Bridge Loans for Real Estate: When and How to Use Short-Term Financing

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You’ve found the perfect value-add multifamily property. Purchase price: $8 million. Your equity: ready. Your permanent financing: approved—but not closing for 90 days. The seller needs to close within 30 days, or they’ll move to the next buyer.

Enter bridge financing: short-term debt that solves timing mismatches between when you need capital and when permanent financing becomes available. Used strategically, bridge loans enable investors to capture opportunities that rigid financing timelines would otherwise kill. Used carelessly, they create expensive debt stacks and refinancing risk that destroy returns.

Key Takeaways

• Bridge loans provide 6-36 month financing: Designed to bridge gaps between property acquisition and permanent financing, sale proceeds, or value-add repositioning completion
• Rates typically run 200-400 basis points above conventional financing: Higher costs reflect the short-term nature and elevated risk factor, true all-in costs, including origination fees and exit fees, into the ROI analysis
• Two primary structures dominate: First-lien bridge loans (replacing permanent financing temporarily) versus second-lien bridge loans (supplementing existing debt for acquisitions or capital improvements)
• Bottom Line: Bridge loans solve timing problems but create refinancing risk—successful deployment requires clear exit strategies and contingency planning for scenarios where permanent financing or property sales don’t materialize as projected.

Understanding Bridge Loan Mechanics

Bridge loans are short-term debt instruments (typically 12-36 months, though some run as short as 6 months) designed to provide interim financing until permanent capital becomes available.

Common Bridge Loan Scenarios for Property Investors

Acquisition Bridge: Purchase property before permanent financing closes. You’ve secured a loan at attractive rates, but underwriting takes 90-120 days. Bridge financing funds the acquisition immediately, then gets refinanced out when permanent financing closes.

Disposition Bridge: Buy new property before selling the existing asset. You’re selling a stabilized property to fund the acquisition of a higher-return opportunity, but closings don’t align. A bridge loan funds the purchase using existing property as collateral and gets repaid when that property sells.

Repositioning Bridge: Fund value-add capital improvements before refinancing. You’re buying a distressed office building requiring $3 million in renovations to achieve stabilization. The bridge loan funds acquisition and improvements are then refinanced into permanent financing once occupancy hits 85% and NOI stabilizes.

The Key Distinction from Construction Loans

Bridge loans fund existing properties or light renovations. Construction loans fund ground-up development or major reconstruction requiring 18-36+ month timelines. Don’t confuse the two—lenders structure them completely differently based on risk profiles and draw schedules.

Bridge Loan Structure and Pricing

Bridge loan pricing reflects their short-term nature and elevated risk compared to permanent financing. Investors must understand total capital costs, not just stated interest rates.

Interest Rates

Current bridge loan rates range from 8-14%, typically running 200-400 basis points above permanent financing rates. Rates vary based on:

• Loan-to-value ratio (higher LTV = higher rates)
• Borrower experience and track record
• Property type and market location
• Exit strategy clarity and feasibility
• Whether loan is first or second lien position

Origination Fees

Expect 1-3% of loan amount charged upfront. On a $5 million bridge loan, that’s $50,000-$150,000 in closing costs before you’ve made a single interest payment.

Exit Fees

Many bridge lenders charge 0.5-1.5% exit fees upon payoff. These fees compensate lenders for short holding periods and prepayment. Factor exit fees into the total cost of capital—they can add 50+ basis points to your effective interest rate.

Interest Reserve Accounts

Bridge lenders often require upfront funding of interest reserves—essentially prepaying 12-24 months of projected interest. This reduces cash flow during the bridge period but ensures debt service gets paid even if the property’s cash flow disappoints.

Loan-to-Value Ratios

Bridge lenders typically provide 65-80% LTV, though some aggressive lenders extend to 85-90% LTV for experienced borrowers with strong projects. Higher LTV means less equity required, but creates refinancing risk if property values decline or appraisals come in low during the permanent financing process.

First-Lien vs. Second-Lien Bridge Structures

Bridge loans occupy different positions in the capital stack, creating distinct risk profiles and use cases.

First-Lien Bridge Loans

Occupy a senior position in the capital stack, providing primary acquisition or refinancing financing. Lower rates (8-10% currently) reflecting lower risk. Typical structure: 70-75% LTV, 12-24 month term, interest-only payments.

