A bridge loan, sometimes know as an acquisition loan or hard money loan, is one of the most useful tools in real estate finance to add value and create wealth. We’ve worked with many developers in securing bridge loans for their deals. We’ll walk through a basic example in this post showing how to successfully use bridge financing. However, before we get into that example, we’re first going to define bridge financing.
What is a Bridge Loan?
A bridge loan is similar to its name. It’s a type of financing used to “bridge” until the next event or round of financing. Bridge loans are typically 6 months to 2 years. They carry an interest rate from anywhere between 8-12 percent, with 1 to 2 points upfront. Some hard money loans can be more expensive depending on the situation. While it’s not cheap money, bridge loans are only temporary. The extra interest expense should be thought of in terms of the end goals of the entire project.
Typical Bridge Loan Terms
As stated above, bridge loans are not the cheapest form of capital. However, they are almost always for a short duration and are typically interest only. Bridge loans can also be closed in an extremely short period of time. Some lenders can fund bridge loans in seven days. Under 30 days is more typical. Here is an example of typical bridge financing terms.
Most Common Uses of Bridge Financing
Bridge loans have many uses. However, in commercial real estate investing, bridge loans are most commonly used for making a quick purchase and re-positioning of an asset. See example below. Bridge loans are also used to capitalize on short-term fluctuations in the market. For example, an owner may use a bridge loan to purchase an office building after large tenant has just left and the value is low. The owner can then work to re-lease the building and refinance out later at a higher valuation.
Example Use of Bridge Financing
We recently arranged a bridge loan for a client looking to purchase a small apartment building. Our client saw an opportunity in this building because the rents of the apartments were below market. Our client also had the vision to build-out an additional apartment in the basement. After reviewing options with our client, we thought a bridge loan made the most sense. Our client needed to take control of the building immediately in order to implement these changes. Waiting 2-3 months for a traditional loan was not an option. The seller also wanted a quick close. We were able to secure a bridge loan in a matter of days for our client. He closed on the property within 30 days of signing the purchase contract. He then immediately went to work on building out the basement apartment and adjusting the rents to market rate. Within nine months of closing on the property, he was able to obtain a loan from a local bank. He refinanced out the bridge loan as well as his initial investment, and some. He now has a cash-flowing property and capital to pursue other deals.