In the world of real estate, it often seems like there is a gap between you and your goals you intend to achieve in a commercial real estate.
This gap is often caused because of the inadequate knowledge. What’s more interesting is that many people don’t know that they do not know so much knowledge.
One such thing that many real estate investors don’t know about is the commercial bridge loans.
Not knowing about it limits the usage of these loans and these investors tend to source their loans from other traditional methods of doing it.
While this part of real estate investors forms one group of the lot, the other groups of investors have simply heard about this term but don’t know the actual meaning or the application of commercial bridge loans.
And as everyone says, in the world of real estate one should never make a decision based on little knowledge!
Little knowledge is more dangerous than no knowledge is a famous proverb adding to this.
This blog is for both, who have no idea about commercial bridge loans and those who know something about this kind of loans but not wholly.
Here are commonly asked questions about the commercial bridge loan financing that will give you more clarity on these loans and thus it may open up new opportunities for you to harness!
So let’s get started!
4 most commonly asked questions about commercial bridge loan financing
Number 4 – What exactly is a commercial bridge loan?
The first and foremost question everyone asks is what exactly a commercial bridge loan is.
Simply put, bridge loans are loans that are financed to provide short-term capital loans to people who want to secure their other types of financing.
It is used to bridge the gap so that the money borrower can hold in the real estate industry, while also carrying on the other business operations or move on to a new project.
These loans are provided only for a short period of time.
Number 3 – What is the term length of the loan?
There’s no accurate answer to this question. The term of the bridge loan varies from lender to lender.
The nationalized banks have a different term period for the different amount of money to be lent.
But usually, with the commercial real estate bridge loan lenders, the term of the loan is no longer than the 12 months.
The average term of the loan is between 4 to 6 months of time. This is true for almost all the commercial real estate bridge loan lenders.
But there are state banks that offer these loans for much extended periods of time like 2 to 3 years.
While taking a call on what type of bridge loan to opt for, it’s always advisable to take the help of loan advisors.
These loans have a different set of rules and regulations making it a confusing deal for a layman to decide which ones the “Go-to” lender!
Taking the advice of an expert who had good knowledge in this regard is always great!
The need for commercial mortgage bridge loans hits a very specific purpose. It is financed by people who don’t have liquid funds but have a source that would soon be generating enough income for them.
They are sure of their future earnings from one of their income sources most likely, from a commercial real estate investment, but do not have money at present.
This is where these loans come to picture wherein they approach banks or private money lenders telling they need money for a short period of time on the basis of the projected income statement of the future months or years which would be generated by a commercial real estate investment if the quick cash can be arranged now.
The classic example of bridge loan financing scenario is the repairs and renovations to the existing residential property.
Let’s say you have a residential property but you’re not able to fetch good tenants for your building because of poor technological facilities at your property.
Making some repairs and renovations, you know for sure that you’d be getting tenants and you’ll soon start earning rental income or income from leases.
That’s when the commercial bridge loan is a ‘Go-to’ loan for you wherein you can approach banks or private money lenders and get your money for carrying out the repairs and renovations to your property by telling that you’ll soon be earning a stable regular income once the renovations are completed.
This was the exact scenario that paved way for commercial bridge loans!
Number 2 – What are the cases when financing a commercial bridge loan is best suggested?
Commercial bridge loans are a most suggested for cases where investment from these loans is going to bring you future income through which you’ll be learning off your dues.
Here are some examples of cases where one may consider commercial bridge loan financing the best option:
- As told earlier, cases where making some repairs and renovations would bring you good tenants and thus a regular and constant income flow.
- A real estate builder who needs quick cash to complete the works of a building while waiting for for the equity financing of the building to be closed. Now, the first question that pops into your mind is “Why doesn’t he just wait until the equity financing is actually closed?” Well, in a practical scenario, it doesn’t work like that. When the construction of the building is already started, there’s a particular time period within which the building construction needs to be completed. Barring this time period of time would mean poor building structure. Another reason is the labor. The labors are hired for a fixed period of time and wasting time idly is only a pure waste of time and money, the price of which is very high! That’s the reason why builders are keen on completing the construction of the building while they wait for the equity financers to close the deal.
- A real estate investor who owns a shopping complex and needs funds for modifications and development, while also looking for the renters. Waiting for the rental income and then making these developments and renovations would make no sense as the renters wouldn’t approve the shop at all in the first place if the modifications aren’t done. This is where commercial bridge loans are used to bridge the gap.
- A business owner who is looking for increased working capital to hires a new team of workers or buy a particular software in order to meet the demands of a new major contract signed. Again, the extra money that’s going to flow into the business because of this new contract would be sufficient to finance a bridge loan.
- A buyer who needs quick cash in order to buy a property immediately. This is especially true when the property is located in an area that has the maximum potential for land appreciation in the coming years. Before it’s too late for the interested real estate investor to look for different types of funding, the best option is to approach a bank or a private money lender and get a bridge loan financed.
Thus, there are different scenarios where commercial bridge loan financing can be considered as a boon especially when there’s a certainty that long-term funds are secured in the near future.
Based on this certainty, these loans are raised to bridge the gap and quickly meet the immediate cash requirements and thus accenture the process of earning stable and consistent money in the near future to come!
Number 1 – What are the requirements for getting commercial mortgage bridge loans?
Just like the time period of the loan, the requirements of the loan to varies from a lender to another.
They have different types of requirements but the most common one is the credit terms. The credit terms of the borrower have a major loan in deciding whether or not to provide anyone a commercial bridge loan.
Another important requirement is the collateral provided. Banks usually asses the current value of the collateral property, the after repair value of the property (That is, if it’s said that the repairs and renovations would be made to that property), and the probability of value appreciation of that particular property.
Barring those primary requirements, the secondary requirement is the projected income flow that’s expected to be generated on account of financing this loan.
Say, for example, you wish to make some repairs and renovations to your residential property, you need to show a projected income statement stating how much you expect to earn from the rental income or the lease income by making these repairs and renovations.
The banks or private money lenders would take a call if or not this is going to work for you and then make a final call of lending you a commercial bridge loan.
This is done so that they can rest assure that they are going to recover their amount.
So, they were the answers to the most common questions that one asks about commercial bridge loan financing!
Before you take a call on whether or not to finance these loans, it’s always suggested that you take the help of a real estate expert or the loan advisor so that you don’t take this loan when there wasn’t a need to or when others form of financing made more sense!
These loans have their own set of limitations which is why taking the help of advisors is highly recommended!
Having said that, have a delightful real estate dealing experience!