Borrowing money might not always be desirable, but it can be necessary if not unavoidable. Paying cash isn’t always a possibility. The cost of goods or services may be so high that financing makes sense. Depleting personal funds isn’t always the wisest thing to do. And funds can only be depleted if they exist in the first place. Someone with little or no money may be required to borrow in order to cover costs. Thankfully, the world isn’t going to ever be short of lending sources.
Not every lender, however, approves all the applications that land on a desk. Not every borrower wishes to deal with the terms put forth by a particular lender. Borrowers do maintain the option of taking their business elsewhere. For those borrowers interested in funding for real estate endeavors, bridge loan lenders could be a valuable and viable option.
What are Bridge Loan Lenders?
Bridge loan lenders can be deemed as investors who direct money in the form of loans for real estate transactions. Those not interested in working with a traditional financial institution may discover bridge loan lenders to be a preferable alternative. Contrary to popular belief, seeking funds from a conventional bank isn’t always easy or desirable. Again, access to alternative lending sources allows those interested in funding real estate endeavors to go outside the traditional sources. Projects do not need to stall as a result.
A bank, credit union, or other lending institution might look at a number of different criteria before making a determination to approve a loan. Obviously, the lender looks out for its own best interests and wishes to avoid risk. A bridge loan lender, however, may be willing to take on more risk since such a lender sees issuing a loan as a form of short-term/high-return investment.
An Option for Real Estate Entrepreneurs
Persons in the market for a home aren’t always looking to live in the residence they purchase. Acquiring a “fixer upper” with the intention of repairing and selling the property serves as a classic means an entrepreneur can amass great wealth. If the buyer maintains the capability of performing significant repairs within a reasonable budget, he/she can resell the house at a great profit. The value of the home invariably increases upon completing the renovations.
A traditional mortgage lender, however, may not be too thrilled about approving a loan for someone wishing to flip a home in 90 days. Generally, the dilapidated condition of the home proves to be more than off-putting to a conventional lender.
Traditional mortgage lenders also don’t move as swiftly as real estate entrepreneurs wish. Receiving approval for a mortgage may take several weeks. Procuring approval in a day or two likely would be totally out of the question. Entrepreneurs could lose out on a good deal due to the delays inherent with standard mortgage approval. Going outside the traditional system keeps investment doors open for those relying on making a move with no delays. Bridge loan lenders might be the ones holding open those doors.
Drawbacks with Bridge Loan Lenders
Nothing in life is perfect. Bridge lending isn’t excluded from this fact. The two drawbacks associated with this type of lending would be the interest rates and the term of the loan. Interest rates come in at high levels: 10% to 12% isn’t uncommon. Also, the loans require repayment within six months to one year. Bridge loan lenders aren’t in the business of approving 15-year mortgages. The lenders act as investors. They engage in a mutually beneficial agreement with a potentially high-risk borrower. Therefore, interest rates and terms won’t be at the low levels a mortgage lender presents.
Explore the Option
Real estate investors should seriously look at options made available by bridge loan lenders. The deals offered by such lenders could make a previously difficult real estate transaction accessible. It’s possible to get a business loan from companies such as OnDeck, PayPal Working Capital, or Kabbage.
How a bridge loan works
A bridge loan, which you can get through Delancey Street, can be structured in a number of different ways. Generally, the money you take from a bridge lender like Delancey Street will be used to help you purchase a new investment property. Generally, a bridge loan lasts only a few months, up to 1-2 years. For example, if your new investment property is worth $500,000, and you only have $200,000 – you can get a commercial bridge loan for the remaining amount.
If you’re thinking of getting a bridge loan – it’s a good idea to understand how you’re going to repay it. Many real estate investors take a bridge loan, but fail to have accurate projections on when it’ll get repaid. For example, some investors will borrow money to purchase a property for a fix and flip – but then fail to sell the property in time. Then, when the bridge loan has to be repaid – scramble to repay it.
Bridge financing – also known as a hard money loan when it comes to real estate investment purposes. It’s a short term form of financing which can bridge the financial gap between the purchase price and the amount of $ you have on hand. When it comes to commercial real estate, a bridge loan can be used until you have more permanent financing in place – like a traditional 30 year mortgage. Bridge loans are often used by rehabbers, or for someone who needs to purchase a commercial property – but can’t qualify immediately.
How do commercial bridge loans work?
Bridge loans can last a few months, or a few years. Often, most bridge loans last longer than a year. These are collateralized loans – you put up some commercial property you own, or will purchase shortly, in order to guarantee the loan.
Often, bridge lenders will ask you to also personally guarantee the loan in order to ensure the loan will get repaid. The company providing the bridge loan will based their approval based on the value of the collateral, and the credit worthiness of the borrower. As a result, commercial bridge loans are easier to get than standard mortgages. The proceeds of a commercial bridge loan can be used to purchase a property you’re looking at.
Here are examples of situations where a commercial bridge loan can be used:
Starting a new business: You might need a commercial bridge loan when you get a new business and need a place to do business, like a restaurant or office building. The bridge loan can be used to pay for the downpayment of the purchase of the new location. For example, if you wish to purchase a small office building for $1 million, you can use a bridge loan and get anywhere from $300-$600k. In order to start, you would apply with a commercial bridge lender like Delancey Street, who will agree to give you 60-70% of the purchase price of the new building.
The way bridge loans work is that a lender gives you the difference between the purchase price, and the amount of money you have. Typically, bridge lenders will give 30-60% of the purchase price. Due to the fact bridge loans can be risky, the interest on a commercial bridge loan is higher than normal loans. It’s not unheard of, for a bridge loan to have an interest rate ranging from 10-12%.
If you borrow $100,000 for example, you could be expected to repay $110,000 to $115,000 after a year, depending on the origination fees, etc, associated with the bridge loan.
Buying a business: Say you want to buy another company, but are running short on funds. Hypothethically, you can use a hard money loan against a piece of property you own and then used those funds to purchase that business.
Cash out: Sometimes, business can go slow during the winter months. If you’re running low on cash, a bridge loan – where you tap into the equity of your business, can help provide you with a relatively “cheap” source of funds. Often, business loans can have an APR of 20-30% per year. In contrast, a hard money loan only has an APR of 10% per year. The savings are huge.
Commercial Bridge Loan Rates and Bridge Loan Terms
Below is a great table to understand the general terms that apply to a commercial bridge loan.
|Loan Amount||$200,000 – $20 million|
|Interest Rates||7% – 11%|
|Loan Terms||6 – 24 months, but longer periods are available|
|Loan-to-Value Ratio||Up to 70%|
|Collateral||First lien on the property|
How can you qualify for a commercial bridge loan
In general, bridge loans are given based on the value of the property which is being offered as collateral. Bridge loan lenders don’t typically look at the credit score of the borrower. Due to the collateral (property) being offered, it helps reduce the risk of the loan. In order to limit the financial exposure of the bridge loan lender, the loans are capped at 60-70% of the property’s value. Typically, you are expected to provide the remainder of purchase price. Some bridge lenders might look at the borrower – such as looking at foreclosures, liens, lawsuits, felonies, etc, to see how trustworthy the borrower is.
What are some fees associated with commercial bridge loans
Before you get a bridge loan you should do some level of due diligence on any offers you receive. Below are fees you should expect:
Origination fees: Upfront fees, called points, add to the cost of your bridge loan. Sometimes, you can expect fees as high as 3-5%.
Brokerage fees: Some brokers act as lenders, and will refer you to another lender. They then tack their fees on the lenders origination fees.
Prepayment penalties: Some lenders will charge you a fee if you pay the loan too early. For example, some lenders will require a minimum 3 month term.