Those who are new to commercial real estate investing often confuse bridge loans with hard money loans and vice versa. That’s because the words “hard money lending” and “bridge lending” are often used interchangeably in commercial real estate even though they are different from each other. While the two share similarities, there are major differences between them affecting the approval process and how the loan is structured.
So when it comes to hard money vs. bridge loans, which source of funding is right for you? Read on for the basic information you need to make an informed choice.
Defining bridge loans & hard money loans
Both commercial hard money loans and bridge loans became popular during postwar expansion in the US. The aftermath of World War II created market conditions that necessitated faster and more responsive financing solutions. These two types of loans also became extremely popular after the 2008 mortgage crisis. During this time, hard money and bridge lending became attractive alternatives to institutional lenders’ traditional loans, subject to increased capital requirements and regulations.
- Hard money loans are used as alternatives to conventional loans. They are always privately funded and collateralized solely by the commercial real estate property’s value in question. As a result, hard money loans are a lot quicker to secure compared to traditional financing.
- Bridge loans are mainly used as temporary sources of funding while the borrower is waiting for permanent financing. Bridge lending can be a practical financing solution for fix-and-flip investments and other similar deals, as it “bridges the gap” between an investment property’s purchase and the disposition. Bridge loans can be funded by private investors or banks/traditional financing institutions.
There are different types of commercial bridge loans; there is no such thing as a one-size-fits-all solution. The right type of bridge lending really depends on the project’s purpose, timeline, and nature.
Core bridge loans provide short-term temporary financing for anywhere from a few months to a few years. They are interest-only loans with reasonable rates. The usual LTV in this type of loan is 65%, so borrowers who cannot come up with the rest of the money may need a secondary source of capital.
High-LTV bridge loans are structured similarly to core bridge loans but have an LTV of up to 80%, with a proportionate increase in the interest rate charged.
Mezzanine bridge loans involve a secondary loan supplementing a senior loan. The interest rate tends to be higher, but as the borrower builds equity in the project, you can restructure the loan to drive down the interest rate.
What makes a mezzanine loan unique is that it offers a mix of equity and debt—a feature that makes it attractive for both CRE borrowers and investors. Interest rates on this type of loan are tax-deductible, benefiting the borrower. Meanwhile, the lender gains equity in the project or has the option to buy equity later, potentially increasing their ROI while providing more security.
Preferred equity bridge loans are structured similarly to mezzanine loans, but the equity is in the company (not in the project). Investors can become more actively involved in the company itself (if necessary) to ensure that the loan is repaid.
Similarities between bridge loans & hard money loans
It’s really not surprising that hard money lending and bridge lending are interchangeably used because they are quite similar. Here are a few ways in which they tread the same path:
Either of these temporary short-term loan products can be useful for:
- Buying a commercial property
- Completing tenant-requested alterations or improvements
- Covering the carrying costs in a vacant CRE property
- Paying any outstanding existing debt tied to a commercial property
- Rehabbing or renovating a commercial property
2. Secured by real property
Both loans are typically based on the commercial property’s value in question (although there are cases when bridge loans are provided as capital). Because they are secured by property instead of money, lenders are not too concerned with the borrower’s credit rating, so applications are approved much quicker than traditional loans. In fact, you can get hard money or a bridge loan in as little as 3 to 7 days if all documents are in order.
3. Flexible repayment
Private lenders that fund hard money and bridge loans are more familiar with the commercial real estate investing game. They know that fix-and-flip deals don’t always go as planned and that exit strategy may take longer than expected. As a result, these lenders are more likely to give borrowers some wiggle room.
4. Shorter loan windows
Compared to a long-term mortgage, the loan windows on the bridge and hard money run shorter. The average term for hard money lending is anywhere from 12 to 18 months. For bridge loans, it’s usually 1 to 2 years.
Differences between hard money & bridge loans
Even though bridge and hard money lending are similar, they are not interchangeable. Here’s why:
1. Bridge loans can be provided by private lenders as well as traditional banks/institutional lenders. Meanwhile, hard money loans are funded by private lenders always. You can’t get a hard money loan from a bank.
If you’re not in a hurry and your FICO score is high enough to satisfy the requirements of banks, you may be able to qualify for a bridge loan from a traditional lender. But if you’re looking to close a deal quickly, a bridge loan from a private lender might be the better choice.
2. Hard money loans are always secured by the value of the investment property. The same is mostly true for bridge loans, but not always.
Which kind of loan is the best choice for your project?
There is no one correct answer. It really depends on your project.
A bridge loan might be the right option if you need instant cash to seize an opportunity but intend on securing traditional financing later on. But if you intend to fix and flip a commercial property as soon as possible—and you have no intention of securing a traditional mortgage on it—then a hard money loan might be the better choice.
Whatever you choose, the key is to work with the right bridge or hard money lender. Be sure to consider the lender’s overall reputation as well as the terms they are offering. You will also want to look at their penalties and incentives. Are there administrative fees involved? Do they offer prepayment discounts?
Because both hard money and bridge loans are short-term, you want to be able to seize alternative funding sources if they become available without having to pay the full interest for the original term of the loan.
Lastly, you want to look at their turnaround time. After all, you are probably choosing hard money or bridge money to get funding quickly. If the profitability of a deal depends on how fast you can act, you need a lender that can guarantee reliable funding and a short turnaround time.