Bridge Loans: A Primer for Commercial Real Estate Investors

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A fix and flip loan is a short-term loan provided to real estate investors to purchase and renovate a property that they then sell for a profit. Fix and flip loans also go by the names swing loans, bridge loans, gap financing or interim financing. These loans are a good option for investors who need immediate access to funds. Something unique to these loans is the fact that the collateral can be the estimated value of the property once it is remodeled. This is done in two ways: by using either the after repair value or the loan to cost ratio to determine the amount you can borrow.

After Repair Value (ARV) Loans

This fix and flip option is best for properties that will greatly increase in value after their remodel. The lender will determine whether or not an ARV loan is a good fit by researching your investment calculations and estimated selling price. Commercial real estate investors who qualify for ARV loans typically expect their property to increase around 50 to 100 percent of the price that they paid for the property. Most ARV loans are valued at around 65 to 70 percent of the property’s projected value after remodel. 

Loan to Cost (LTC) Ratio Loans

LTC ratio loans are a good option for properties that will not have as high of a profit margin as properties that qualify for ARV loans. LTC ratio is the metric used to compare the amount of the loan to the cost of the investment property and gives lenders an idea of the risk they are undertaking by providing the loan. 

For both ARV and LTC loans, you will have to put up a small portion of the property’s cost not covered by the loan yourself. You can be confident that HML Solutions will determine whether an after repair value loan or a loan to cost ratio loan is right for you. 

Rates for Bridge Loans

Fix and flip loan rates can vary considerably and depend on such factors as the type of lender or whether the loan is from private money, hard money or a bank. The terms of the loan will also vary by lender, so most commercial real estate investors will do some shopping around before working with a fix and flip lender. HML Solutions knows that you have many options of where to obtain a bridge loan, so we strive to provide the best rates and terms possible. 

Whether you choose an after repair value loan or a loan to cost ratio loan, and the amount of loan you choose to undertake, is largely dependent on the needs of your property and remodel and on your personal financial risk. A loan specialist can talk you through all of these factors. 

Contact Us Today!

It can be difficult for commercial real estate investors to know whether or not they are getting the best deal on a loan. Speak to a professional loan servicer at HML Solutions today to apply for and receive a quick fix and flip loan for your next real estate investment. 

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

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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.

Purchasing Investment Properties in South Florida with Hard Money Loans

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At HML Solutions, we are experts at hard money lending. We have worked with many real estate investors in Florida, both seasoned investors and those purchasing their first investment property. Let us explain how a hard money loan can help you purchase property for investment or flipping purposes.

What Is a Hard Money Loan?

Hard money loans are great for people who would like to buy investment properties but can’t qualify for a conventional loan. You don’t need to have perfect credit to get a hard money loan because the loan is based mostly on the value of the property and not so much on your credit score. Hard money loans are usually given for shorter terms and require a larger down payment than conventional loans. However, interest rates are usually higher.

Although these factors may seem like disadvantages, they actually work very well for the unique situations that real estate investors encounter when purchasing property. Conventional bankers are used to working with people who are purchasing property to live in. They often are skeptical of real estate investors and may be reluctant to finance property for investors with shaky or nonexistent credit.

Benefits of a Hard Money Loan

Hard money loans have many benefits for a real estate investor in southern Florida. These loans are often much easier to obtain than conventional financing. There is not as much red tape involved. Hard money lenders are well aware of the time-sensitive nature of investment real estate transactions. Here are some of the benefits to you as a real estate investor:

  • Hard money loans can close much more quickly than conventional loans.
  • Hard money loans are easy to qualify for by using the value of the property as collateral.
  • You can usually make interest-only payments on these loans.
  • Lenders who specialize in hard money loans are eager to find investors to loan money to.
  • Approval for hard money loans can happen quickly without a lot of paperwork.
  • Mortgage insurance may not be required.
  • The Dodd-Frank act, which can limit the types of mortgages available, does not apply to hard money loans.
  • Loan terms can usually be negotiated with the lender.

Uses of Hard Money Loans

  • Flipping properties: If you are using a hard money loan to purchase property to flip, it is to your advantage to choose interest-only payments. You will be able to pay the loan back in full once you sell the property, and in the meantime, you will have much lower monthly payments if you are only paying the interest charges. There is usually no prepayment penalty, so you can pay off the loan as soon as your flip is complete.
  • Renovations: If you want to make renovations to property that you already own, a hard money loan will be easy to get. You will only be borrowing a fraction of the property’s value, so your loan-to-value ratio will be good. Hard money lenders will be able to give you flexible terms while you are doing the rehab work. You will not need to purchase mortgage insurance. You will probably need to get an appraisal and get inspections of the work being done, but this is not too difficult and is well worth it to get a quick hard money loan approval.
  • Purchasing fixer-uppers: It may be hard to get a conventional loan on a fixer-upper property. Hard money lenders, on the other hand, are eager to lend money for this purpose. The application process is easy, and you will have an answer very quickly. Hard money lenders are used to working with real estate investors, so you will have an easier time explaining your plans to them.
  • Rental properties: Purchasing property that you plan on renting out is a good use of a hard money loan. The value of the property will serve as your collateral, and the interest-only payments will allow you to put more money into making improvements and attracting better tenants.

