Finding the perfect financing for your commercial real estate property can be a daunting task. Sure, you can find hundreds of lenders online who might help you with your financing needs, but choosing the best one and the perfect one in terms of your long-term benefits is the real challenge.
Different financing needs will need different loans and if you miss out by opting for a wrong loan, things could get hard in the future. The good news in the world of commercial real estate is that the Bridge loans are back.
Bridge loans, often considered as the boon to the real estate investors are the best loans in the cases of finding a temporary loan until a more permanent form of financing is made available.
What are the cases where bridge loans will prove to be the best fit for your purchase of commercial real estate? Read on to find out.
Before we talk about how Bridge loans can help you purchase commercial real estate property, let us know what bridge loans are.
If you’re a beginner in real estate investing, you should definitely read on and know what these loans are and figure out yourself why they’re referred as a boon to real estate investors.
So, what are Commercial Bridge loans?
Commercial Bridge loans are short-term financing, which as the name suggests, bridges the gap between the present and future financial circumstances. These loans basically get your back covered in order to be able to shell out finance completing certain things, which will generate income for you in the future.
In the world of real estate, bridge loans are used until a more permanent form of financing, such as mortgage can be made possible.
Bridge financing is also known as gap financing, swing financing and in layman terms as, hard money loans. These loans are most used by the rehabbers.
If you’re wondering who rehabbers are – rehabbers are people who repeatedly buy properties, make certain renovations or repairs to fix them and flip these properties (resell these properties).
Bridge loans in a nutshell: Bridge loans get you covered financially during the gap between the purchase of a property and finding a more permanent form of financing for this property.
That’s the reason bridge loans are incredibly lent only for short terms of time, say 6 to 12 months and are expensive in comparison with other forms of financing.
Well, these loans being expensive is quite justified as these loans are literally the ‘need-of-the-hour’ loans.
Note that the term of commercial Bridge loans can be more than 12 months, say 2 to 3 years too depending upon the lender you choose to borrow from, but on a general note, these loans usually have a term of around 6 to 12 months.
Here’s the best part about commercial Bridge loans
Commercial Bridge loans are easier to obtain than other standard forms of loans. The reason behind this is that commercial Bridge loans are collateral loans.
Meaning, they will typically require you to put up a commercial property you already own or a property you will own soon as collateral to the loan.
The good part about this? The commercial loan lenders will look at the value of the collateral placed rather than the creditworthiness of the borrowers themselves.
So, if you have a bad credit score and are tired of getting your standard loan applications rejected repeatedly by the lending institutions of private moneylenders, these loans can really get you covered.
If your credit score is anything less than good, before you try your hands on financing long term standard loans, mind that there are high chances you will not find any lender or a lending institution who is willing to do that for you, because they typically cover only those borrowers whose credit scores are high.
Bridge loans are a safe go-to option in the case of a poor credit score. They become much easier to obtain and cut down so much time, otherwise wasted on the paperwork involved in obtaining a standard loan.
Here are few cases where bridge loans make the most sense to get and how they can help you purchase your commercial real estate property
Case #1 – Moving or shifting your current business
If you’re thinking of moving your business because you found a better location or a better market or simply because of any personal reasons, you’ll need finance not just to buy your new property but also to pay off the remaining mortgage of your old property.
Now, you might think it’s easy to convince a lending institution that you will be generating revenue once you shift your business and pay off their loans, but in reality, this seldom happens.
Lending institutions or private lenders do not show interest in such arrangements, and good chances are that they’ll turn you down. In such cases, opting for bridge loans is the best thing to do.
You can apply for bridge loans and buy the new property, offering it as a collateral, cover up your expenses of buying and paying off your old liabilities towards your old store, and pay off the bridge loan once you start earning from your new store.
True to its name, Bridge loans will bridge your current financial circumstances to that of the future in such cases.
Case #2 – Rehabilitation purposes
You might be owning a commercial property space which you know is not performing to its fullest potential.
It might need many renovations and repairs to attract more clients or tenants. Bridge loans are best in such cases and they’ll allow you to make all the renovations or repairs to transform your poor performing space into a profitable space.
Bridge loans will have your back covered until you can find a more permanent form of long-term financing on your newly rehabbed property.
Case #3 – To make use of a buying opportunity
So, your company had found a new property with great potential for high profits and you want to get your hands on that property before anybody else.
Companies often compete to buy the hot properties capable of bringing in fortune and these buying opportunities can vanish sooner than you may think.
So, the fact you might not be having enough finance now to buy this property should not stop you from buying it, which you know, can bring in a lot profits to your company.
This is an ideal scenario for obtaining a commercial Bridge loan and use the finance raised from this loan to make the immediate down payment for that hot property you have your eyes on and to also make monthly payments on the new property until a more permanent form of financing is arranged.
Case #4 – When your credit score is low
As mentioned earlier in this article, close to zero lending institutions or private moneylenders are willing to lend finance to someone with a poor credit score.
Bridge loans are of immense help here as they not only cover your immediate and urgent financing needs but also help you gear up your credit score.
How can you possibly increase your credit score through a bridge loan you may ask? Well, by making timely bridge loan repayments, you will be able to boost your credit score a great deal until you’re eligible for long-term financing.
In fact, there are borrowers who use commercial Bridge loans primarily to boost their credit score, on the foundation of which they intend to obtain long term standard forms of financing.
It is quite a justified way to increase your credit score and you’ll find rehabbers play this trick often and probably you should too if you’re facing hard times because of a poor credit score.
Those are the cases where you can use bridge loans as the best form of financing to purchase your commercial real estate property.
Covering more vital details about bridge loans which might give you more clarity on how/if these loans are the best fit for you to purchase your property.
This is how a typical bridge loan would look like:
- Loan amount would range from 1 million dollars to 20 million dollars
- Interest rates applicable is between 9% to 12%
- Term of the loan is 6 to 12 months and can be higher depending on the lender you choose
- General fees associated with getting a commercial Bridge loan would be origination fee, appraisal fee, title fee, prepayment penalties sometimes
- These loans would typically have to Loan-To-Value (LTV) ratio of 80%
Note that these properties of a bridge loan is a typical scenario and you’ll always find better or worse deals than this one depending on the lender you choose, your own previous history of repayments.
You’ll also be required to bring in around 20% of the value of your property as equity as commercial Bridge loan lenders cap their lending amounts to around 75% to 80% of the total value of the property you’ve placed as collateral. So, if you’re able to arrange for a small amount of around 20%, there are great chances you will be able to successfully finance your new commercial property without any hassles, until, an exit strategy or a more permanent form of financing is possible for you.