What Is a Bridge Loan in Real Estate? A Plain Guide for Investors

What does a bridge loan actually pay for?

A bridge loan pays for the time between two events. The first event is buying or refinancing the property. The second is the exit: selling it, or paying the bridge off with a long-term loan. Investors use bridge financing when a bank loan is too slow, or when the property does not yet qualify for long-term debt because it needs work, tenants, or both.

Common uses on the investor side include:

• Buying a property that needs renovation before it can be rented or sold.
• Closing quickly on a purchase while the long-term loan is arranged later.
• Pulling cash out of a property you own to fund the next project.
• Holding a property through lease-up until the rent supports a permanent loan.

Axelrad Capital's Bridge Loans page describes the product as covering a fix-and-flip, rental rehab, or cash-out refinance. All Axelrad bridge lending is business-purpose lending on investment property.

How is a bridge loan different from a long-term mortgage?

Three things set it apart: the term, the underwriting and the repayment plan.

Term. Bridge loans are measured in months. The exact term is set on your term sheet, so get it in writing before you commit. See the Bridge Loans page for current program terms.

Underwriting. A bridge lender looks at the deal first: the property, the budget and the exit.

Repayment. Most bridge loans are paid off in one lump sum at the end, from a sale or a refinance. That final source of repayment is called the exit. When the exit is a new long-term loan, that loan is called the takeout, meaning the loan that "takes out" (pays off) the bridge.

What terms do lenders use to size a bridge loan?

Two ratios come up on almost every bridge deal.

• LTC (loan-to-cost): the loan amount divided by the total project cost, usually the purchase price plus the renovation budget.
• LTV (loan-to-value): the loan amount divided by the property's value. On a renovation deal, lenders may also look at value after the work is done.

Axelrad's bridge page lists loans up to $5,000,000. That is a maximum. The amount offered on a given deal depends on underwriting.

Key terms table

Who uses bridge loans?

Axelrad's bridge page lists four kinds of borrowers: fix-and-flip investors, buy-and-hold investors, real estate developers and property wholesalers. What they have in common is a plan with a clear end date. Bridge debt fits poorly when the plan is "hold and see." Without a defined exit, short-term debt turns into a deadline you can't control.

When does a bridge loan fit, and when doesn't it?

Bridge financing fits when speed or the property's condition rules out a long-term loan today, and the plan makes it likely the property will qualify for a sale or a takeout later. It fits poorly when the numbers only work if everything goes right, or when the exit depends on approvals you haven't checked.

For a deeper walk through exit planning, see Axelrad's guide to investment property bridge loans and the exit. If your deal is a same-day resale rather than a hold, compare transactional funding vs EMD vs bridge loans.

Checklist: is a bridge loan the right tool for this deal?

Use this before you request terms. Tick each item you can answer yes to. An unticked item doesn't kill the deal. It tells you what to fix first.

The last item matches the documents Axelrad's homepage FAQ lists for firm terms: a loan application, purchase contract, rehab budget, entity information and ID.

Example: one bridge deal on paper (hypothetical)

Example for illustration only. Not a quote or an offer.

An investor contracts to buy a rental for $300,000 that needs $60,000 of work. Total cost is $360,000. The investor asks for a $306,000 loan, which is 85% LTC ($306,000 ÷ $360,000). The plan is to renovate for four months, lease the property, and refinance into a rental loan. The bridge term needs to cover the renovation, the leasing period and the refinance closing, with time left over. The investor's own cash covers the remaining $54,000 of cost plus closing and carrying costs.

The questions a lender asks here are simple. Is the budget realistic? Will the property rent for enough to support the takeout? What happens if the work takes eight months instead of four?

Key takeaways

• A bridge loan is short-term, property-secured financing that runs to a defined exit.
• Lenders size bridge loans on LTC and LTV and underwrite the exit from the start.
• Axelrad's published bridge terms include loans up to $5,000,000 and no prepayment penalties. Confirm the term and everything else on your term sheet.
• Axelrad's bridge loans are business-purpose loans for investors.
• Build in a timeline buffer. The maturity date doesn't move just because the project does.

Talk through your bridge deal

If you have a property, a budget and an exit, send it in. Axelrad Capital is a direct private lender, so the people who review your deal are the ones who make the decision. Apply for a bridge loan, or review the program on the Bridge Loans page.