Details of Hard Money Loans

Hard money loans are structured to give advantages to both the lender and the borrower. The loan terms are shorter than conventional loans, and there are greater risks involved. Because of this, you need to understand the details involved in taking out a hard money loan.

1. Interest Rates

The interest rates for hard money loans are higher than the interest rates for conventional real estate loans. A regular mortgage will have an interest rate that is determined by the borrower’s creditworthiness and the value of the property. These interest rates will often be in the lower single digits.

For a hard money loan, however, interest rates can range from 10% to 15% and can sometimes even be as high as 20%. This is because there is a greater risk to the lender with a hard money loan. Since the borrower’s credit may be shaky, the lender risks not getting their money back.

For the real estate investor, the fact that interest rates are higher should not deter you from looking at a hard money loan. Since you can get an interest-only loan, your payments will not be too high. Also, the term of the hard money loan is usually only a few years. After that, you can refinance into a loan with a better interest rate or pay the loan off, depending on your situation.

2. Loan-to-Value Ratios

The loan-to-value (LTV) ratio is the ratio of the amount being loaned to the value of the property being purchased. The market value of the property is considered to be the same as the purchase price of the property. Of course, the lender is going to want to see an independent appraisal of the property to make sure it is worth the price that is being paid. 

For hard money loans, lenders will usually not loan more than 70% of the property’s value, which means that the LTV is 70%. Occasionally, the lender will accept an LTV of up to 85%. The lender needs to be sure that the property can be sold for an amount that will cover the amount of the loan, in case the borrower defaults on the loan.

3. Down Payment Amount

Since the LTV ratio is usually somewhere around 70%, the down payment will need to be around 30% of the value of the property. If the LTV is only 60%, it will be necessary to come up with a 40% down payment. This is far different than conventional real estate loans, where the down payment can be 20%, 10% or even less. FHA and VA loans sometimes only require a down payment of 5%.

Many real estate investors do not have access to a down payment this large. You can get around this problem by finding another hard money lender to loan you the down payment. This second lender will need to agree to take a secondary lien on the property. A secondary lien means that, in case of default and sale of the property, they will be paid only after the first lender is paid.

4. Points Charged on the Loan

Hard money loans usually have a one-time fee, called points, that is charged at the beginning of the loan. With a conventional loan, the lender will usually charge closing costs that are broken out in detail. With hard money loans, the closing costs are all included in the points. The points are a percentage of the loan amount. For example, 2 points means 2% of the loan amount. The points charged for a hard money loan typically range from 2 to 10 percentage points. The points can vary depending on the property’s loan-to-value ratio and the complexity and risk of the loan.

How to Get Approved for a Hard Money Loan

Hard money lenders are often investors themselves. If they are not investors, they have an understanding of purchasing property for investment purposes because they work with many real estate investors. They will understand the particular situation of investors who may not have perfect credit or are just starting to build their portfolio of investment properties.

Once you have chosen a property to invest in, the property is the basis for approval of the loan. You will need to get an appraisal of the property. You will probably not need to provide your tax returns, employment status, credit reports or bank statements. The loan will be based on the value of the property, not your own creditworthiness.

To increase your chances of getting approved for a loan, you may put together a real estate investor credibility package. This package consists of items such as a list of properties you own, your business plan, your investment background and previous real estate transactions. This package is not required, but it may help a new investor who wants to be taken seriously by lenders.

Contact Us

At HML Solutions, we are happy to speak with you about your Florida real estate investment plans. We can consider your situation and find hard money loan terms that will be beneficial for you. Call us today and talk to one of our loan specialists to see what we can do for you.

Why Florida Property Flippers Use Hard Money Loans for Their Projects

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Alternative financing such as hard money funding is a great option when Florida property flippers seek mortgage funds. [Company_name] understands that hard money capital can be a quick solution to a time crunch, whether from investors, companies or individuals. Since there are so many myths floating around about hard money loans, here are some facts you should know.

Identifying Traditional Loans

Traditional loans have been around for hundreds of years, but they have changed little in all that time. In fact, most still have the exact requirements from when they were first created. Before offering a loan, conventional lenders look for:

  • Long-term employment
  • High credit scores
  • Ample disposable income

They also check the income to debt ratio to make sure the loan can be repaid. All this verification can take months before an approval is reached and money secured.