Use Cases: Acquiring stabilized property pending permanent financing close; temporary refinancing while repositioning property to qualify for agency debt; buying property from a distressed seller requiring a quick close.

Second-Lien Bridge Loans

Subordinate to existing first-lien debt, filling the gap between senior debt and required equity. Higher rates (10-14%) reflecting subordinate position and elevated risk. Typical structure: Combined LTV of 80-85%, 12-18 month term, interest-only or accrued interest.

Use Cases: Funding the down payment on a new acquisition while the existing property remains listed for sale; financing capital improvements on a leveraged property; providing additional equity for an acquisition when the senior lender caps LTV at 65-70%.

Critical Risk Difference

First-lien bridge loans control the asset—if you default, the bridge lender forecloses. Second-lien bridge loans are subordinate—if the senior lender forecloses, second-lien holders get wiped out. This explains the rate differential and why second-lien bridge lenders scrutinize deals intensely.

Qualifying for Bridge Financing

Bridge lenders evaluate deals differently from permanent financing sources. Speed matters, but so does clarity in the exit strategy.

Underwriting Criteria

Property Cash Flow: Bridge lenders care about existing NOI, not projected stabilized NOI. If the property generates $400,000 NOI today, that’s what they’ll underwrite—not your $600,000 stabilized projection.

Borrower Experience: Bridge lending is relationship-driven. First-time investors face higher rates and lower LTV than experienced operators with successful track records. Lenders want confidence that you can execute the business plan and navigate exits successfully.

Exit Strategy Clarity: This is the deal-breaker. Bridge lenders won’t fund deals where the exit strategy relies on hope. “We’ll refinance when rates improve” isn’t an exit strategy. “We have a term sheet for permanent financing closing 90 days after acquisition” qualifies.

Liquidity Requirements: Expect minimum liquidity requirements of 6-12 months of debt service plus projected capital costs. Bridge lenders want assurance that you can carry the property if plans take longer than projected.

Credit Score and Financial Strength: Most bridge lenders require credit scores of 680+ for individual investors, though some require 720+. Corporate entities need demonstrated financial capacity and guarantor strength.

The Exit Strategy: Where Most Bridge Loans Succeed or Fail

Bridge loans work brilliantly when exit strategies materialize as planned. They become disasters when exit strategies fail, and borrowers face refinancing crises.

Primary Exit Strategies

Refinance to Permanent Financing: You close the bridge loan, execute a value-add business plan, achieve stabilization targets, then refinance into permanent debt at lower rates and longer terms.

Property Sale: You acquire property with a bridge loan, implement improvements or operational changes, then sell at a profit. The bridge loan gets repaid from sale proceeds.

Equity Raise: You use a bridge loan for the initial acquisition, then raise additional equity from investors, allowing you to pay down or pay off the bridge loan while retaining ownership.

Permanent Financing Closes: You used a bridge loan specifically to close the acquisition pending permanent financing approval. Permanent financing closes 60-120 days later; the bridge loan is paid off.

Exit Strategy Risk Factors

Market Deterioration: Property values decline between bridge loan funding and the planned exit, rendering refinancing infeasible or undermining sale economics.

Execution Failure: Repositioning takes longer or costs more than projected, preventing achievement of NOI targets required for permanent financing.

Credit Market Disruption: Permanent financing markets freeze, or the rate environment changes dramatically, making planned refinancing uneconomical or unavailable.

Property Performance Shortfall: Leasing takes longer than projected, capital costs exceed budgets, or operating expenses exceed underwritten levels.

The Bridge Loan Decision for Property Investors

Bridge loans can solve real problems—enabling acquisitions in competitive markets, funding value-add strategies before permanent financing qualifies, and managing timing between property sales and purchases.

But bridge loans create refinancing risk. Every bridge loan requires the successful execution of an exit strategy within 12-36 months. Markets change, properties underperform, and permanent financing becomes unavailable. When exits fail, investors face extensions at penalty rates, forced sales, or defaults.

Use bridge loans strategically for deals with high-conviction exit strategies backed by committed permanent financing, contracted property sales, or execution plans with margin for error. Avoid bridge loans for speculative deals where exits depend on market conditions beyond your control.

The difference between successful bridge loan usage and disaster? Exit strategy clarity combined with conservative underwriting and adequate liquidity reserves.

Wiss provides advisory services for real estate professionals and investors. Connect with us to learn more.  

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