If you've had a difficult time securing financing for your next commercial investment property because the property is half-occupied or it is in decrepit condition, you should consider the benefits offered by bridge loans. Learn why this type of financing might be the help that's right for you and some approaches to improve your eligibility.
Conventional lenders don't like deserted or distressed properties. This isn’t the case with bridge lenders. Bridge lenders secure their loans based on a borrower’s experience and the potential of a property.
Bridge financing allows real estate investors to capture the long term and short term income potential of poorly-managed or distressed properties. Using bridge financing, an investor could purchase a half-occupied apartment complex, improve its condition, and increase occupancy. Once most of the units are occupied, the investor can then refinance to a conventional mortgage.
These loans also benefit developers who intend to resell distressed properties. The capital given by a bridge lender allows the investor to improve a property’s condition and then resell it for a tidy profit.
However, when it comes to bridge lenders, you need to do all in your power to prove the potential of your project and your experience as a developer.
Can you meet these basic eligibility standards when it comes to commercial bridge loans?
• Net Operating Income: The annual income of your intended property must be able to cover the cost of the loan on a yearly basis, so you need to have on-hand income and expense statements from the property’s current owner, as well as rent rolls and current lease agreements.
• Experience: Most of these loans exceed a million dollars, so not just anyone can qualify. You need to either have a resume on hand or be able to discuss your track record of previous real estate development projects.
• Savings: Having decent savings on hand is a must. Your lender will want assurance that you can carry your loan should things not go according to plan.
• Net Worth: Along those lines, your net worth should be at least equal to the amount of money you intend to borrow. Even if you aren't pledging your personal property as collateral, these lenders want assurance that you have assets on hand to carry your loan if things go south.
• Credit: Credit is only a factor if you intend to refinance. If this is the case, generally a minimum credit score of 650 is needed to qualify.
But above all else, bridge lenders are concerned with one thing: your exit strategy.
When it comes to commercial bridge loans, talk up your exit strategy.
Bridge financing is just that: a bridge. It is designed to be paid back either through refinancing or resale, so being able to discuss your exit strategy is crucial. Consider the following talking points to assure your bridge lender about your exit strategy:
• If you plan to refinance: Talk up unrealized income potential. Half-occupied commercial properties suffer due to low cash flow, and this means conventional lenders refuse to finance such deals. Talk up your plan to improve cash flow from the property you want to invest in, and have a clear strategy to increase occupancy either by making specific improvements or through better property management. Having a specific plan along these lines will give your prospective lender confidence that you will be able to refinance before the loan comes due.
• If you plan to resell: In this case, a bridge lender will be interested in your plan to bring the property back to marketable condition. Have a clear budget and timeline specifying the improvements you want to make, and cite comparable sales to give your lender concrete assurance that the final resale value will pay back the outstanding loan.
Talking up your exit strategy with these tips and keeping the basic eligibility standards in mind will ensure that you can take advantage of the unrealized potential of neglected or distressed properties with the help of bridge financing.
Level 4 Funding LLC
Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis Dahlberg Broker/RI/CEO
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 44 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters and 5 amazing grandchildren. Dennis has been an Arizona resident for the past 43 years.