For real estate investors, commercial bridge loans can be a lifesaver. There are times when such professionals seek short-term financing to fill a need while they make arrangements for a more permanent lending arrangement. There are numerous pros and cons to these borrowing scenarios that deserve consideration. Here are some that responsible players in the real estate game ought to weigh before signing on the dotted line.
One advantage is that bridge loans are speedy. If you’re looking for a quick cash injection, the application process remains a cinch, and you may have your money in a few short days.
Another bonus is flexibility. With few exceptions, borrowers can use the money they obtain in any way they deem necessary. This feature makes such loans preferable for those facing unique, one-time expenditures.
They’re equally handy when trying to stimulate interest among buyers. The money you secure can go toward enticing upgrades. Consider installing energy-efficient windows, upgrading WiFi, or replacing old carpeting with stunning hardwood flooring. Fundamental changes of this magnitude sometimes make the difference between a bidding war erupting and a listing perpetually languishing on the market.
Best of all, most of these financial agreements are nonrecourse. Essentially, this means lenders only may demand repayment from assets generated by the piece of real estate in question. The personal assets of the borrower remain protected.
Despite these appealing features, downsides exist. A huge negative is that they feature unfavorable rates. Lenders get away with these percentages because their customers tend to have urgent needs. When it comes to contract negotiations, financial institutions hold the upper hand.
Further, these lending agreements impose high penalties in response to late payments. Some borrowers skip over this factor when securing a loan. They assume everything will proceed as planned and that every scheduled installment will go out the door on time. Later, an emergency arises that initiates a cash flow problem, and the fees begin piling up.
Stopgap loans rely on a more permanent form of financing being available in short order. If replacement monies aren’t in place after the agreement has run its course, a real estate investor might have to scramble to find a solution.
Bridge loans can be the ideal answer for real estate investors searching for a modest burst of funds. That said, these instruments come with drawbacks that borrowers must recognize. Weighing the benefits against the disadvantages is essential before moving ahead with such an arrangement.