly discussed types are short-term, interest-only, secured real estate loans with the principal balance due at the end of the loan term. This is ideal for investors looking to turn properties around and resell them because some lenders will base the loan value on the projected improved property value. It’s not always done, but if you can access that kind of loan, you can invest and make a return on your money while risking very little of your own capital.
Other bridge loan products you might encounter include unsecured loans or hard money loans. These are typically more expensive than other bridge loans, but they have the advantage of not being secured to the property. They can be damaging to a credit report in the extreme if they go into default, but the upside is that your property can’t be repossessed if the loan is not secured with it as collateral. This makes it a sound strategy for investors worried about their risk level if they can afford its higher costs.
All these options for bridge loans are available to commercial real estate investors, so consider your game plan, and remember that you will get faster approvals more reliably when you build a relationship with a regular lending partner. If they already know your business, they already know what you can handle.