July 06, 2016
Hard money loans and bridge loans are nearly synonymous. And they are a type of commercial loan that is not a conventional loan. Basically, you get a hard money or bridge loan when you do not qualify for conventional financing. You are lacking something needed for conventional financing.
Also, most often a hard money or bridge loan is temporary financing that gives you time to qualify for a permanent loan. Here are some commercial loan situations that a hard money/bridge loan could be a solution for.
But first – a word of caution. Hard money/bridge loans tend to be costly, have greater risk than conventional financing, and are not usually a good strategy for a new commercial investor unless that investor is partnering with an experienced investor. Hard money/bridge loans are costly. It’s important to note that when you do bridge financing, you need an exit strategy which is your permanent loan. Therefore, you are paying for two loans which can be quite a big financial risk unless you have experience and you have done excellent costing and estimating.
1. The investor’s credit score is too low. Conventional financing/permanent loans require a certain credit score. If an investor doesn’t meet that requirement, a hard money/bridge loan might help meet that requirement. Hard money/bridge loans generally are one year to eighteen months. A bridge loan could give the investor time to increase their credit score.
2. The occupancy is too low. For example if you are talking about a multifamily property, a high quality conventional loan will require the property to have 90% or greater occupancy. If the property falls short (not close to 90%), a hard money/bridge loan could give the investor time to get the occupancy to meet the 90% occupancy requirement.
3. The cash flow of the property is too low. Let’s say that the property fails to meet the cash flow requirement to qualify for the loan. Perhaps the previous owner did not raise rents for the past few years, and the rents are well below what such a building, and neighborhood commands. A Hard money/bridge loan could give the investor the time needed to raise rents to meet conventional/permanent loan requirements.
4. The property requires quite a bit of rehab. An investor has found a property that needs quite a bit of rehab – too much to meet conventional loan standards. A bridge loan could help give the investor the time to rehab the property to meet conventional loan requirements.
5. The investor wants to invest in a new construction project. A bridge loan could give the financing and time to get the project built and stabilized. But I highly recommend that you do not get involved in new construction unless you are experienced or have an experienced partner.
I would not recommend that you get involved in rehab projects as well as construction loans without experience or a partner. One big reason for this is that that costing and estimating are extremely difficult unless you have experience. Even with experience, many investors underestimate costs because of various reasons – cost of materials rise, project delays, costly problems found in the hardware or construction that were missed at inspection, etc.
I don’t want to scare you from doing a hard money/bridge loan. It can be a very good part of an overall strategy. But – if this is the route you decide to go, do major due diligence, and I recommend you stay away from it unless you have experience or an experienced partner.
Contact us to see if you pre-qualify for our best multifamily, commercial, bridge, construction, or business loan rates and terms. Also, contact us if you would like to discuss your particular commercial lending needs, or if you have any questions. Call 214-695-7310, or send an email to firstname.lastname@example.org
Bruce Painter, Director of Marketing, Business Loan Store