Bridge Loans as Business Investments

 While bridge loans constitute a non-conventional investment, the benefits of investing in them with a private lender can be significant:

• Collateralization: The funds are secured against a recently appraised commercial property without requiring the investor to manage or purchase an actual property. Generally, the maximum loan-to-value ratio is between 50% and 65% of the current or improved value of the commercial property.
• Diversification: Private lending in real estate gives an investor another option for diversification. The rate of return is hardly affected by global politics, stock market swings, or future real estate trends.
• Control: Unlike the mortgage products that led to the subprime meltdown, bridge loans are not sold, re-sold, or transformed into other investment products packaged to divert attention to deficiencies. These are straightforward, direct loans secured by commercial property structured to protect both the borrower and investor. Bridge loan borrowers are individually qualified and assessed, and investors are critical business partners that the lender wants to remain satisfied.
• Profitability: Investors can earn predictable, proven rates of return without committing their funds for years or decades in other investments. Generally, the lender will offer the investor a set rate of return with no fee structure, although terms can vary between lenders and specific deals.

Investing in bridge loans secured with commercial property has some potential disadvantages; however, with a little caution, the investor can reduce that risk substantially:

• Loan position: First position is obviously the better place to be, and it is best not to assume that a bridge loan is always first. Positions are directly tied to the amount of risk involved, and are inversely related to the returns.
• Research: While investing in certificates of deposit or even a fund that mirrors a certain index may be straightforward, bridge loans require a certain level of due diligence. While some investors work directly with borrowers, many reputable, proven companies pool investors and then lend to borrowers. They will find, analyze and structure the loans. These firms should have a verifiable track- record, references, and recommendations.
• Other factors to scrutinize include investor protection in case of default, the maximum LTV the company will lend, and whether the company lends to borrowers based on the current or anticipated value of an improved property.

With these factors in mind, becoming an investor in commercial real estate bridge loans can offer a relatively very rewarding rate of return.