Understanding Hard Money

There is nothing traditional about hard money financing available to property flippers. Loans are secured by collateral, and that means there is less pressure or concern about spending months reviewing credit documents. Funds are quickly available because ample collateral secures the financing. If you default on the loan, the lender can sell off the collateral to pay off the debt. This decreases the lender’s risk and increases your ability to obtain the needed financing.

Selecting Financing Funds

When looking for short-term loans for up to five years, choose hard money funding. The interest rates for the loans can be higher than traditional financing options, so the loan lengths are shorter. Because the turn-around time is significantly less than when using conventional financing options, flippers can work on more property projects at the same time than they would otherwise.

Advantages For Flippers
Hard money has some significant advantages for flippers, and that may be why so many opt for this type of financing. Here are three of the most popular benefits:

  • Speed of closing – With the backing of collateral, these loans can be approved in weeks instead of months. More importantly, once you have a relationship with your financing partner, you can get money and close deals even more quickly.
  • Amount of Loan – When looking for an investment property, you choose how much collateral to offer and the value of that collateral. That means you have control over the amount of the loan through the property’s valuation. No matter how much money you need, the arrangement with your lender is all about the collateral.
  • Flexibility of details – Hard money loans can offer much more flexibility than conventional financing. Since the loan is secured with property, you can work with your lender to develop funding that fits each of your projects. This can include a repayment schedule that fits your individual property flipping needs.

With so many options for individualized loans available, it is easy to see why these advantages are so popular among flippers.

Choosing Hard Money

In the competitive world of Florida real estate, time is of the essence for property flippers when it comes to locating and securing great deals. Choosing hard money financing makes sense for the fix-and-flip property investors because of the turnaround time for the contracts and the quick loan closing time. Give [company_name] a call today and find out how we can help you finance your next flip.

How Businesses in Florida Use Bridge Loans as Private Equity Financing

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Many investors appreciate the benefits of working with private equity companies and taking advantage of related investment opportunities, but when those openings arise, investors may not have the necessary capital immediately available. When the amount of needed funds is greater than the available monetary resources, bridge loans provide a solution. In other words, this financing option provides temporary help to cover short-term costs until regular resources become available. Bridge loans are sometimes referred to as equity bridge facilities and subscription line facilities or credits.

Experts at HML Solutions may use bridge loans to provide hopeful investors with the private equity financing necessary to continue moving forward. Our Florida-based organization offers many services and solutions with a deep understanding of current trends in the private equity market. We understand the need for flexibility and tracking as you work to improve the performance of your investments. In addition to helping investors, the loans may be used by institutions that need capital to cover short-term obligations. No matter how they are used or what they are called, bridge loans cover the gap between when you need the funds and when capital calls are made.

A Timely Solution for Significant Investments

Bridge loans have become a popular tool within the private equity world, especially over the past few years. According to the April 2021 Quarterly Update, inflation will be a focus for investors, and investors’ prospects will continue to brighten as inflation spurs interest in the asset class. With increased interest in significant investments, quick sources of convenient financing have become vital. Bridge loans have successfully provided funding gaps since before the turn of the century, and their use has grown steadily between then and now. Today, the loans are a key part of investment processes throughout Florida and other states.

These short-term loans are frequently used for real estate investments, both commercial and residential all over Florida. The loans are used by individuals, investment firms, and companies of all sizes. Some of the most common uses of the loans include the purchase of investments at an auction, the purchase of a rental property, the purchase of homes and properties for flipping, and the chance to relocate. Purchased properties may include condominiums, office buildings, warehousing properties, gas stations, retail centers, and hotels. Another important use of the loans includes getting cash out of existing properties and the built-up equity.

Benefits of Bridge Loans

There are several important reasons for the popularity of bridge loans, especially in recent years:

  • Bridge loans are convenient and offer quick access to needed capital. This affects both flexibility and liquidity, two things that are vital within the investing and private equity sectors.
  • The loans can be used to finance time-sensitive opportunities; qualifying and getting approval happens much more quickly than through traditional lenders.
  • They offer funds when financial resources are allocated in other currencies.
  • Credit scores don’t affect qualification or loan amounts as much as the value of the real estate.
  • Properties that need a lot of work present difficulties for traditional lenders; bridge loans are an appropriate solution in these situations.
  • Bridge loans provide the possibility of a delay of capital calls. This reduces the administrative load for investors and private equity funds.

Another important, albeit sometimes controversial, benefit of equity bridge financing is the inflation of returns. This happens when one partner’s equity is used for a shorter length of time, resulting in an increased internal rate of return. Thus, the measured performance of the equity reflects positively in investment criteria. The IRR also positively impacts the determination of carried interest.

