So, what is a bridge loan in commercial real estate?
Bridge loans are short-term loans that allow the borrowers to buy sufficient time required in order to line up with the long-term funding, and thus helps in a closing of the property quickly! In other words, bridge loans are loans that’ll help you to purchase a residential or a commercial estate property, improve the property by adding some features or working on the infrastructure of tAfter you’ve made your decision of buying a real estate property, the next thing you would be considering is to look out for various kinds of loans. There are many options for financing from loans and your loan advisors will help you out by weighing the pros and cons of each type of loan. But no matter how much your advisor is going to suggest you, at the end of the day, the final call has to be taken by you. So knowing different types of loans is never going to be a waste of knowledge. If you’ve already been looking at different products that are available for residential and commercial real estate loans, you must have heard the term “Commercial bridge loan”. But then unless you’ve applied for such loan, you’ll have no clue about what it is and how it works! This blog is a short guide on what are commercial bridge loans? and how it works in reliance life scenarios in the world of the ready estate?he building and then resell it within a short period of time!
In the world of real estate, these kind of bridge loans is often used by the “House Flippers”, who are real estate investors involved only in purchasing the property, working on repairs and improvements of the property and reselling it to other people within a short period of time. The House Flippers term was coined by investors who repeatedly bought homes only to resell after some time by making minor or major changes to the property. Thus they represent a great investment opportunity for investors who are more keen on short-term and faster returns than the long-term returns. Bridge loan in commercial real estate has been playing an important role as it keeps rolling out space for buying and reselling of the properties. Without these bridge loans, it would have been extremely difficult for investors to keep raising funds every time they bought a real estate property.
What role does bridge loan play in the real estate industry?
Number 1 – Best suitable for short-term period investments
Bridge loans have very short maturity terms. Loans that fall into this category have terms ranging from as less as 3 to 24 months. The most common term is around 12 months for a bridge loan and so many players in the real estate industry purchase the property and make all the renovations and improvements they want in the next 12 months and resell it.
Number 2 – Benefit of low prepayment penalties
Unlike any other types of loans in which the borrower has to bear huge penalties for prepayment of the loan, the commercial real estate bridge loans have very low penalty rates. This is done mostly because in many cases, the property developers would complete the construction of the building before the stipulated time. So, instead of wasting time and bearing more interest, the loan can be cleared off much earlier than the loan repayment date. Low penalties thus give more motivation to the investors to complete the construction of the building and resell it soon. This is one of the major reasons why the real estate industry always or at least, almost always runs in good terms! Imagine if the bridge loans weren’t there. What’s most likely to happen?
We will end up paying more penalties and thus lose motivation to complete the construction of the building faster. This slows down the entire process of buying and selling of commercial real estate properties and thus slows down the earnings of real estate investors! Just like the old Chinese proverb that goes like, “Every small change in anything will one lead to a big change!”, this little advantage of bridge loans is what makes the real estate so profitable. Because the more frequently properties are bought and sold, the more the exchange of money between the parties.
Number 3 – They cover large percentage of the value of property during purchase
Bridge loans mostly cover a large percentage of the value of a property. They are even sometimes available to borrowers up to the complete value of the price of the property. So you don’t have to worry about raising loans from 3 to 4 sources to accumulate your total money. Commercial real estate bridge loans help the borrower in making full payment at once during the purchase of the real estate property. It’s more like putting a down payment on your residential mortgage. This facility is not available for most other types of loans.
Number 4 – High penalties for late payment of loans
As opposed to the policy of low penalties for prepayment, the commercial mortgage bridge loans have high penalties in case the loan is paid much later than the date of loan repayment fixed. As explained above, this also helps in completion of the transaction much quicker and thus providing more space for investors to trade the properties. The real estate investors are able to trade (literally buy and sell) the properties so soon only because of the bridge loans. The high penalties will motivate the investors to complete the construction of the property, resell it and repay the loan amount soon without any delay. Thus increase in the number of transactions leads to increase in the exchange of money-making real estate industry one of the most profitable businesses to be in!
Number 5 – The loan is usually split into multiple ‘draws’
The commercial mortgage bridge loans are usually split into many or multiple ‘draws’. There are generally milestones that are set which will.allpw access to drawing these amount of time as and when required. The first draw from this loan shall be made to purchase the property which is usually the commercial real estate property. Subsequent draws of this loan amount will be made according to the completion of the property. It’s similar to completion of a construction contract. Different phases of construction shall be set and accordingly cash will be drawn from the commercial bridge loans.
Number 6 – High-interest rates
The rates of the commercial bridge loans are generally high. They are high for two good reasons. One is the availability of these loans for making a full one-time payment. The other benefit is the aspect of multiple draws. Since they are short-term loans, they focus on quick completion of the contracts and thus the interest rates are generally high! These loans have a purpose of getting you returns quickly! Now if your borrower is going to use the commercial estate property bought from you for doing business or for reselling, it does not matter here. What’s important for you is to keep trading the real estate properties. Literally the buying and selling of commercial real estate properties.
Number 7 – Also helpful for landlords of residential properties
The landlords of the residential properties usually purchase bridge loans in order to finance cash for making renovations to their existing homes. This system provides the landlords with initial.investments that’s required for making small repairs to big renovations to their building which will leverage their rent. So, if you are a landlord of a residential property, and are willing to raise the rates of your rent, you’ll surely listen to the rants of your tenants in case you hike the rent for no purpose. You got to define the purpose. And what could be a more convincing purpose than the addition of parts of a building or any wooden work etc?
Your tenants will happily pay you the increased rent rates and you can more happily repay your loan after receiving it or recovering it from your tenants. The benefit of this increased rent can be enjoyed by you for years to come. The Beautiful plan right? Thank the investor who first thought about bridge loans! This is one of the biggest advantages of the commercial property loans! The landlord of the residential properties get the best deals here! Consider yourself lucky if you are one!
So that was a brief view on how commercial bridge loans work in real estate industry. Many real estate investors regard the bridge loans as the boom to the real estate industry and we couldn’t agree more with it! It’s always a better idea to finance a bridge loan if you’re looking for money with the intention of using it for repairs and partial reconstruction! So, weigh the uses and features of commercial bridge loans and take your pick!