Property Investing Fun Fact: Not All Bridge Loans Are Hard Money
homebuyer signing property purchase agreement at desk with laptop and miniature house model, finalizing mortgage and closing transaction
Bridge loans are a common tool among property investors looking to secure new investments while working on other sources of revenue. Here is a property investing fun fact you might not know: not all bridge loans are hard money loans. Some of them come from institutional lenders.
This post was motivated by research revealing a misunderstanding about bridge funding. That research revealed an incorrect assumption that all bridge loans for real estate transactions come from hard money lenders. I get why the misunderstanding exists. Nonetheless, it is still a misunderstanding.
The Bridge Loan Briefly Explained
An easy way to explain the fundamentals of a bridge loan is to look more closely at its name. What does a bridge do? It connects two points separated by a gap. Bridge loans do exactly that from a financial standpoint. A bridge loan bridges the gap between an immediate need and a future source of funding.
Picture a real estate investor attempting to purchase a new office building. He has another property in his portfolio that he no longer wants. So he puts that property up for sale with the intention of using the proceeds to purchase the new property.
The new property’s seller might not be willing to wait until the investor’s other property sells. He gives the investor just 30 days to close or the deal is off. It could take the investor months to line up traditional financing. So instead, he turns to Salt Lake City’s Actium Lending for a bridge loan.
A Temporary Loan to Get to Closing
Actium Lending agrees to provide a bridge loan that gets the investor to closing. He buys the new property even as he continues working to sell the other one. When that other property does sell, the proceeds pay off the bridge loan. Everybody is happy and the investor did not lose out because he couldn’t get to closing fast enough.
A typical scenario involving a private lender like Actium is pretty straightforward. But banks and credit unions offer bridge loans as well. Their approval and underwriting processes can be more time-consuming and extensive, which could ultimately make obtaining a bridge loan a moot point.
The advantage private lenders have is the speed at which they move. Where institutional lenders often need weeks or months to fund a loan, a private lender can do it in a matter of days. Bridge loans are an attractive option for completing property transactions for that very reason.
A Bridge Loan Prior to Traditional Funding
Actium Lending says it’s not abnormal for a client to obtain a bridge loan to purchase property, only to turn around and secure traditional financing to pay off the bridge loan. In such a case, traditional financing was always the long-term plan. The investor only utilized a bridge loan to complete the deal as quickly as possible.
In essence, the bridge loan becomes a tool for obtaining a piece of property that the bank will ultimately finance. The bridge loan ends up acting as the invitation to a party. The party is where all the action is; the invitation gets you in the door. Likewise, a bridge loan gets the investor in the door and seals the deal. Then traditional funding takes over from there.
Bridge loans used to be fairly popular for residential real estate transactions. That changed following the 2007/2008 financial crisis and housing crash. These days, most bridge loans go to commercial real estate transactions. They help real estate investors reach their financial goals more quickly and with fewer hurdles to overcome.
