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Commercial real estate moves quickly, and if you haven’t already secured financing, you’ll likely miss out on some great opportunities. Unfortunately, traditional financing can move at a glacial pace as lenders check your creditworthiness with credit scores, cash flow reports, payment history, the amount of capital you’ve currently invested, and the value of your collateral.
To bypass those hurdles and obtain funding as quickly as possible, many commercial real estate developers choose a bridge loan. These are short-term loans used to purchase a property while more traditional financing is secured. The terms of the loans aren’t as generous, but approval is swift, and that’s exactly what you need to capitalize on a real estate opportunity.
This guide will answer the question “What is a bridge loan in real estate?”, explain how they’re used in the commercial real estate market, and share how AVANA Capital can serve your financial needs.
A bridge loan is a temporary loan that’s used to make a purchase while you look for long-term financing. Think of it like a credit card; the card allows you to purchase things when you may not have the cash available to pay for them. The card has a relatively high-interest rate, certainly higher than what’d you expect when getting a loan at a bank.
Credit cards differ from bridge loans in how the lender ensures they’re paid back. With a credit card, the lender relies on your credit score to determine how much credit to extend to you. If you don’t make the minimum payment on your card, the lender files a report with the credit bureau and your score goes down.
Real estate bridge loans are even more straightforward. As the buyer, you’ll need to put down anywhere between 20-30% of the property’s price. Should you fail to pay back the loan, the lender acquires the property and sells it to repay the loan.
Bridge loans differ from traditional real estate lending in that the down payment is higher, the interest rates are higher, and the repayment time is shorter. Despite those less favorable terms, they have a faster approval process, which makes them more attractive in a competitive real estate market.
One of the most common examples of a bridge loan involves buying a home. Often, a buyer will secure a bridge loan to purchase a new home with less favorable terms than would be possible with traditional financing. Bridge loans take less time to be approved, which allows a buyer to make a bid faster, without having a contingency built into the contract. After the purchase, the buyer can sell their old home to pay back the bridge loan.
Similar to the residential bridge loans that make it easier for a home buyer to purchase a new home without having sold their old house, commercial bridge loans speed up the financing process to allow buyers to take advantage of real estate opportunities. Short-term commercial bridge loans can be used to purchase inventory and keep the business afloat during tight times, though their primary purpose is to purchase real estate.
The approval process for a commercial bridge loan is a more streamlined version of a traditional loan. Lenders still look into your finances, but the main number they’re looking at is the loan to value (LTV) ratio. This is the amount of money you’re requesting versus the value of the property you are purchasing. The LTV needs to be 0.8 or less for most lenders to feel comfortable extending a bridge loan.
Bridge loans aren’t all that different from traditional loans in how they’re structured, but are used in different situations, and thus certain aspects will be more important to the borrower.
Time to Funding: The main advantage of commercial bridge loans is that you can get the money that you need quickly. If the approval process for your bridge loan drags out for months, you’d be better off with traditional financing that would have a lower interest rate.
Interest Rate: Bridge loans usually have an interest rate between 6% and 11%, which is considerably higher than traditional real estate loans. You’re paying for convenience though, and you’ll be refinancing a long-term loan within the next year or two.
Amortizing: As bridge loans are structured as temporary funding, you’ll want to pay them off as soon as possible to avoid higher interest charges. Loans that are amortized incur less interest the faster you pay them off. Conversely, loans that have a factor rate require you to pay a certain amount of interest based on the principle that was borrowed.
Knowing the answer to “What is a bridge loan in real estate?” can help you properly finance your project. Bridge loans are one of the best options for temporary financing, but the terms of those loans can vary widely between lenders.
AVANA Capital finances up to 75% of the cost of a commercial real estate purchase with a loan repayment term between 12 and 36 months. Approval comes in as little as three days, which allows you to close on a property in weeks rather than months.
AVANA Capital prioritizes a fast closing process, with approval in as little as three days. Their commercial bridge loans make it easy for enterprising buyers to take advantage of discounted prices that are only available to cash buyers. Generous Interest-only loan terms allow borrowers to keep more cash on hand while searching for long-term financing.
To learn more about how a bridge loan can solve your real estate financing challenges contact AVANA Capital today!