Sometimes life throws a curveball that puts you in a financial bind, such as tenants not paying rent, customers not paying bills, and so on. On the other hand, sometimes the curveball is an opportunity that will have a positive outcome after a financial investment. This might be a major business deal that requires an investment in inventory, the chance to purchase a commercial rental property, or a major equipment purchase that creates new revenue streams.

If you’re a real estate investor with equity, you can tap your assets with a bridge loan to cover the gap when these types of opportunities arise. However, terms for a bridge loan can vary significantly depending on the deal—especially as we emerge from a global pandemic that temporarily put bridge lending on hiatus.

How does a bridge loan work?

A bridge loan is intended to be a temporary source of capital to help cover a financial gap. When someone gets a bridge loan, their intent is typically to pay it off within the terms or to buy time until it can be converted to a conventional loan or refinanced with a lower interest rate. In either scenario, the loan is backed by equity, so if you have substantial equity in a property, you can use it to secure short-term funding.

Why do bridge loan terms vary?

Bridge lenders are more cautious these days as we emerge from an unprecedented financial situation caused by the global pandemic. Rates are fluctuating more than they were pre-pandemic, and lenders are being more discerning. They are observing the market and demand for different asset types to see which ones are thriving and which ones present a higher risk. 

They are also more carefully assessing information such as the collateral type, riskiness of the borrower, past foreclosures, current forbearances, and the type of business. It’s also worth noting that many lenders are only providing loans to existing customers who have already built a foundation of trust.

Another factor that has affected many bridge lenders is the way their loans are secured—often in a real estate investment trust—that became less liquid and limited their ability to provide loans. Bridge loans became more expensive because lenders could offer fewer of them. 

The funding source of bridge loans is private investors. The more money private investors are willing to put into the funds, the lower the interest rate can be. It's the basic concept of supply and demand of money. Right now, there is a higher supply of money, so bridge loans rates are actually lower, but that could turn on a dime if investors get another market scare such as the one that occurred in March 2020.

Bridge loan terms also depend on the sector. For example, residential development feels less risky than office or hospitality real estate, which is why the terms vary between the different markets. Market uncertainty is also playing a major role in the reluctance to provide bridge loans. Some lenders are waiting for the dust to settle before returning to pre-pandemic practices. 

Bridge funding terms may be less predictable these days, but these loans are still available—especially if you have an existing relationship with a lender and a good deal to fund.

Learn more about bridge lending through Socotra Capital.

When you get a bridge loan, the terms will depend on the riskiness of the deal. If you need a bridge loan, it’s worth approaching multiple lenders and comparing your options. 

Socotra Capital offers bridge loans for investors who want to make improvements on investment properties, purchase vacant rental properties, or refinance to cover short-term capital needs. As a direct lender, we are able to be flexible with our terms and can work out different deal structures to mitigate risk and keep the interest rate low.

If you need a bridge loan or any other type of financing, read our Borrower’s Guide to learn more about how you can prepare in advance and questions to ask potential lenders.