Real estate investors seeking to acquire properties for future development, such as adding accessory dwelling units (also known as an ADU), face a unique set of challenges. One of the key hurdles they often encounter is securing financing for these properties, especially when they intend to undergo a lengthy approval process before construction can commence. In recent years, short-term hard money bridge loans have emerged as a popular financial tool for such investors. This article explores why these bridge loans have gained traction among real estate developers, focusing on three compelling reasons: the need to obtain project approval, the challenge of creating an accurate budget, and the advantage of resetting the loan term through refinancing.
One of the primary reasons real estate investors turn to short-term hard money bridge loans is the need to secure project approval. The approval process for a real estate development project can be a complex and time-consuming endeavor. It may involve zoning approvals, environmental impact assessments, community consultations, and various other regulatory requirements. In some cases, this approval process can take months or even years to complete.
During this waiting period, traditional lenders may be hesitant to provide long-term financing for a property that cannot be developed immediately. Bridge loans, which are typically short-term loans with higher interest rates, become an attractive option in such situations. They allow investors to acquire the property quickly, initiate the approval process, and begin positioning the project for development without committing to a long-term mortgage.
Another significant challenge real estate investors face when purchasing properties for future development is budgeting. The ultimate cost of a development project is often contingent on factors like regulatory changes, unforeseen construction issues, and market conditions that can fluctuate significantly over time. Consequently, it can be challenging to create an accurate budget at the time of the initial property purchase.
Short-term bridge loans provide flexibility in budgeting. Investors can acquire the property with a bridge loan and initiate the project approval process without being locked into a long-term financing arrangement. Once project approval is obtained and a more accurate understanding of the development’s scope and cost is achieved, investors can refinance the bridge loan into a construction loan that aligns with the final budget. This flexibility ensures that the financing terms are tailored to the project’s actual requirements, reducing financial risks associated with budget overruns.
One of the key advantages of using short-term bridge loans in real estate development is the ability to reset the loan term through refinancing. Traditional mortgage loans typically come with fixed terms, such as 15 or 30 years. However, real estate investors may prefer to structure their financing differently based on the development’s progress and market conditions.
By initially obtaining a short-term bridge loan, investors have the option to reassess their financing needs as the project unfolds. Once the project reaches a more advanced stage, they can refinance the bridge loan into a longer-term construction loan or another suitable financing instrument. This allows them to adapt their financing strategy to the project’s evolving needs and take advantage of favorable market conditions when they arise.
Short-term hard money bridge loans have become increasingly popular among real estate investors buying properties for future development due to their flexibility and ability to address the unique challenges of this niche market. These loans provide the means to acquire properties, initiate approval processes, and create accurate budgets while offering the flexibility to reset loan terms through refinancing. As real estate development continues to be a dynamic and evolving industry, the popularity of short-term bridge loans is expected to persist, providing investors with valuable financial tools to navigate complex projects with greater confidence and adaptability.
Brock VandenBerg has been investing in short term real estate loans for over 20 years. During that time, he established TaliMar Financial, one of the leading real estate private lending companies serving the residential and commercial real estate market. Mr. VandenBerg also invests in the private real estate debt market on behalf of high-net-worth investors, family offices, and institutional partners through individual trust deed investments and a private mortgage real estate investment trust, TaliMar Income Fund I.
Prior to establishing TaliMar Financial, Mr. VandenBerg spent two years working with the Federal Deposit Insurance Corporation (FDIC) managing the closure of failing banks and the sale of their loan portfolios. His experience at the FDIC helped shape the strategy he uses today to minimize risk while maximizing returns for his investors.