When you buy real estate, you need to put a down payment on the loan. If you already own a property, you may want to use the sale of that real estate to cover the down payment of the new loan. However, this means that you need a contingency in your offer in case you can’t sell in time. The solution is to use a bridge loan. This lets you borrow against your current equity without a sale.
How It Works
You already own a certain amount of equity in your current property. You can use that equity to secure a loan that will cover the down payment (and possibly more) on your new purchase. In other words, it bridges the gap between your two loans to help you buy a new property.
This can be secured against a property that you intend to sell or another one. In either case, you will settle the outstanding balance of the loan within a short time, typically with the sale of the original property.
The Opportunities of Using a Bridge Loan
The key advantage of using a bridge loan is that it can open up access to credit that may otherwise not be accessible. Some capital-intensive ventures can provide a serious return on investment in a relatively short timeframe but also require a lot of money upfront. For example, if you want to invest in developing an industrial park, you could potentially recoup a large portion of the initial investment within a year of opening. However, the land and construction require a lot of capital.
Bridge loans can also be helpful when you want to move very quickly on a project. In the commercial real estate world, this can be important. It can make the difference between a successful project and having to wait for the next opportunity.
Examples of Using Bridge Loans
A bridge loan can be used on almost any building type. Provided that you have equity in an existing property, you can use it for either a commercial or residential purchase.
One example is a multifamily apartment building. There is tighter access to credit for new developments these days. However, if you have the equity, you can use a bridge loan to fund your purchase and build a high-return building.
Another example is creating a healthcare space. This may be an owner-occupied property that you want to use to replace and existing office.
Discover more about how a bridge loan could help you. This valuable tool is worth understanding.