Investing in commercial property can often be a delicate balance. There may be property that you think would be a great investment, but you may need to wait for more renters to supply rental income or sell a current property before being able to have enough for a down payment. You do have the option of waiting, but you’re probably not the only investor eyeing that real estate, and you need to act quickly. Fortunately, bridge loans may be extremely helpful in these situations.
A bridge loan is a short-term loan that typically requires you to use a current building you own as collateral in order to get financing to be able to have enough money for a down payment for the new property. The loan is usually for six months to a year, though lenders may extend the time for a little bit. Then, you would use that period to sell your old property, attract more renters or get more permanent financing.
Bridge loans can be extremely effective if you want to purchase property that is in need of major repairs. This is because of the loan-to-value ratio that lenders often use to determine whether to approve a loan. The formula generally works like this: The mortgage company takes the loan amount and divides it by the value of the property. Assuming the loan amount is the same, the lower the value of the property, the higher the ratio percentage. Most lenders prefer the percentage to be lower and may even turn down a loan request if the ratio exceeds their specific standards.
Bridge loan lenders, on the other hand, may use the after-repair value of the property when calculating the formula. For example, if there is a run-down property that is in need of repairs on sale for two million dollars, but it may be worth ten million dollars after the repairs have been complete, the lender may use the higher figure. This will then lower the ratio percentage, which may then increase your chance of being improved for the loan.
Bridge loans typically do have higher interest rates than the more long-term type of commercial real estate loans. However, if you have done your due diligence and wisely analyzed the market and the potential future worth of the property, you should be able to recoup any money spent on high interest rates.
The real estate investment market can be competitive, often requiring quick action. For investors who do their research and know the market well, a bridge loan can be a great tool to get that next great investment property.