Do you need to close a loan fast to beat the competition or buy at the best price possible? Do you have rehab that will add value that needs to be completed? Then a Real Estate Bridge loan is for you.
What are commercial real estate bridge loans?
Bridge loans are typically short-term, but open the option of creating time for organization and preparation for long-term funding. In better terms, a bridge loan allows a borrower to take a loan to purchase a residential or commercial property, make any needed renovations or improvements, and resell the same property in a short period of time. With the multitude of loan options, even assistance from a loan advisor will not fully erase you from the stresses of deciding on the “correct” one. However, with you, the borrower, being the decision maker, broadening your knowledge on every type of loan will never hurt. If you have researched, shopped around, or are looking to work in the loan industry, you must have seen or heard of the term “Commercial Bridge Loan”. Without going through the process of starting a commercial bridge loan, most do not know what it is and/or how it operates.
Bridge loans are most often used by “Fix and Flip” investors who solely look to purchase real estate, fix or renovate the property, and then flip it by selling it for a profit. “Fix and Flips” have proven to be great short-term investments, but they wouldn’t have been able to be sustainable without Bridge Loans. Bridge Loans have allowed real estate “flippers” and investors to receive the funding they need to remain successful in their line of work.
Here are 7 of the key factors behind Bridge Loans to better understand it:
1 – Most ideal loan for short-term investments
Maturity terms of a Bridge Loan are notably short. With the average Bridge Loan term being 12 months, one may see the term vary from 2-3 months to as much as 24 months. Whatever the term length may be, the borrower always looks to purchase, fix, and then flip the property within that time period.
2 – Little to no prepayment penalties
There are many loans in the real estate industry that slam the borrower with huge penalties for prepayment of the borrowed loan, but Bridge Loans are not one of them. Bridge Loans have very low, and sometimes no, penalties for prepayment. This purposeful lack of penalties are to motivate the borrowing party and its investors to complete all renovations and resell as soon as possible.
3 – Large portion of property value is covered
When taking a Bridge Loan, a majority of the property value can be included in the loan. There are cases in which the Bridge Loan will cover the entirety of the property value. This gives the borrower the benefit of not having to take loans from multiple sources and helps the borrower make the payment in full, at once, after the property is purchased. This is one of the foundations of Bridge Loans and cannot be found in almost any other loan.
4 – Late payments can result in high penalties
With such low penalty rates for prepayment of the loan, Bridge Loans counter that benefit with high penalty rates for the late payment of the loan. This helps facilitate the expedited completion of these real estate transactions. Just as the lack of prepayment motivated the investors to pay the loan off as soon as possible, the high late payment penalties also motivates the investor to complete all renovations and list the property for sale.
This system of creating pressure on the investors allows the real estate industry to experience more transactions, adding more value to the industry, and making the investors more profit.
5 – There are multiple ‘draws’ in the loan
With commercial Bridge Loans, the lump sum of the loan is then divided into what some call “draws”. These draws are similar to construction or development contracts in which only a portion of the money is taken during each construction phase. For commercial Bridge Loans, the first “draw” from the loan will be for the purchase of the real estate property, each draw from the loan after will be for completion of another part of the investment project.
6 – High-interest rates
Normally, one can find that Bridge Loans have higher interest rates than what can be found with other loans. These high rates are due to the access a borrower has for a full payment, all at once, as well as the factor of having multiple draws. Like discussed in other factors, Bridge Loans are set up for short-term investments, facilitating one transaction after another, keeping the real estate industry thriving and giving the investor great returns on their investment.
7 – The benefits for landlords
Bridge Loans can also be found to be a popular loan option for landlords of residential real estate. Landlords will use Bridge Loans to get the majority of the finances they need to renovate their properties. Bridge Loans give the landlord the sum of which they need to begin investing in their renovations, in turn landlords may have to raise rent. But, tenants would be much more accepting of the rent increase if they already see the work being started, instead of paying towards the renovations they may not see for months. It’s a benefit for both parties, the landlord is able to get the renovations needed completed quicker for happier tenants, and the tenants are able to see their landlord be proactive with their property and will have better trust with the finances of the landlord.
Many investors and analysts of real estate reference Bridge Loans for the reason behind booming real estate and we can all see why! Always keep Bridge Loans in mind and take consideration of all the benefits when deciding on a loan option!
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