Financing is always a concern among commercial real estate investors and property developers. They need flexible and responsive funding solutions that allow them to seize opportunities quickly while also managing risk effectively. Unfortunately, what they need is usually not found in traditional financing. More often than not, property investors and developers turn to private lenders and their more flexible hard money loans.
Hard money, when structured as bridge loan, is designed to address short-term funding needs, like speedy property acquisition. Bridge loans are invaluable tools that help investors and developers navigate complex but fast-moving real estate transactions. Without them, real estate investing and property development would be significantly more difficult.
The Bridge Loan Defined
The best way to understand a bridge loan is to consider its name. A bridge loan is a temporary, short-term financial arrangement that offers a bridge between an immediate funding need and a long-term way to meet that need.
Bridge loans were extremely popular in residential real estate back in the 1990s. Homeowners looking to purchase new homes while also selling their current residences would use bridge loans to buy them . Once their existing homes sold, the proceeds would be used to pay off the bridge loans.
Alive and Well in Commercial Real Estate
We don’t see that sort of thing as much in residential real estate today. But in commercial real estate, bridge loans are still quite common. Salt Lake City-based Actium Lending is very familiar with hard money and bridge funding. One of their more recent examples involved a real estate investor looking to simultaneously sell one property and buy another.
This borrower’s exit strategy was the sale of another property in his portfolio. But he could have gone to Actium with a different exit strategy. For example, Actium wrote a loan some time ago for an investor looking to purchase a multi-family apartment property. His exit strategy was to refinance the property with a traditional loan once it was stabilized and generating income.
In each case, hard money covered an immediate need on the promise of future funding. Actium was willing to take the risk because the value of the property being acquired was more than enough to cover the amount requested.
Hard Money’s Key Characteristics
So, what is it about hard money that makes it so different from traditional funding? For starters, although some banks are willing to entertain bridge loans from time to time, most hard money comes from private lenders like Actium. But there are more differences, as demonstrated by some of the key characteristics hard money is known for:
- Approval Speed – Hard money loans arranged by private lenders can typically be approved and closed within a matter of days. Approval speed is one of the most compelling reasons to consider a private lender.
- Loan Flexibility – Private lenders have considerably more flexibility when writing their loans. They can accommodate just about any circumstance, no matter how unique.
- Rates and Terms – Private loans tend to come with higher rates and shorter terms compared to banks. But given how quickly borrowers exit, neither is usually a problem in the commercial real estate space.
Hard Money is flexible enough that borrowers are comfortable using it for a variety of needs. They are most commonly used for property acquisition. But some borrowers rely on it to refinance existing debt, cover property renovations, transition between properties, and even meet temporary gaps in cash flow.
One thing is for certain: hard money bridge loans from private lenders have a lot more potential than traditional bank loans. They are built that way from the ground up.
