Understanding Bridge Loans – Episode 066

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[00:00] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, best-selling author, Kim D.H. Butler, and No BS Money Guy, Todd Strobel. Hey everybody, welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel, and I am happy to have our co-host and best-selling financial author, Kim Butler, in the studio with us today. How you doing, Kim? Wonderful. Happy to be here. Super. Well, we’re getting down to the end of the year. And one of the big topics that our listeners keep asking about are bridge loans. And first of all, it has nothing to do with building a bridge. Correct. And it actually has nothing to do with a loan either.

[00:54] Usually when you use the term loan, people think they’re borrowing, but this is actually bridge loan investing that we’re talking about. Super. So let’s kind of just start out. If you would give us a real basic definition. You might also hear this as mezzanine financing as well. Absolutely. Short-term lending, peer-to-peer lending in a way is even a type of bridge loan. And what I want to do today is drill down. We’ll give a quick overview and then drill down a little bit more specifically about them because there is a lot of information that you can use as a little checklist to make sure that if you’re getting involved in bridge loan investing, that you have the right pieces and parts to it. And that’s not always easy to do.

[01:41] So generally speaking, a bridge loan investment is where you as the investor are providing money for a real estate owner, could be an individual property or a fund, where you have the opportunity to receive a monthly paycheck from that borrower and it is secured by a first deed of trust on the property. And that’s what a bridge loan investment is. They’re typically one to two years long up to maybe four to five years long. Again, sometimes individual properties, sometimes funds. You can get interest rates anywhere in the 8, 10, 12 range per year. And again, it’s interest only. And then you get your principal back at the end of the timeframe. But as I said, I’ve got a list of things that I want to run through that is going to be a

[02:34] due diligence checklist of what a typical project looks like. Todd, let me just check in with you. Do you think we’ve covered the big picture sufficiently? Todd, the only thing that I would like to add is why these things exist and why they make sense. Banks are restricted in the loans that they’re allowed to make. So a lot of times when a project is completed, say you’re building an apartment complex or you’re renovating a condo development or something like that, there are banks that are waiting to make the loans when the project is done. But because they’re investing our money from our savings accounts, they really can’t legally make those loans to do the actual construction. So there’s this short window of opportunity.

[03:24] One year, two years, three years, maybe even sometimes up to five years where an investor can come in and make far above average interest rates while not taking on a huge amount of risk because you’re providing that interim financing. And the developers also making money because they know that they have this guaranteed source of financing at the end. So again, you don’t want to get involved in a project where you may be the lender for 20 years, but when you know there’s that permanent financing waiting at the end really reduces your risk, doesn’t it? Absolutely. And that’s why the term mezzanine financing or bridge loans is used because it’s in between where the borrower, and this is typically an existing property with a building,

[04:16] it’s not raw land. The borrower is in a position to have the end result, but he needs a bridge. He needs a mezzanine like a partial floor of a building, the landing there. He needs that spot in the middle. And so that’s a great opportunity for investors. And what I think is interesting is how long this has been around. Occasionally people ask, well, how long have you been working with this? Since I was out of college and I am almost 50. So we’ve got an opportunity here where as investors we can really do good and also benefit ourselves because we’re helping get this piece of property back into use. Again, like you said, it’s a condo unit that’s being converted or it’s somebody’s apartment building that needs new roof on it,

[05:08] the whole building or that kind of thing. Shall I dig into our documentation? Yep. I think we’ve, like I said, I just want to make sure because unfortunately there are a lot of things that are getting slid into bridge loan financing now that looks more like high risk permanent financing to me. And those are two entirely, you’re not making hard money loans. This is not the same subject. Right. And yet they do often get called that. So that’s very good distinction. So we’re going to list out three different sections of documentation. And when you deal with an individual product where you’re literally lending on one building, you want all three of them. When you have a fund, the fund is the one that should be getting all of this documentation.

[05:59] You’re not necessarily going to see it all, but it’s still good for you to know about. And of course, if you’re interested in just basic real estate investing, this too can be a valuable list. So the first part of the group of documents is the borrower documentation. So you’re going to have a loan application for each borrower. You’re going to have resumes and background of the borrower. You’re going to have entity validation. In other words, if they’re using a corporation or an LLC, you’re going to have a list of projects that that borrower has already done. So you don’t want a first time real estate person here. You want to know that this is a repeat borrower. And then you also want some written management and even the disposition strategy for the project. Very clear. In other

[06:51] words, what’s going to happen at the end of that bridge? So that’s it on the borrower documentation. Any questions there? Nope. So now first question is who you want to know who we’re doing business with. That makes sense. Absolutely. And then what is the second question, which is the property documentation. So here we’ve got an appraisal report. That should be an obvious one. This is on the property title insurance must have, of course, title insurance commitment, a survey of the property, the sales contract, and then some type of hazard or builders risk insurance that’s prepaid for the term of the loan. And again, if you’re in a fund, you’re not going to see all these, but it’s good to know that they exist and it’s certainly valid to ask questions about them.

