Sourcing immediate funding for your new commercial property acquisition can be stressful, especially if banks are taking too long or demanding too many papers causing delay after delay. The stress can be unbearable. Loan programs are abundant and options for many loans are advertised everywhere...with tons of promises about rates, fees and especially loan closing timeframes, however, there is one other option that might be better suited to your situation. That is another kind of loan called commercial bridge loan. Here is what you need to know about bridge loans to acquire or even refinance your apartment building, land, industrial or retail building:
What is a commercial real estate bridge loan?
A bridge loan is short-term financing used by a borrower until he or she can obtain permanent financing. In the situation of you and your perfect investment property, taking out a bridge loan would help you buy that dream asset before you sell your current real estate. The goal is to acquire the new asset before selling the old asset or to get a quick loan instead of waiting 3 months to get bank financing.
Why Commercial Bridge Loan
Oftentimes commercial bridge loans are used when a property needs significant renovation before it will qualify for permanent financing. Bridge loans are perfect for ongoing construction and rehabs. Once completed, banks will be happy to make the permanent loan. Other reasons a borrower might want to consider a bridge loan are:
Low occupancy rates in the property or NO occupancy are often called an “unstable asset”.
The borrower’s credit profile needs improving.
The borrower can’t wait for permanent financing due to contract stipulations.
Incomplete ownership or project team in place or even a partner buy-out.
Commercial bridge loans can be used for the purchase or refinance of office buildings, hotels, retail property, multifamily housing, including apartment complexes, and even for raw land that will be developed for commercial purposes.
How a bridge loan works.
A bridge loan can be issued by a few specialized banks or a private lender such as Private Client Investments, Inc and can be structured in different ways, but generally the money is used to pay off your old mortgage or trust deed. Your agreement may require you to make monthly payments on the bridge loan, or it might be structured as upfront or back-end lump-sum interest payments. The bridge loan is meant to be short term that might last from a few months up to as long as a year. Sometimes bridge loans are referred to as “gap loans”.
To help you understand what a bridge loan might look like and how it might be used, here is an example: You own a building worth $1,000,000 and you still owe $250,000 on it, and you're going to buy a $500,000 building, you might take out a $500,000 bridge loan using your $1mm asset as collateral. You have used your equity in your big asset to get the money to pay all cash for your new asset. Once closed, you can go back to your bank and get a permanent loan on the second asset and take that money to pay down your bridge loan. The main thing is that you did not have to wait a long time and go through a bunch of issues with the bank and could close immediately with your bridge loan.
How Much Can You Borrow On A Bridge Loan?
In general, in a bridge loan you may borrow up to 70% of your asset’s value, but no more. Interest rates and fees are quoted after a loan application is received and underwritten.
The benefits of bridge loans
A homebuyer can buy additional real estate while selling an existing asset on the market with no contingencies.
Might gain a period of payment free months.
Can still buy a new asset even after removing the contingency to sell under certain circumstances.
Acquisitions for any assets are immediate. Very little qualifying.
Sellers like quick, cash closings.
The Cons of Bridge Loans
With a higher interest rate, bridge loans tend to be more expensive.
To qualify, borrower must have a sizable equity and a good standing credit rating.
The stress of handling two mortgages at once plus the bridge loan interest if your home takes longer to sell than anticipated or other unexpected delays.
In summary, bridge loans are an option for you to consider when purchasing new real estate. At Private Client Investments, we will walk you through all your options and discuss the consequences in depth to help you make the decision that’s best for you.
Ready to learn more about the bridge loan process? Contact us to explore a variety of topics on all aspects of real estate financing, investments, buying and selling.