Why Investors Are Using Bridge Loans for Their CRE Investments
More and more investors are applying for bridge loans to pay for their commercial real estate investments. To understand why, you’ll need to understand what this type of loan is, and what the immediate benefits are for using it until you can gain more permanent financing.
What a Bridge Loan Is
This commercial loan gives you almost immediate interim financing for a commercial property to help avoid liquidity problems and let you take advantage of quick sales. They usually last between six months and a year until you can obtain a more conventional loan or sell the property after repairs. If you need an extension, lenders are sometimes willing to grant another six months to a year in exchange for a half point to 2 point fee, based on your individual case. Because the loan is short term and high risk, it often has a higher interest rate than one from a traditional lender, but you normally won’t have to worry about prepayment penalties.
The Benefits of Bridge Loans
A bridge loan can give you quick access to short-term funds that you may not be able to access otherwise. Use it to pay an upcoming balloon payment on an existing commercial loan until you get regular financing or purchase a commercial property that is only available for a limited time period and pay it back with your permanent mortgage funds. Basically, a commercial bridge loan is designed to help you finance a real estate deal until you can improve, sell, refinance or lease the property.
If you need an example, think about purchasing a slightly run-down apartment complex in a great area of town. With the right repairs over the next six months, the property could be worth double the money. So, you get a bridge loan to cover the purchase and the construction costs. When you finish the property, you raise the rent and gain refinancing for the new property value which you use to pay back the original short-term loan in full. Then you just sit back and reap the profits.
Bridge loans can be a handy way to make a quick purchase or cover a rehab project for the short-term until you can obtain permanent financing. They fill the gap in cash flow operations until you can finish major improvements, bring in new tenants, or sell or refinance your property. For this reason, they are becoming a more common choice for investors when making commercial real estate investments.