From time to time, many real estate investors find themselves in need of short-term loans to help fill gaps as other, long-term options become available. Loans such as this are known as bridge loans for the simple reason that they literally bridge the time and space needed to help other deals or matriculations work. For instance, if you own a highly rentable property in need of serious renovations with the opportunity to sell just around the corner, a loan that provides the funds necessary to pay for the renovations and enable the profitable sale acts as a bridge and facilitator.
There are a number of reasons to consider bridge loans, but the best can be attributed to the opportunity costs they afford. Too many investors lack the imagination it takes to improve their properties for greater income potential. A lack of short-term funding and a fear of entering into costly agreements may keep them from securing the money they need to turn a small investment into a huge reward.
Such loans exist for precisely the reason described here. Banks and other investors recognize that improved properties are often big money makers, and they are willing to loan their funds to worthy borrowers. Once the gap has been bridged and improvements to the property made, long-term financing can be secured to repay the debt for the short-term loan or the funds may be secured through the sale of the property.
Because there can be a high risk factor involved for lenders, people seeking bridge loans may encounter high interest rates. One thing that helps to offset the costs, though, is that most loans such as this have a 6-12 month repay stipulation. In some cases, where the credit of the borrower merits it, an extension of 6-12 additional months may be available with a fee to secure it. Depending on the cost to secure them, these loans can be very useful tools for commercial property investors who hope to both improve their units and demonstrate a tremendous turn over quickly.
Eliminating the debt of the bridge quickly helps to free the investor from a high debt-to-loan burden and improves the general value of the investment itself. Once the bridge has been satisfied and the loan consolidated through repay by a long-term loan, the general value of the situation should be even more evident.
The inclusion of bridge loans within your economic planning can help to keep your property improvement plans moving, and this can equal improved opportunity values and investment returns. If you are in the market to achieve great things with your rental units, you should consider coupling these with long-term loans that improve your capital and bottom line.