Timing is always a factor in real estate transactions. But in the fast-paced environment of real estate investing, timing is critical. It is the name of the game among multiple investors competing for the same property. So when a prime property hits the market, waiting on conventional financing makes little sense. But what other options do investors have?
Salt Lake City’s Actium Lending recommends hard money and bridge loans. Both are forms of private lending that give highly competitive investors the advantage in time-sensitive acquisitions. A hard money or bridge loan acts as the connection point between an acquisition opportunity and long-term stability.
More About the Bridge Loan
While all bridge loans from private lenders are hard money loans, not every hard money loan is a bridge loan. Investors need to know the difference. A bridge loan is a short-term financing tool whose purpose is in the name: it bridges the gap between an immediate capital need and a future means of funding that need. A hard money loan is more general in its purpose and nature.
Investors should also understand that there are differences between bridge loans from private and conventional lenders. Private lenders work with less stringent borrowing requirements. Conventional lenders, though they may be a bit less stringent with bridge loans, still require more from borrowers.
Private Lending Is Based on Assets
One of the biggest advantages of both types of loans is that they are asset-based. This means that lenders are not digging through credit reports and profit-and-loss statements before determining whether to lend. They are not interested in a borrower’s creditworthiness. Instead, they are interested in knowing the value of the property being acquired.
A typical scenario at Actium involves a Utah real estate investor looking to buy something like an office building or a multi-family residential complex. A conventional lender would request tons of documents covering everything from the borrower’s income to his current debt load to bank and tax records.
On the other hand, a hard money lender would appraise the property being acquired and compare its value against the sale price and the amount being requested. If all the numbers work out favorably, approval is probably forthcoming. Only then will a lender consider creditworthiness to determine the interest rate and term.
Key Bridge Loan Principles
By their nature, bridge loans are short-term instruments. As such, there are some key principles investors should know before considering bridge funding for an acquisition:
- Shortest Possible Terms – Lenders tend to keep the terms as short as possible. Terms of 6-24 months are the norm.
- Interest Rates – Interest rates are typically higher than their conventional counterparts.
- LTVs – Private lenders have lower loan-to-value (LTV) ratios, requiring higher down payments.
- Exit Strategy – Every bridge loan requires an exit strategy. The lender wants to know how the loan will be paid back.
Higher interest rates and shorter terms might make bridge loans seem unattractive. But just the opposite is true. In exchange for those higher rates in shorter terms, investors get speed and flexibility. And because terms are so short, it is possible to actually pay less total interest on a bridge loan than would be paid on a conventional loan with a term of 15-30 years.
The Best Option for Many
Hard money bridge loans get a bad rap in the media. But that is because they are widely misunderstood – even among financial experts. The fact is that hard money and bridge loans are the best option for many investors in competitive markets like Utah. They are ideal for acquisition purposes.