June 16, 2024 Breaking News, Latest News, and Videos

Column: What is a Bridge Loan?

About the author: Avi Sinai is the principal of HM Capital, a Los Angeles company specializes in hard money real estate loan and private lending. To contact HM Capital you can call (530) 436-5630, or email all inquiries to avi@hardmoola.com

A bridge loan is a temporary loan secured by property, to provide capital to purchase additional assets until a more permanent financing can be secured. In most cases, real estate professionals use bridge loans to purchase a new investment before they sell assets they currently own, not to miss a good deal that can’t wait.

For example – a real estate investor finds an office building for sale in a great location. The seller will only accept cash offers, but the investor is currently short on liquid cash. With a bridge loan the investor can make an offer and have a chance to purchase the office building, and once the transaction is complete he can then sell of another asset to satisfy the bridge loan and secure long term financing.

How can real estate investors use bridge loans?

The best use for bridge loans is to secure a purchase of a new investment when you don’t have enough time to sell existing assets. When a good investment comes by, there is often not a lot of time to set up financing and it is possible that your current property will take longer to sell than the time it takes to purchase the current opportunity.

What are the advantages of using a bridge loans?

Bridge loans offer real estate investors flexibility – by leveraging the equity in an existing property into a second purchase of another investment. Because private lending uses asset-based underwriting, they are easier to qualify for and the process to get approved is a lot faster. Because the loan is for a shorter term, usually less than 12 months, the monthly payments are interest-only. By using bridge loans investors can make all-cash, non-contingent offers to lock up a deal and beat out other buyers with a superior offer.

What are the risks with bridge loans?

Bridge loans are short term – so they are due usually in less than 12 months and require investors to cover the debt quickly. Bridge loans also have higher rates and fees due to the risk factors associated with higher leverage. Bridge loans should only be used when you are confident you can repay it back within 12 months. A good alternative to bridge loans is a line of credit.

Summary

  • Bridge loans are short term loans to purchase real estate
  • Use equity in an existing property to purchase a new investment before selling
  • Flexible, but come with higher rates and fees
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