Bridge Loans Through Commercial Real Estate Crowd Financing

A Bridge loan is a short-term loan that 'bridges the gap' during times where longer-term financing is needed but is not yet available. The bridge loans provide temporary financing until permanent financing is secured, allowing current obligations to be met by providing immediate cash flow.

When a bridging loan is taken out, the lender usually finances the purchase of the new property, as well as taking over mortgages on an existing property. Many property groups are now using crowdfunding platforms as a source of bridging loans, to finance strategies including things such as renovations.

In this blog post, we take a look at Bridge financing, how a bridging loan works, their advantages and disadvantages, and how they can be obtained via a commercial real estate crowdfunding platforms.

Know What is a bridge loan?
Advantages and Disadvantages of the bridge loans?

What is a Bridge Loan in Real Estate

A bridge loan can be a very accessible source of funding for a property group looking to raise capital quickly until they secure a long-term source of financing.

Commercial crowdfunding platforms such as CrowdfundUP have listed bridge financing opportunities in the form of retail space, medical funds, office buildings, and renovation loans.

Additionally, this finance is flexible and secured, it provides you with the quick cash injection that you may not have been able to secure elsewhere.

With more speculative development taking place than ever before, bridging finance is on the up but it’s not easy to secure from high street banks.

Our commercial property experience means we can realistically assess the potential of your project and provide the right finance from our network of Investors.

Two main types of bridging loans

Dependant on your situation, there are two types of bridging loans:

namely: open bridging loan, closed bridging loan,

・A ‘Closed’ loan

This is used when there is a set date for when the loan must be repaid. You’re likely to be eligible for this type of loan if you have a long-term funding option already arranged, such as the sale of your existing property.

・An ‘Open’ loan

This type of loan is useful when there isn’t a definite long-term finance option in place. The loan may run for six or nine months, however, depending on the circumstances, this may be longer.

How long does it take to get

A Bridge finance is a short-term loan, with lenders usually agreeing on terms of no longer than 12 months. Some lenders or borrowers also offer bridge financing for non-bank lender occupied home loans.
A bridge loan is usually paid back when the borrower either sells the property in question or obtains conventional financing. In the meantime, the property acts as collateral for the loan. While lenders typically do not charge upfront fees for bridge loans, some do assess a prepayment penalty if the loan is repaid ahead of schedule.

How to calculate the amount of a Bridge Loan

To calculate the amount of a bridge loan, you need to know how much money is required as a down payment on the new property development projects as well as the outstanding balance of the current mortgage.

This loans are useful as lenders who provide bridging finance can often allow servicing to be based on the end debt. They allow up to 3 to 12 months for existing Australian properties seeking to obtain bridge loans for refinancing or refit. Bridge loans are useful as lenders who provide bridging finance can often allow servicing to be based on the end debt. They allow up to 3 to 12 months for existing Australian properties seeking to obtain bridging loans for refinancing or refit.

Fees and Charges

For example, assume that you qualify for $500,000 in bridge financing to develop an office building you purchased. The loan comes with an interest rate of 12%, plus three points. With a 12-month term, the total interest payments on the loan would total approximately $60,000. Once the points are deducted, the loan proceeds would come to $485,000, so the effective cost of financing would be over 15%.

When gauging what size bridge loan is needed, it’s important to factor in the points and interest. Failing to do so could create a problematic gap in funding. It’s also necessary to consider the loan to value ratio that can be used to qualify. Depending on the lender, the maximum loan amount may be capped at anywhere from 60% to 80% of the property’s appraised value.

LVR and RISK

Another considerable is there are Loan-to-value (LVR) limits that apply and that mortgage insurance(LMI) the LVR can be up to 85 % peak debt on a full documentation loan or 80 % on a low documentation loan. Also, the borrowers have to be careful, the loan will be expensive if the peak debt exceeds 80% loan to value ratio.

The risk of bridging finance is that you may be unable to sell the property you wish to sell in the allotted time frame and at that point, repayment must commence on the entire debt.

Advantages and Disadvantages

Like all financing options, it's important to know the pros and cons of bridging loans in order to compare options. Some of the advantages and disadvantages of bridging loans are listed below.

The Pros

Secure and Quick finance option: The short-term period is the biggest advantage of a bridge loan. Bridging period is able to be arranged in as little as 1 week and last for up to 12 months
Flexibility: The flexible nature and quick access to capital are the reasons bridge loans are widely accepted in the real estate industry.
Repayments: This loan payment is usually paid back when the borrower either sells the property in question or obtains conventional financing.
Long-term cash flows: This finance in this instance would empower the owner of the property to complete the renovations immediately and thus secure long-term cash flows.

The Cons

Valuation cost: Bridging finance may require two property valuations (your existing property, and the new property), which means two valuation fees
Interest: Interest: The Interest rate is usually charged on a monthly basis, so the longer it takes to sell your property, the more interest your new loan will accrue. Lenders require higher interest rates than many other traditional financing options.
Termination fees: If your current home loan lender doesn’t offer a bridging loan, you will need to switch, which may result in early exit fees from your current loan.
Risk of Economic conditions: A state of the economy can risk the outcome of even high calibre investments. Borrowers risk losing their property asset if they are unable to settle their debt.

Who will offer

Bridging loans are a great option if you need to move quickly to buy a property. Like any other financing loan though, it’s not a debt to be taken on lightly and it pays to speak to a professional mortgage broker so they can provide the right recommendations to you. There are two avenues available for pursuing financing.

・Traditional Banks

The first is to contact a traditional bank that offers these types of loans. Keep in mind, however, that qualifying can be challenging since banks may be more reluctant to take a gamble on a development project if they perceive it as higher risk.

・Alternative finance platforms or Non-Bank Lenders

An alternative lending website may be more receptive to helping you meet your financial needs, including hard money lenders and real estate crowdfunding platforms.

When comparing the different lending options, it’s advisable to pay close attention to the fees, rates and terms each lender is offering.

Is an appropriate method for you?

Bridge finance is an advantageous option for many in the real estate industry due to its flexible nature. When the need for finance arises suddenly, ie: in the event of an appealing investment opportunity arising on the CrowdfundUP platform, a bridge loan is often an appropriate method of acquiring the capital to resolve the issue. This type of loans are used to fund projects for a short period of time, giving the borrower a chance to secure longer-term financing or settle the debt from the profit of a quick sale of the property.

How Real Estate Crowdfunding Platform helps

Alternative lending can be a valuable tool to raise finance for development projects. Real estate crowdfunding provides individuals with the ability to lend money to established property groups with the expectation that it will be repaid together with interest.

Commercial Real estate crowdfunding websites such as CrowdfundUP enable property groups to list their financing needs on the platform, such as bridge financing, and a network of investors to provide this financing via the pooling together of funds.

If you are looking for bridge financing to fund your development project, visit CrowdfundUP's registration page or contact us at admin@crowdfundup.com

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The information in this article is general in nature. Any advice it contains is general advice only and has been prepared without taking into account the objectives, financial situation or needs of any particular person.
The article content is not intended to be a substitute for professional advice and readers are urged to seek their own appropriate advice before making decisions.

Any reference to a particular investment is not a recommendation to buy, sell or hold the investment.

Sep 21. 2018 CrowdfundUP