Bridge Loans for Beginners
Stuck between selling one commercial property and buying new real estate? Need money to complete a renovation or to make a balloon payment? You’re not alone. Many companies that buy and sell commercial properties run into cash flow issues at some point. What do you do when you need funds fast? If securing traditional financing is not the best option, then consider bridge loans as an alternative.
What is a Bridge Loan?
A bridge loan is used by individuals and businesses. It’s most commonly used in the real estate sector.
It’s a short-term lending alternative that covers the financial gap between transactions. A prime example of this is the selling of one apartment complex and the buying of another. It helps buyers secure the funding they need until the apartment building is sold. Your current property is used as collateral. There are no penalties for prepayment. In most cases, the loan period is 6-12 months. This finance vehicle is also used for completing tasks such as refinancing, leasing up, or finding new tenants.
Benefits
The most obvious advantage of a bridge loan is the fact that it is short-term, temporary financing. As a borrower, you don’t have to deal with a carrying additional debt for several years. The payment options are flexible. You can pay off the loan after or before you secure long-term financing. Additionally, you may be able to wait a few months before you start repayment. This depends on the lending terms and conditions. The qualification and approval process isn’t lengthy. Bridge loans are approved much faster than traditional loans. As a result of the speedy approval process, you can seize upon real estate opportunities more quickly. Finally, these funds allow you to take your time during the home buying process. In other words, when it comes to purchasing or selling a property, you can wait for the best deal.
Disadvantages
While there are several upsides to obtaining bridge loans, there are other factors you must consider before pursuing this lending option. For one, you’re adding to your debt load. It can be stressful when you’re already juggling two commercial mortgages. The terms and conditions vary among lenders. Even though the qualification process is less time-consuming, there is no guarantee of approval. Finally, a bridge loan is expensive and carries higher interest rates than traditional loans.
Bridge loans are a valuable financing alternative under the right circumstances. If you have no way of generating cash flow between your commercial real estate transactions, then this may be your best option.
