Real estate investment is competitive, and that means it can be risky. When you are looking to close in a market with stiff competition from other investors at both the inventory acquisition and resale stages, the cost of your financing becomes important. Lower capital costs translate to higher profits and more growth in your portfolio, and sometimes that means using bridge loans for commercial real estate. While they have higher interest rates than long-term loans, their short terms and structure often make them less expensive.
Often, investors use these loans even for long-term purchases because they can be approved quickly. Depending on the program you use, LTVs can range from 70% to 90% of the purchase price, and interest-only payments throughout the loan term make it easy to maintain your financing costs while you focus most of your money on property improvements.
Improve Your Investment
For flippers, the balance is paid when the property is sold to a new investor, with no need to set aside additional funds for the principal. When buying income properties, the plan is usually to refinance the bridge loan into a longer-term commercial loan after making improvements. When it is done carefully, you can even build in enough additional value to absorb the costs of improving the property when you refinance.
Property Loans Are Risk Management Resources
When you put up all the capital for a new investment yourself, you risk a lot of money when you do not need to. One reason that experienced investors still rely on financing is to minimize the loss exposure they face if a deal goes wrong. The less money you have to pay upfront to acquire a property, the less you stand to lose in the event of a loan default. While it’s true that you do not risk a default when paying cash, you assume other risks like the complete inability to sell a property on time. Those risks might be low, but they are there.
By contrast, if a commercial real estate deal goes sour and you are looking at having to walk away from it, you can let the lender seize the property and move forward with losses that only amount to your financing costs and improvements made so far. It’s never an ideal situation, but it can be the solution that allows you to regroup and restart with enough capital to keep moving forward.