When to Use Bridge Loans for Commercial Real Estate in South Florida

by HMLS

If succeeding as a real estate investor is all about location, dealing in properties in South Florida must be a smart career move. As more and more people flock to the Sunshine State, housing and commercial buildings become increasingly more valuable. While Florida certainly offers many highly coveted properties, making the initial purchase of a piece of real estate can be tricky. Whether you are new to the world of commercial real estate or have been buying and selling properties for years, having an efficient and affordable means of financing deals is central to the success of your business. Unfortunately, selecting a method of securing the funds you need is made somewhat challenging by the shear number of loans and financial institutions you have to choose from.

At HML Solutions, we believe that financing real estate doesn’t have to be an overly complicated matter. We recommend bridge loans as an effective financial solution for investors in various distinct scenarios. Learn more about how bridge loans work and when they may be advantageous to your business ventures.

The Basics of Bridge Loans

Bridge loans, as you may surmise from their name, are meant to help real estate buyers overcome financial gaps so deals can be closed more easily. This goes to say that businesspeople take out bridge loans to capitalize on profitable investment opportunities when these professionals lack immediate working capital. There are various reasons an investor may be short on cash. For one, she may be new to the world of commercial real estate and require funds to get started on her first property. Alternatively, a buyer may have his funds tied up in a previous property that has not yet sold.

As a general rule, bridge loans are short-term financial solutions. Oftentimes, lenders set the term of the loan as less than three years. Within this amount of time, borrowers may have the opportunity to renew the loan or they must repay their lender in one of a few different ways. For one, an investor may sell a previous property and pay off her bridge loan using these profits. Another common scenario involves refinancing. Borrowers may apply for a traditional loan that they can use to pay off their bridge loan, aiming to lower their interest rate.

Bridge loans come along with multiple distinct advantages. For one thing, you can often be approved and receive your funds quite rapidly. This prevents you from missing out on a strong investment opportunity because someone else closed the deal first. In addition, bridge loan lenders often base your approval on the value of the property itself, rather than solely your personal credit history. This may simplify your application process and increase your chances of being approved.

The Risks of Bridge Loans

While bridge loans are beneficial in numerous ways, they also come along with a few risks. Namely, bridge loans generally have significantly higher interest rates in comparison to traditional loans. Your exact rate will vary, but it may exceed traditional loan interest rates by many basis points. This discrepancy is accounted for by the short turnaround times and reduced credit requirements that bridge loans offer. Additionally, bridge loans must be repaid relatively quickly. This means that you must be able to secure another type of loan or earn a significant amount of money within the term. Because the property itself generally serves as collateral, defaulting on a bridge loan may lead to the loss of the building.

The Best Times To Use Bridge Loans

There are a multitude of specific situations that may call for the use of a bridge loan. Consider just a handful of times when this form of financing is especially useful to commercial real estate investors:

  • Credit Problems: If you have experienced financial difficulties in the past that have damaged your personal credit, it may be challenging to secure a traditional loan. Whether you have been denied by a bank or are concerned that you don’t meet set requirements, a bridge loan may be a good solution. Bridge loans often use the property being purchased as collateral. While this means you could potentially lose the building if you cannot repay the loan, it also makes it much easier to qualify. 
  • Time-Sensitive Deals: In Florida, a profitable property may be sold very quickly. When you need to obtain funds in a hurry to close a deal before someone else does, a bridge loan may be a good choice. Because bridge loan lenders are not as concerned about your credit history, you may be able to apply, be approved and receive the cash with minimal paperwork and hassle. A traditional loan could require up to two months to complete, while bridge loans often take less than one month.
  • Value-Add Plans: Financial institutions are hesitant to fund the purchase of properties that investors intend to flip. After all, it is not always easy to see how a class C building could bring in a reasonable return. Bridge loan lenders, on the other hand, are often willing to work with fix-and-flip businesses, accepting the degree of risk these value-add ventures present. If you can see the potential worth in buildings that are in less-than-optimal condition, consider using bridge loans to close deals.
  • Atypical Properties: Traditional lenders are also wary of investing in properties with unique purposes because it is not as easy to estimate their future value. Bridge loan lenders are more comfortable with risk in these situations. If your bank turned you down for a loan or you suspect they might, try a bridge loan. These work well for atypical situations such as renovating an assisted living facility. 
  • Non-Recourse Loans: Some loans carry a great deal of financial liability, or recourse. This means that you may have to use your own personal savings as collateral to back up your loan. If you want to avoid taking on this degree of liability, a non-recourse bridge loan may be your best option. This way, the only collateral you must provide is the real estate itself; your personal cash is secure.

Consider a few specific examples of circumstances that may lead an investor to apply for a bridge loan. First, imagine you hear about a foreclosure or short sale of a valuable property in an up-and-coming area of South Florida. The affordability of this property is likely to attract a number of bidders within a short period of time. Applying for a traditional loan may take far too long; a bridge loan may get the funds you need into your hands as soon as possible.

As a second example, suppose you come across a building for sale that looks rather run-down. Upon closer examination, you notice that it has a strong foundation, is in a growing neighborhood and simply needs to be updated and repaired. A bridge loan lender may be more willing to partner with you to achieve your vision than a traditional lender would. 

Finally, say you have struggled to maintain your credit score in the past. Perhaps you purchased a pricey bit of real estate before a major dip in the market. You want to improve your credit and strengthen your business but need additional working capital to do so. By finding an available property that is intrinsically valuable, you may be able to qualify for a bridge loan. This way, you can capitalize on an advantageous opportunity and start rebuilding your credit.

Tips To Apply for a Bridge Loan

While bridge loans are much more flexible than many other financial solutions, not just anyone can qualify for one. On top of that, not all bridge loans are made equally. Before applying for a specific loan, be sure to carefully investigate all of its requirements and even to compare similar offers at different companies. This may help you to find the best possible interest rate and to avoid being surprised by various fees. 

Additionally, it’s essential that you consider whether your financial situation can withstand additional debt. For instance, take some time to understand your debt-to-income ratio and your estimated profit from the property. These figures may impact not only your likelihood of being approved for a loan, but also your ability to repay it. It’s important to determine how much working capital you currently have, as well. Many lenders may fund only a percentage of the real estate’s cost, so be prepared to make a significant down payment. On top of that, make sure you can cover your expenses for several months if the property takes longer to sell than you expected.

Building up momentum as a real estate investor in South Florida is not easy. Properties may sell quickly, but you still must find a way to finance their initial purchase. When a traditional loan is made impractical by your credit history or the type of deal you wish to make, a bridge loan may have a lot to offer your business. At HML Solutions, matching property investors with financing solutions is one of our specialties. Reach out to our team today to get specific details about our bridge loans and to start your application.

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