What is a Bridge Loan? How Real Estate Investors Use Them
Learn how bridge loans work, when to use them, and how they help real estate investors bridge the gap between transactions.
Dan McColl
Director of Construction Lending
What is a Bridge Loan?
A bridge loan is a short-term financing solution that "bridges" the gap between two transactions. In real estate, it's most commonly used to purchase a new property before selling an existing one, or to quickly acquire a property while arranging longer-term financing.
Think of it as a financial bridge that gets you from Point A to Point B when timing doesn't perfectly align.
Common Bridge Loan Scenarios
Scenario 1: Buy Before You Sell
You've found your next investment property but haven't sold your current one yet. A bridge loan lets you:
●Purchase the new property immediately
●Avoid losing the deal to another buyer
●Repay when your existing property sells
Scenario 2: Acquisition to Stabilization
You're buying a commercial property that needs tenant improvements or lease-up. A bridge loan provides:
●Quick acquisition funding
●Time to stabilize the property
●Opportunity to refinance once occupied
Scenario 3: Rescue from Failed Financing
Your buyer's financing fell through 3 days before closing on your new property. A bridge loan:
●Provides emergency funding
●Keeps your deal alive
●Buys time to find replacement buyers
Scenario 4: Auction Purchases
You're buying at auction and need to close in 7 days with no financing contingency. Bridge lending:
●Moves at auction speed
●Provides proof of funds quickly
●Closes when you need to close
How Bridge Loans Work
Structure
●Term: 6-24 months typical
●Interest: 9-12% annually
●Payments: Interest-only monthly
●Principal: Due at term end (balloon payment)
Loan Amounts
●LTV: Up to 70-75% of property value
●Minimum: Often $250,000+
●Maximum: Depends on lender, often $5M+
Costs
●Origination: 1-3 points (1-3% of loan)
●Interest rate: Higher than conventional
●Closing costs: Similar to traditional loans
Bridge Loan vs. Hard Money Loan
These terms are often used interchangeably, but there are subtle differences:
| Feature | Bridge Loan | Hard Money Loan |
|---|---|---|
| Primary Use | Transaction timing | Property condition/speed |
| Property Condition | Usually good condition | Any condition |
| Exit Strategy | Sale or refinance | Sale, refinance, or hold |
| Term | 6-24 months | 6-18 months |
| Rates | Similar | Similar |
In practice, most bridge loans ARE hard money loans—they're provided by private lenders and secured by real estate.
Who Uses Bridge Loans?
Real Estate Investors
●Fix and flip investors bridging between projects
●Buy-and-hold investors acquiring before selling
●Developers needing time to stabilize projects
Business Owners
●Purchasing commercial property while selling existing
●Acquiring real estate for business expansion
●Handling timing mismatches in transactions
High-Net-Worth Individuals
●Buying primary residence before selling current home
●Accessing equity quickly for opportunities
●Managing complex real estate portfolios
Qualifying for a Bridge Loan
What Matters Most
1. Property Value - Sufficient equity provides security
2. Exit Strategy - Clear plan to repay (sale, refinance, etc.)
3. Reserves - Ability to make payments during the term
4. Experience - Track record helps (but not always required)
What Matters Less
●Perfect credit (flexible requirements)
●Income verification (asset-based lending)
●Property condition (if stabilized)
Bridge Loan Risks
Interest Cost
Higher rates mean significant interest expense over time. A 12-month bridge at 11% on $1M costs ~$110,000 in interest.
Mitigation: Have a realistic timeline and stick to it.
Extension Risk
If you can't repay at term end, you may need to extend at higher rates or risk foreclosure.
Mitigation: Build 3-6 month buffer into your timeline.
Market Risk
If property values decline, you may owe more than the property is worth.
Mitigation: Don't over-leverage; keep LTV reasonable.
When Bridge Loans Make Sense
✅Speed is critical - You need to close before your current property sells
✅The math works - Your profit margin absorbs the higher costs
✅Exit is clear - You have a definite path to repayment
✅Alternatives aren't available - Banks can't move fast enough
When to Avoid Bridge Loans
❌Uncertain exit - You're not sure how you'll repay
❌Tight margins - Profit doesn't cover the extra cost
❌Long timeline needed - You need more than 24 months
❌Over-leveraged - Adding more debt is risky
The Application Process
1. Initial inquiry - Share basic deal details
2. Property evaluation - Lender reviews value and exit
3. Term sheet - Receive proposed terms
4. Documentation - Provide required paperwork
5. Closing - Typically 7-14 days
The Bottom Line
Bridge loans are a powerful tool when timing doesn't align perfectly. They let investors capture opportunities that would otherwise be lost to slower financing.
The key is understanding the costs, having a clear exit strategy, and working with an experienced lender who can execute reliably.
