There are different types of loans that can be raised for financing the commercial real estate needs.
Many people can tell about the wide range of loan options from which you can choose from. It doesn’t require an Einstein for that!
But, not everyone can tell you which type of loan is the best one for your financial needs and situations.
Different loans have different pros and cons and deciding which loan is the best one for your financial needs is the true challenge!
The age-old unspoken principle of real estate market which says you should never entirely make your decisions based on advice and recommendations still holds true!
What people recommend you might have worked out for them and it may or may not work for you. So, it’s always a wise idea to do your own research before coming to a final conclusion or decision.
This blog would throw light on the pros and cons of commercial mortgage bridge loans which surely come handy. Read on!
What is a commercial mortgage bridge loan?
First things first!
There have been many myths about commercial mortgage bridge loans and it’s a surprising fact that a lot of people who invest in real estate have less knowledge about the concept of commercial mortgage bridge loan.
Commercial mortgage bridge loans are short-term loans that are financed for a temporary time period until a more permanent way of financing can be figured out.
These loans are usually raised when there’s an assurance of cash inflows in the future.
Raising a loan for making repairs and renovations to the building with the purpose of earning more rental income is a classic example for commercial mortgage bridge loans.
It best suits the circumstances where the loan borrower is sure of being able to generate more cash inflows in relation to the loan raised.
The pros and cons of commercial real estate bridge loans
At the outlook, commercial mortgage bridge loans look like the best form of financing for short-term needs.
But if you look at it deeply, these loans have their own pros and cons which needs to be considered.
Jumping to conclusions too soon or with too little knowledge will only increase the chances of risk!
There are enough risks involved in the business of real estate already and you wouldn’t want to add more to it. Read on to dig into the pros and cons of commercial real estate bridge loans.
Pros of Commercial Mortgage Bridge Loans
1) Secure and easy resort for short term financial needs
Commercial mortgage bridge loans are one of the easiest and most secure ways of raising loans for short-term financial needs.
They do not require as much time traditional loans would need to be processed.
This quick processing time is a major advantage of these loans because we all are aware that time is of the highest essence in the industry of real estate.
2) Highly flexible
Commercial real estate bridge loans are highly flexible in nature. They’re the best loans when you’ve to meet an immediate short term expense.
The short-term capital required at the peak time can be easily processed by applying for a commercial mortgage bridge loan.
Commercial real estate bridge loan lenders have different terms, conditions and interest rates varying from one bank to another and one private commercial real estate bridge loan lender to another.
However, the documentation process of the majority bridge loan lenders is pretty much the same and it’s highly flexible nature makes it the “Go-to” loan for meeting your short term expenditure obligations.
3) Best form of financing in case of repairs or renovations
Commercial real estate mortgage loans have been extensively used for financing the repairs and renovations purpose since so many decades that many people confuse these loans to be the ones that are used solely for repairs and renovations.
If there’s an assurance that you can repay the loan once the project is completed, this loan is the best option!
4) Helps in easy closure of property deals
Commercial mortgage bridge loans will help bridge the gap for properties from being less profitable deals to high profitable deals.
For example, let’s say you’ve a commercial office space where 50% of the property is not being used in an efficient way.
Making some repairs and modifications to the existing building and renting it out to other business owners is a great way of making your idle space more profitable for you!
Similarly if you have an apartment that’s too old or is less technologically advanced, making few additions to the building like a gym, swimming pool, good Wi-Fi might help you in easy closure of property deals with the new tenants.
5) Majority of bridge loans are non recourse in nature
Bridge loans provided by the majority commercial real estate bridge loan lenders are non recourse in nature.
It means that these lenders can ask the borrowers to repay the loan only based on the income generated by the property or project for which such loan was raised.
This is a major add on to the loan borrowers as there’s no burden of repaying the loan using the personal assets.
Cons of commercial mortgage bridge loans
1) High interest rates
One of the major drawbacks of commercial mortgage bridge loans is the high interest rates.
There’s a good reason why these loans are charged high as they’re available for urgent short term financing needs!
If you choose to raise any other form of traditional loans, you’ll not be spending as much as you would be in case of commercial mortgage bridge loans.
The high interest rates of bridge loan are something that must be well thought of before making a final decision because in the long run, the outstanding interest rates to be paid at the end of every month is going to act as a major overhead.
One needs to work out the total costs with all the related high expenses associated with these loans.
2) Late payments leads to high penalty fees
Majority of the commercial real estate bridge loan lenders charge high penalty fees for late payment of loans.
Many loan borrowers totally brush aside this factor thinking or rather, being over optimistic about their future financial conditions.
The high penalty rates can count nothing while buying the loan but might prove to be expensive in the long run if everything doesn’t go as desired!
And a more practical approach is to always be prudent while taking loans about the future financial conditions!
Assuming that everything would go well might turn into a costly mistake!
So the wise option is to always be prudent and take these loans only if you’re very sure about your future income flows before taking the final call.
3) Commercial mortgage bridge loans rely on more permanent form of financing being present in future
Bridge loans are taken mostly when the borrowers are sure about making profitable deals out of the loan money.
But unfortunately, future is uncertain and one can never completely be sure about the future earnings. In the hope of making more money in future, many investors tend to raise commercial mortgage bridge loans and the results it hasn’t always been positive.
Owing to its high penalty rates and interest rates, it can prove to be a dangerous expenditure of things does not go as planned!
Whether or not to raise a commercial bridge loan can be decided in the most effective way only after weighing the pros of cons of commercial mortgage bridge loans.
Now that you’re familiar with the major pros and cons, making the final call would be much easier.
However, you must remember that raising loans that carry high interest rates requires a good risk handling mindset.
The final call can be made based on the risk appetite which varies from one person to another! While some people believe in the “High risk, high returns” approach, some believe in the principle of conservatism or being prudent!
This difference in the mindsets is the major reason why some strategies won’t work for so many people when the same strategies would have worked for someone else!
There are tested and proven methods to determine the best kind of loan one needs as it largely depends on the mindset which varies from an individual to another.
What might have worked out for someone may not work out for you and what worked for you in the past might not work out again!
The final decided thus largely dependent on one’s capacity and willingness to take risks!
So, at the end of the day, it all comes down to your willingness of taking risks. So the first step towards making the decision is to first get crystal clear picture of your risk appetite.
Making a wise call won’t be a hard thing if you’re clear about how much risk you’re willing to take!
Once you’re clear on your risk appetite, you can make the best decisions for you after considering the pros and cons!