Additionally, bridge loans are usually secured through a limited partnership, and they may not be considered when the investment fund’s leverage ratio is reviewed. This is important for private equity firms who want to keep their debt burden within a specific limit. The means of securing the loans means that the fund’s capacity for investments hasn’t increased.

Bridge Loans: A Non-Traditional Option

There are two basic types of lenders: traditional and non-traditional. Bankers are traditional lenders and look at expected factors:

  • Amount of the loan
  • The borrower’s credit history
  • Cash flow estimate
  • Available collateral

These factors are weighed to determine the lender’s risk, and if any of these factors are uncomfortable for the lender, Florida borrowers may struggle to obtain a traditional loan.

The good news is that there are alternatives available. Non-traditional loans come in many forms:

  • Crowdfunding
  • High-net-worth individuals
  • Insurance funds
  • Online lenders
  • Pension funds
  • Family offices
  • Sovereign funds

Those lenders are often willing to offer non-traditional opportunities because private equity funds tend to be creditworthy ventures. Of all these alternatives to traditional loans, the bridge loan is uniquely suited to satisfy the needs of Florida borrowers.

Before offering a bridge loan, however, lenders carefully research the creditworthiness of the proposed investment opportunity. This research is primarily based on the strength of the fund and the fund investors. Lenders will also take the fund’s ability to call capital into account. For many lenders and prospective borrowers, interest rates are relatively low even for significant loans.

Florida borrowers should expect to present a solid credit history and demonstrate a secure position within the market when seeking a loan. It’s generally better for prospective borrowers to seek help when short-term credit is a viable solution, rather than waiting until the financial situation becomes desperate.

The Risks Faced by PE Funds and Investors

Naturally, there are certain risks and disadvantages involved with providing or taking bridge loans. As the popularity of the loan type has increased, so have the terms. Repayment terms may extend over a year, and this has an impact on the internal rate of return. While there are positive results from this, there are also some drawbacks, such as the incentivization of funds; the IRR may increase, but only as a result of time – not because the investments and related projects were profitable. This false sense of security can encourage the inappropriate use of credit lines.

The risk of investor default is another reason to carefully consider the loans before committing. Bridge loans decrease the risk and occurrence of capital calls, but also increase the risk that investors will default on those calls. This is, in part, because the capital call amount has increased even though the frequency of calls has decreased. For many Florida borrowers, this means that bridge loans are a more expensive route, with high interest rates, for obtaining financing.

Private equity funds aren’t required to submit information regarding the use of bridge loans, so there’s a lack of information. In fact, there’s a distinct and troubling shortage of data on the loans and the private equity funds’ performances, specifically when used during a recession. This absence of reliable information may make it difficult for lenders to accurately determine risk.

The lack of regulation and disclosure requirements has also made the use of bridge loans a bit uncertain.

Of course, some private equity funds have had negative experiences. In the past, strong companies have acquired financing through bridge loans to purchase investment opportunities, only to see the value of those investments take a steep drop before an appropriate amount of capital was raised. In these situations, the borrowers and lenders were both negatively impacted.

Those potential borrowers in Florida should thoroughly consider whether they can accept the terms (high interest rates, short loan length, and lack of information) before committing to the loan. Once the borrower fully understands and accepts the terms, bridge loans can be very beneficial. As with all other financing solutions, borrowers must carefully weigh the benefits and disadvantages before determining whether the solution is appropriate.

Industry Recommendations for the Use of Bridge Loans

The Institutional Limited Partners Association, a trade association in the private equity asset class, recommends that bridge loans are used to benefit both parties rather than simply for increasing the IRR. The ILPA published several recommendations about the best practices regarding the use of the loans:

  • Loan lengths should be less than 180 days.
  • No more than 20 percent of the funds should be committed.
  • Lenders and funds should work on increasing the level of transparency in interactions.
  • Consistency throughout the funds’ lifetimes should also be increased.
  • Quarterly disclosures of information regarding the size, terms, and costs of the loans should be published.

The Future of Bridge Loans

Bridge loans are expected to maintain their popularity in the upcoming years based on consistent liquidity and the consistent emergence of non-traditional lenders. Florida borrowers, lenders, and industry leaders may watch the performance of bridge loans throughout the ups and downs of the market in the next few years. Hopefully, more information about the use of the loans will be shared by private equity funds.

Florida investors and business owners can use bridge loans as private equity financing for short-term solutions that save their businesses or make new opportunities possible. The loans are likely to provide convenient solutions and increased business stability as the loans are better understood and as more information becomes available. HML Solutions is committed to providing useful solutions to Florida business owners.