A bridge loan is a financial transaction often used in commercial real estate when buying a new property before another one has been sold. Ideally, the proceeds from one sale would be applied toward the purchase of another property, but the timing doesn’t always work out for that to happen, so bridge loan can help cover the gap, while waiting for sale of the previous property. When a bridge loan is secured, it can be used as down payment on the new property, and some of the proceeds of that loan might even be left over.
Why use bridge loans for commercial real estate?
The reason bridge loans are commonly used by real estate investors is that quite often, the opportunity to purchase a new property is only there for a limited amount of time, and must be acted upon quickly. If an investor were only able to purchase a property after the sale of the previous property, the opportunity to make that new purchase would frequently be lost. Bridge loans make it possible to ‘strike while the iron is hot’, and make the new purchase of property without waiting for the other property to sell.
Advantage of bridge loans
While it might seem that securing a bridge loan creates a precarious situation for the investor, that doesn’t have to be the case. It’s true that an investor might end up paying on both the new property and the bridge loan before the previous property sells, and of course that could be problematic, but that can usually be avoided. Bridge loans don’t usually have to be paid on immediately, with the first of the monthly payments usually being deferred for several months. That allows investors to make purchases as they become available, rather than always waiting for previous properties to sell before any action can be taken on new ones.