Hard money and bridge loans are two types of financing real estate investors take advantage of. This leads some new investors to assume that the two types of loans are the same. But are they? That is a tough question to answer. If you are speaking strictly of real estate, the differences between the two may be purely semantic. But outside of real estate, the differences are enough to make the two types of financing distinct.
The one thing hard money and bridge loans have in common is that they are purposely designed to be short-term financing. You are not going to find a hard money lender willing to offer a term of more than a year or two. Likewise for bridge loans. Terms on bridge loans are typically at one year or less.
Differences Between Them
Despite hard money and bridge loans being discussed interchangeably in the real estate industry, there are two key differences that may or may not come up in relation to a particular investment. They are loan sources and loan usage.
1. Loan Source
All hard money lenders are private lenders. Furthermore, because hard money loans are asset-based instruments, banks don’t deal in them. The only lender you can get a hard money loan from is a private lender specializing in the hard money model.
On the other hand, both hard money lenders and banks offer bridge loans. An investor might find that a bank is more restrictive about bridge loans and how they are structured, but banks routinely provide bridge loans to real estate investors, land developers, builders, etc.
2. Loan Usage
The second difference between the two types of loans is usage. In nearly every case, hard money has to be used for a specific purpose designated in the loan contract. Salt Lake City-based Actium Partners says that, more often than not, hard money loans are used to procure investment properties.
Bridge loans are different in that they can be utilized for multiple purposes. A hard money lender might insist on a single purpose, but a bank is more likely to be somewhat flexible here. For example, a bridge loan from a bank could be used by a business to cover a variety of expenses.
Both Require an Exit Plan
Hard money and bridge loans do share some similarities. In addition to being short-term instruments, both types of loans require an exit plan to gain approval. An exit plan is nothing more than a reasonable strategy for paying off the loan on its maturity date.
Actium Partners once made a hard money loan to help a local client purchase a multi-family apartment complex. The client preferred hard money for the acquisition because bank financing could not be arranged quickly enough. However, it could still be arranged. His exit plan was to do just that: obtain bank financing based on property value and rental payments and use it to pay off the hard money loan.
A typical bridge loan, by its nature, is intended to bridge the gap between current financial needs and future financial resources. This implies that the borrower can successfully demonstrate that those future resources will be forthcoming. They would constitute their exit plan for the loan.
There are times when investor discussions of hard money and bridge loans are different only semantically. But there are other times when the differences between the two types of loans matter. Either way, hard money and bridge loans are viable funding options real estate investors take full advantage of. They represent two more options for helping investors realize their financial goals.