How Does a Bridge Loan Work for Commercial Real Estate?
Trying to find money to invest in a real estate property can be like running a 25K marathon with a maze for a track. The banks do not usually like to lend money on anything they might perceive as risky. However, to get a great deal in real estate, you typically have to be willing to take some risks. To get the money you need, you might have to turn to alternative financing options. Bridge loans are one type of financial vehicle that might help guide you to the money you need to make the deal.
When you borrow money from a bank, you can usually count on fairly low-interest rates. They make their money by making long-term loans to borrowers who will most likely make their payments on time. If your project does not qualify for a bank loan, get ready to fork over some seriously high amounts for a while. The higher interest rates and fees associated with bridge loans are just part of the extra costs that lenders feel justified in charging to cover the higher risk factors. You need to face the fact that if you are buying a “diamond in the rough” type property with hopes of fixing it up and selling at a profit, you are embarking on a risky venture. Expect to pay extra for the privilege. However, the rewards at the other end can be substantial.
The idea behind bridge loans, as the name suggests, is to carry you over with the funding that you need until you can get a regular mortgage with an accompanying lower interest rate. To do this, you will need to add value to the property by enhancing it in some way, or you will need to count on the market to increase the value of the property on its own. The latter choice is perilous, so it is generally better to have a firm plan in place for expanding the property’s value. As soon as you have made the improvements, start trying to qualify for a bank mortgage. You will want to secure that lower interest rate and pay off any bridge loans as soon as possible.
Real estate investing poses many challenges to the novice player of the game. Securing adequate funding can be one of the greatest of these trials. Getting a bridge loan is one way, if carefully managed, that you can come out ahead in the game of skill and chance known as real estate investing.