Bridge Loans: Providing Financing Opportunities For Investors
Do you have your eye on that perfectly located piece of unimproved property that’s just begging for someone to build? What is obvious to imaginative real estate investors sometimes escapes the generally more practical lending institutions. Oftentimes, in order to qualify for conventional commercial mortgages, the property must be improved or already generating income. This state of affairs often creates a timing gap for investors. An investor might have the perfect spot picked out for rental cottages, for example, but the bank only sees its possible return on a vacant lot if the investor’s dream does not come to fruition. This potentially dead-end situation is often rectified by something known as bridge loans. As its name implies, a bridge loan can help span troubled financial waters generally caused by timing gaps that leave some investors unable to qualify for conventional lending.
A bridge loan is a short-term financing option that investors can use to buy some time while they are waiting on obtaining funds through conventional lenders. The investor can use the funds from the bridge loan to acquire the property and start improvements, or, in some cases, start generating rental income from the property. Keep in mind that since these types of loans are short-term, and typically come with higher interest rates and fees due to their higher presumed risks to the lender, the goal of the investor is generally to obtain a conventional mortgage as soon as possible. The short-term loan can help investors obtain property and start taking the necessary actions required to improve the odds of gaining approval from a traditional lender.
As with most short-term lending vehicles, it is advisable that the investor has a solid action plan in place before attempting to secure this type of loan. Generally, the investor should have a thorough understanding of the local real estate market conditions and exactly what the commercial mortgage lenders require to deem the property worthy of a loan. Once the short-term financing is secured, the investor in effect starts a stopwatch that will stop when the loan payments begin to come due. Ideally, the investor will immediately start taking the necessary steps to make the property eligible for a conventional loan as quickly as possible. Once the investor obtains the funds from the regular commercial mortgage, the short-term loan can generally be retired. In this manner, a bridge loan can be used to find those opportunities that might not qualify for a regular mortgage until the investor has time to make some improvements.