Hard money lenders are known to speak about hard money and bridge loans interchangeably. They have their reasons for doing so. But practically speaking, hard money and bridge loans are not necessarily the same thing. The main difference between the two is something known in the lending industry as an ‘exit strategy’.
Below is an explanation of hard money and bridge loans. As you read, bear in mind that all bridge loans made by hard money lenders are also considered hard money loans. But not all hard money loans are bridge loans. It is like saying that all Labrador retrievers are dogs but not all dogs are Labrador retrievers.
More About the Bridge Loan
Let us start by discussing the bridge loan. Generally speaking, a bridge loan is a short-term loan designed to bridge the gap between an immediate financial need and a future financing arrangement. Prior to the 2007/2008 housing crash, bridge loans were a common tool for climbing the property ladder. A homeowner would put his house on the market while simultaneously shopping for a new one. If he bought one before he sold the other, a bridge loan would facilitate the transaction.
Bridge loans are almost unheard of in the residential market these days. But they are alive and well in commercial real estate, particularly where property investments are concerned. Investors use bridge loans to acquire new properties or refinance existing ones.
Here is what makes the bridge loan unique for property investors: investors plan to obtain another form of financing to pay off the bridge loan. This is their exit strategy.
For a real-life example, we turn to Actium Partners out of Salt Lake City, UT. They once funded the acquisition of an apartment property using a bridge loan. The loan was structured as an interest-only loan with a term of 24 months. During that 24-month period, the borrower was able to arrange traditional bank funding to pay off the bridge loan.
More About Hard Money Loans
Hard money and bridge loans are nearly identical on most counts. They are both backed by hard assets, like real estate. But the main difference with a hard money loan is exit strategy flexibility. A hard money borrower does not necessarily have to arrange traditional financing to pay off his loan.
Hard money lenders can accept any exit strategy they believe is sufficient. So in the case of Actium’s loan to the investor purchasing the apartment property, acquiring traditional financing was an acceptable exit strategy. They approved the loan, and the borrower got his property.
The thing is that other exit strategies are possible. Here are just a couple of examples:
- Rental Income – An investor may take out a short-term hard money loan to obtain a commercial office building. He plans to set aside all his profits over the course of the two-year term in order to pay the loan principal at maturity.
- Property Resale – An investor might purchase a property in desperate need of rehab. His exit strategy involves holding the property for two years and then putting it back on the market. Sale proceeds will satisfy his loan.
Again, hard money lenders are able to accept any exit strategy they deem appropriate. It is really up to them to figure out what makes them most comfortable as lenders.
Although hard money and bridge loans are often spoken about interchangeably, they are technically two different types of loans. If you see their differences as merely semantic, that’s fine. The most important thing is that lenders and borrowers are on the same page when they do business.