Bridge loans are very aptly named, and not in that they are used to secure funding so you can buy a bridge. Instead, they’re used to cover the period between two commercial ventures when people often experience liquidity issues. If you’re waiting for a sale to go through on a newly renovated office building when a second lot hits the market, you’ll likely need to borrow money in order to have a chance at purchasing the additional property. This is exactly why people turn to a loan that will provide them with a financial bridge.
Bridge Loans vs. Standard Loans
The biggest advantage with these loans is the expedited processing time. Commercial real estate investors know a good property when they see one and have to act fast if they want to get a bid in. If you just went to a bank and asked to borrow money, the property would be long gone by the time your request got approved. With bridge financing, however, you can offer up a separate property as collateral and get near-immediate access to capital. This use of another building as a guarantee is what makes these loans so popular with people working with commercial properties, as they have the real estate to use as leverage.
Naturally, a loan that pays out quickly usually comes with a higher interest rate. Lenders need to make it worth their while if asked to expedite the processing of a loan. You shouldn’t look to this type of financing for any sort of long-term mortgage situation. If you’re on the verge of selling or leasing a property, however, bridge loans can be the perfect solution to your short-term liquidity issues.
This method of financing isn’t exclusively used when working with two properties. For example, if you own an apartment building that needs to be renovated before you can start collecting rent from tenants, a loan can be used to cover the costs of renovation. Once construction is complete and money starts coming in, the lender gets repaid. While bridge loans are frequently used by people working with multiple units, their main function is to provide capital to those who need a quick surge in cash while waiting for another venture to pay off.
Any sort of financing that allows for multiple properties to be in play at once is good for commercial real estate investors. If you’re working with one building and wondering if it’s possible to purchase another, there is a way to bridge that gap.