What Are Bridge Loans?

Bridge loans play an invaluable role in the health and growth of certain segments of the real estate markets. For multi-family and commercial properties, bridge loans provide borrowers a “bridge” to: close a sales transaction for a property, and/or prepare a property to be eligible for a long-term permanent loan or an eventual sale. With conventional lenders maintaining their higher levels of underwriting standards, there are many real estate lending scenarios that would suffer without the support of the bridge loans market.

How Bridge Loans Are Used

Bridge loans can be used to provide borrowers with needed capital to navigate a financial transition, as well as time to improve upon a property’s standing or stabilize a property. After long-term permanent financing is available for the property, the monies from the new loan are used to pay off the interim financing. In the case of a sale, the sales proceeds are used to pay off the bridge loan. Any equity cash-out or profit from a sale, belongs to the property owner. In some instances, where time and other financial constraints exist, bridge loans are put in place between the end of one loan and the start of a new one. In function, bridge loans are short term loans that normally hold a first lien position against a property. Typically, bridge loans are arranged for a period as short as 2 weeks and, in some cases, up to three years. The most common time frame is 6 months to 2 years. For the most part, bridge loans have interest-only payments for the duration of the loan. At the end of the contract term, bridge loans have a balloon-payoff feature, where the entire loan has to be paid off in full. These types of loans are synonymously referred to as interim financing, gap financing, caveat loans or swing loans. These terms are used interchangeably in most financial circles. In recent times, private money loans and hard money loans have been utilized for the same purpose as bridge loans.

Bridge Loan Lender

Gap Financing lenders assume a higher level of risk when issuing a commercial bridge loan to a borrower. This additional risk of issuing interim financing stems from factors such as: having real estate collateral that is not properly performing, an emerging property needing rehab or construction, borrower and/or entity financials that are outside the immediate lending parameters of traditional financing, and providing financing for special circumstances that traditional lenders tend to stay away from.

Due to this higher risk, bridge loans typically involve higher interest rates than standard loans. On a case-by-case basis, a borrower can expect additional up-front costs as well. A bridge loan is an effective tool to use under specific circumstances. However, know your situation and speak with a trusted advisor if you have any questions or concerns.

The Investor Side of a Bridge Loan

Gap Financing lenders assume a higher level of risk when issuing a commercial bridge loan to a borrower. This additional risk of issuing interim financing stems from factors such as: having real estate collateral that is not properly performing, an emerging property needing rehab or construction, borrower and/or entity financials that are outside the immediate lending parameters of traditional financing, and providing financing for special circumstances that traditional lenders tend to stay away from.

Bridge loan borrowers represent one side of the loan equation; the other side belongs to the investors who provide the financing. If you are a qualified accredited investor, Woodbridge Wealth offers the opportunity to participate in a Commercial Bridge Loan Fund. This fund has the potential of generating a 6% annual return paid monthly. The investment can be held for one to five years, with the investor deciding each year whether to continue in the security. If an accredited investor chooses to hold their monies in the fund for five years, there is an additional 1% accrued incentive return, for an aggregate payout of 7% annually over the five-year period.

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