Bridge Loan Basics
There are numerous types of financing those in the real estate market can acquire. Each one will be advantageous at certain times over others, and it pays off to learn when to use each one. One loan type that seems to be used regularly are called bridge loans. A bridge loan is the process of obtaining temporary financing to help bridge the time period between renovating an asset and obtaining long term financing. The funds from these loans can even be used to help fix up, and stabilize the asset while collecting rents. Once you can provide an accurate rent roll to lenders showing cash flow. Then they can provide you with long term financing.
Pros and Cons of Bridge Loans
Pros
There are many benefits to using a commercial bridge loan. For starters, it allows the borrower the flexibility to purchase an asset without having stabilized income. Traditionally, banks will only lend on assets that are income producing. However, Banks that offer bridge loans are very particular and still rely on the borrowers personal income to service the debt. Bridge lenders are much more flexible and rely on Loan to value rather than cash flow. Usually these terms are interest only, which helps alleviate the debt service payment. In the meantime this gives you enough time to fix up and rent out your property before refinancing or selling your property. The main benefit you receive from a bridge loan is forcing appreciation and equity into the deal. You can then turn around and refinance the property and cash out the forced equity.
Less Paperwork
Another reason why commercial bridge loans are so popular with real estate investors is because of the amount of paperwork required. Most real estate investors have more than one LLC to purchase real estate. For liability issues or tax purposes, having multiple entities for your real estate investment is the smart way to go. However, when trying to find financing this can be difficult. When it comes to traditional financing, banks sometimes require that you show them three years of tax returns and an interim financial statement for each entity. You can imagine how hard and frustrating this could be if you had 5+ entities. When it comes to a bridge loan, the lender is only focused on that asset. So the only paperwork they need to see is based upon that specific property.
Faster Time to Close
When it comes to the acquisition or refinance of a property, time is very crucial. That is why a bridge loan is so attractive to investors. With less documentation needed to be provided it allows the underwriters to speed up the process. In most cases lenders can submit, approve and close a loan within two to three weeks. This will give you an advantage going into the deal knowing that you have the ability to close fast and with minimal headaches.
Cons
Even if a commercial bridge loan sounds like a smart plan, there are certain downsides to consider. For a short period of time, the owner of the property is having to pay high interest and fees on the loan while stabilizing the property. You also have to go out and find tenants to rent out your property. The bridge loan you acquire is usually only 1-3 years in length. You have to make sure you are setting a schedule and meeting requirements so that your project stays on track. For some people, that may cause a certain amount of stress. Make sure to look at your financial situation and receive the advice of a financial professional to see if bridge loans are right for you before getting one.
Fee’s
It is very important to remember there are various fees that come with these loans you will need to make. In addition to interest, you will also need to pay notary, recording, title policy, escrow, appraisal and administration fees. Also, there will be loan origination fee, legal fee and sometimes there could be a prepayment penalty.
In conclusion, As with all other types of loans, there will be times when a bridge loan will be great. There will also be times when you need to avoid getting one at all costs. It is vital to look at your personal situation to see what will work ideally for you. Bridge loans can be helpful under certain circumstances, so get one if you believe it will be an asset.
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