An ideal 1031 exchange situation allows the investor to use the proceeds from the sale of one property to buy the second one. But, there might be a situation when the gap between the sales is large that an investor can’t immediately use the funds from the sale of the relinquished property to cover the cost of the replacement property. In this case, they need funding to “bridge” the gap. Enter bridge lending, also called bridge financing, bridge loan, or bridge funding.
People can use bridge loans when they are purchasing and selling properties for their own use. A business or financial expert investor can also use the bridge fund to cover a gap in funding.
WHAT IS A COMMERCIAL BRIDGE LOAN?
A commercial bridge loan allows the investor to buy the new investment property without selling the existing one. When the investor gets permanent financing like a commercial mortgage, they pay the remaining balance on the bridge loan. The loan that is used to finance a short-term purchase is known as a Bridge loan. An investor can go for a bridge loan to buy a property that needs to be sold quickly.
Below listed are some features that make commercial bridge loans different from the other loans:
- Loan term: Generally, most commercial mortgages have a term of 5 to 20 years for the repayment. But it is not the same with a bridge loan, as it has a much shorter term of less than one year. Many of the investors repay the full loan after a few months.
- Interest rate: The bridge loan has a higher rate of interest than any other type of mortgage or business loan. Some bridge loan is amortizing, that means the borrower can pay less interest if they pay the loan before the scheduled time. But this option is not available in other loans, meaning the borrower has to pay the same amount of interest either they pay quickly or pay on a scheduled time.
- Speed of funding: The turnaround time of a bridge loan is less as it takes weeks for the conventional mortgage or business loan, i.e., under a bridge loan, an investor gets it fast to pay for the immediate property.
- Collateral: Generally, the bridge loan needs collateral, like real estate.
- Funding Sources: Funding for a bridge loan can come from various sources, including private lenders, traditional banks, accredited investors, and hard-money lenders.
1031 Xchange offers a marketplace of fully vetted real estate offerings. Check out some high-performing 1031 properties in the 1031 exchange properties list published in the property section of the website.