The Basics of Bridge Loans
When borrowing money for commercial real estate, getting the right loan can be challenging. Sometimes it takes a little time to get everything in order for your project. However, you may need to move quickly to take advantage of a time-sensitive opportunity. In these cases, taking out a bridge loan may be the right answer.
What Is a Bridge Loan?
Bridge loans are a form of short-term financing that is designed to be paid off when you secure a long-term loan or remove a prior obligation. They are typically used in commercial real estate when you either need funding quickly to buy a property or want to use an existing property as a down payment but haven’t sold it yet.
As the name suggests, the purpose of a bridge loan is to bridge the gap between your current finances and your long-term financial plan for the property. These loans are designed to move quickly and be paid off after a short timeframe.
Ways To Use a Bridge Loan
There are many ways to use a bridge loan for commercial real estate. These are a few examples:
Hedging Rates: If you ever thought that interest rates might decline in the next 6 months or so, a bridge loan would act as temporary, interest-only financing until the moment was right to convert to permanent financing.
Renovation: Alternatively, you may use one of these loans to renovate one of your buildings. This could allow you to attract more and higher-paying tenants, thus allowing you to pay off the loan promptly.
Flipping: A bridge loan may fit a property flip project. There are other hard money options for this, but bridge financing can be a good solution.
Benefits of Getting a Bridge Loan
There are many great reasons to consider taking out a bridge loan. The most significant is that they are fast-moving and very flexible. This can allow you to take advantage of real estate opportunities. Additionally, they are not necessarily that expensive if you repay them promptly and on time. In many cases, bridge financing is also non-recourse (only the property can be used to repay a defaulted loan).
Drawbacks of Getting a Bridge Loan
Of course, they aren’t without drawbacks. Most significantly, the interest rates and fees are high. Thus, if you hold onto your bridge loan for too long, it can start to become expensive. Additionally, bridge loans are sometimes associated with debt spirals that can threaten your business.
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With the right solution, you could achieve commercial real estate success. Contact one of our Funding Consultants now.
