Is a Commercial Real Estate Bridge Loan Right for You?
If you’re looking to fund a property investment, a commercial real estate bridge loan is an option worth considering. Bridge loan financing allows you to raise capital quickly, serving as a “bridge” or a way to “fill the gap” between a short-term loan and a more permanent option. Whilst bridge financing attracts higher interest rates and fees, they offer a multitude of benefits that can fast-track your portfolio growth and increase your wealth.
So, what can you use a commercial real estate bridge loan for, when might you need one and what are the pros and cons of choosing short-term bridge financing over a traditional loan?
What Can You Purchase with a Commercial Real Estate Bridge Loan?
A commercial real estate bridge loan is specifically intended for the purchase or refinancing of an investment property. This may include:
Apartment or condo buildings
A bridge loan lender can offer financing for all these property types, as well as resort financing, hotel financing, motel financing and hospitality financing.
When Might You Need a Commercial Real Estate Bridge Loan?
A commercial real estate bridge loan isn’t permanent financing. They are typically designed to be in place for just a few months, up to a maximum of two or three years. There are a number of circumstances, you might find yourself in need of fast financing. For instance:
You want to purchase commercial real estate but won’t have the available cash until you’ve sold an asset you already own
You don’t want to miss out on an immediate opportunity to purchase a commercial property but intend to later refinance with a more affordable long-term option
You’re renovating a commercial property and it’s taking longer than expected but your balloon payment is due
You need to stabilize a commercial asset, such as an office building, to ensure you qualify for a traditional loan
You want to make improvements to a property you own in order to attract higher rent and therefore increase your long-term gross rental income
You cannot get traditional financing with a bank due to your personal situation, whether it’s your employment status, your reported income or your credit history
A commercial real estate bridge loan with an asset-based lender will get you money fast, whether it’s to refinance an investment you already own or to fund the acquisition of a new one.
Why Choose a Commercial Real Estate Bridge Loan Over a Traditional Loan?
In addition to bridge loan funding potentially being the right choice based on your circumstances, they offer many advantages over a traditional loan. Some of these include:
Faster closing times. Traditional loans can take a long time to be underwritten and processed. This can lead to missed opportunities. A bridge loan can close in a matter of weeks, which means you can move quickly and sort out alternative permanent financing when the bridge loan has closed.
Simpler loan qualification requirements. Generally speaking, it’s much easier to qualify for a commercial bridge loan. Whilst bridge loan lenders may have credit score minimums, these will be much lower than traditional lenders. They also take other factors into account such as your debt-to-income ratio as well as the viability of your business plan, your track record for success with previous projects, and other assets you already own.
More flexible use of loan option. When it comes to funding a commercial investment property in need of repairs, you’ll find that traditional lenders usually won’t provide finance after a renovation is done and the property is leased. Asset-based lenders think outside the square and are much more flexible with how the bridge loan can be used. Therefore, they will happily provide financing for a commercial rehab or fix and flip project.
No prepayment penalty. Since bridge loan lenders typically want the loan paid off quickly, there won’t usually be a prepayment penalty. This means if you want to pay off the entirety of your loan before the payback period – typically three months to three years – you’ll be able to so without incurring fees or other penalties.
Flexible structures. Because a commercial bridge lender isn’t restricted in the same way a traditional lender is, they can offer flexible loans that are structured to meet your specific needs.
The Risks of a Commercial Real Estate Bridge Loan
Of course, as with any loan, there are downsides to consider. The most obvious of these is the higher interest rates and fees. A hard money bridge loan’s fees and interest rates are much higher than a traditional loan, which is essential to mitigate the risks involved for a commercial real estate bridge lender. You’ll likely incur closing costs and fees such as appraisal and escrow fees, title policy costs, administration and loan origination fees.
Additionally, the property you are borrowing against will be used as collateral for the non-recourse bridge loan, as well as other properties you own, putting them at risk if you don’t make repayments.
What to Look for in a Commercial Real Estate Bridge Loan
When choosing both a bridging finance lender and a short-term bridge loan, there are many things to keep in mind. For instance:
What is the funding timeframe? How quickly can the bridge loan be issued? Generally, bridge loan providers can issue a commercial mortgage bridge loan within weeks or even days, so you can move immediately on a deal that’s too good to pass up or quickly meet a pressing obligation.
What facilities does the bridge loan company offer? A good bridge loan for commercial real estate will offer the borrower the option to increase the loan balance during the loan term for the purpose of paying for capital improvements, tenant improvements or leasing commissions. The advantage of this is keeping interest repayments down, as opposed to lump sum traditional loans which incur ongoing interest.
Is the loan flexible? Many bridge lenders will tailor their loans to meet your needs.
Ready to Apply for a Commercial Bridge Loan?
If you want to learn more about bridge loan funding or are ready to apply for a bridge loan, get in touch with RSC CONSULTING LLC We are a renowned bridge lender offering a range of flexible equity bridge loans, and can help tailor a solution to your specific situation.