Bridge Loans: Benefits and Drawbacks – By their very nature of being time-sensitive, bridge loans help the real estate investor purchase property that otherwise could not be met by conventional means. Here are 5 benefits and 5 drawbacks for a total of 10 reasons to help you make an informed decision on whether or not to obtain a bridge loan.
- You do not miss an opportunity when the bank cannot close the deal in time.
A bridge loan is needed to carry this deal through until the bank can close it. If you did not obtain a bridge loan, you would miss out on the deal.
- The bridge loan carries you over until the property is sold.
You need to sell property now, but realistically, it may take a few months on the market to sell. The value is in the property that you own.
- It can be less expensive than paying a partner” never-ending-profits” on a specific deal.
If this is a shared investment, a bridge loan may be the solution to paying out a partner who sets the terms of this particular deal. The partner could make the short-term deal a long-term one for self-interested monetary gains.
- You can buy out an investment partner entirely.
This can have long-term benefits in paying off a partner who is no longer interested in the real estate partnership.
- A flexible bridge loan payback may be possible.
Proving sufficient income to repay the debt is one of the criteria a borrower must meet. However, there is an option of utilizing an interest reserve if there is enough equity in the property to support a larger loan.
- Since bridge loans are time sensitive, fees normally carry a higher interest rate and money must be paid up-front.
It is not unusual for interest rate to start at 10% and go up from there. It is a lenders market; therefore, they set the rates.
- At this time, banks are not the best sources of bridge loans.
Banks and other large institutions seem to favor longer-term loans that profit them the most. It will be hard pressed to find a major banking institution to finance this type of loan. This reason enables the bridge loan lending industry to set higher interest rates.
- Lenders base their rates on many factors and they set their own criteria.
Bridge loan lenders are savvy and base their lending on many factors such as credibility, equity as well as the current economy. So, you must pass their list of criteria in order for them to offer you this short-term loan. Ultimately, a bridge loan lender sets the terms.
- Bridge loan lenders need to know exactly when and how they will be paid.
This is not necessarily a drawback. It just takes advanced planning on your part. Your loan exit strategy cannot be an afterthought. You need proof in writing of how you will repay the loan.  And how you repay the loan should to be determined before you select your bridge loan lender. Have you sold collateral to make payments or have you already secured permanent financing? I could see why deals fall through if all ducks are not in a row during this phase.
- Private lenders are not regulated the way that banks are.
You must research the best lender for your short-term needs. Look at their criteria requests, interest rates and past performance in dealing with clients.
Bridge loan lenders’ increasing popularity is due to their ability to fill short-term financial gaps that help real estate borrowers close major deals. As a real estate investor, being aware of the benefits and the drawbacks is the only way you can make the best decision.