[07:43] So that’s the property documentation appraisal title insurance survey sales contract and hazard or builders risk insurance. Super. Makes sense so far. And then you have the construction. So oftentimes there is a major rehab going on. You want a full set of the construction plans, including any type of engineering specs. You want copies of building permits from all the applicable agencies. You want a breakdown, an itemized cost breakdown for all of the construction phases. You want full building material specs, including all the finish out materials. If they’re overhauling something that has finish in it, a structural engineering report, construction contract between the borrower and the contractor, and then of course all the contact information and bid prices for

[08:36] all the contractors. Now this is a pretty heavy list and we find that our individual bridge loan providers have this at the ready. Whereas again, if it’s a fund environment, you’re relying on the managers of the funds to pull that together. But this should make a nice little due diligence checklist for anybody, whether they’re wanting to be involved in bridge loan financing or investing, or if they’re wanting to do actual individual real estate deals, a lot of clients out there interested in getting involved in their own real estate deals. We have a real estate calculator that is available. If you’re curious about the rate of return that your particular deal is going to make. So switching gears a

[09:27] little bit here from the bridge loans where it’s a stated say 8% or 10% deal, you know you’re going to get interest only and then principal back at the end, where you have a real estate deal and you’re doing the environment. How do you guess or how do you know? How do you figure out the rate of return that you can actually earn on that property? And we actually have a real estate calculator to calculate that. Super. And where might that be located? Oh, you want me to share that too? Yes. Oh, okay. Got it. So that real estate calculator is done at truth concepts. So truth concepts.com is Todd Langford’s calculator system. And it has a real estate calculator that is sold by itself. So you don’t have to have the whole

[10:13] system. You can just buy the real estate calculator. If you don’t want to buy it, you can bug me and I’m happy to send you a fillable PDF that when I have the information back from you, I can actually do the calculation for you. And it’s amazing to me how many people are investing in real estate and don’t really know the rate of return that their particular property is earning. And that makes it very hard to compare that particular investment to anything else. So again, truth concepts.com, full disclosure, Todd Langford is my husband, but he has this real estate calculator that is for the sole purpose of determining the interest rate that a particular property is earning. Super. And again, looking at the

[10:59] real estate market, particularly the commercial real estate market, I am so attracted by these bridge loans because I have a lot of confidence in being able to predict the market for one to three years. But again, trying to predict the market over 20 years, especially looking back at the last 20, that’s a little frightening. Absolutely. And when we know that there are so many opportunities out there, it’s very, very important to be able to measure the results that we are getting. And so many people are involved in real estate or looking to get into real estate and truly do not have a good due diligence checklist or a good way to measure the rate of return that their money is going to be getting on a particular deal. So this

[11:50] blog post piece that is available on truth concepts.com, if you just go there and go to that blog and go to the real estate section, you can see actually all the components that go into that real estate calculator. And it works as a great due diligence checklist also for if you’re out and about looking for real estate investments. Super. And Kim, we are not a non-profit organization. If somebody would like recommendations on specific bridge loans or investments, I think you’re available for that as well. Yes, we do have some that we represent and some of the loans are for accredited investors only, which is million dollar net worth or two to 300,000 of income, depending if you’re married. And then we also have

[12:38] some companies that provide investors that are not accredited with bridge loan opportunities. And you know, the whole accredited investor arena is definitely subject to a lot of eyes right now. A lot of people are looking at it, but pretty much anybody that owns a business can fairly easily qualify for that. And if not great, we have programs that can help with somebody that’s not accredited. Those tend to earn the 8% range, whereas the ones for accredited investors tend to earn the 10% range or so. But those are nice solid returns that are backed up again by First Deeds of Trust on these properties. And I’m more than happy to go over the different programs with people. If they have questions,

[13:25] they should email in off the website, hello at partners number four, prosperity.com. And if they’re comfortable sharing, whether they’re accredited or not, I can even immediately share back with them an email with the right program that would fit their requirements in terms of whether they’re accredited or not, the bridge loans and the program that they could invest in so that they can actually read and learn about it in more detail before spending any time with me on the phone, which I’m also happy to do. And one thing I would like to add before we wrap up and that’s that, you know, all bridge loans or all mezzanine financing are not the same. And in fact, I would say that our experience has been that maybe 5% of the different ones that we look at we find have both

[14:19] the safety as well as the rate of return that we’re looking for. So don’t just automatically accept the first bridge loan that you see. Would you agree with that? Absolutely. It can be an area fraught with potential hazards. We’ve definitely lost money ourselves, but if done right, it’s very, very difficult to see how money can be lost. And we’ve got some great companies with really good history behind them that provide these. And we’re super grateful to be able to offer them in all 50 states and enable people to learn about them. And a lot of times it’s not that you invest right now. In fact, one of the things that we recommend often is take some small steps and just invest a little bit of money. But

[15:04] typically 50 or 100,000 is the minimum for these so that people know. But if you can take that baby step and then you start to get a paycheck every single month, which is what bridge loans are designed to do, this is for cash flow, the fourth principle of prosperity, then you can gain a lot of confidence and be willing and able to do more. And they’re also available for either IRA money or cash money. Super. That was going to be my next question. And before we wrap up. Well, just really grateful for our listeners. This is about learning and learning is something good to do every single day. And so as my husband Todd Langford does like to say, if it sounds too good to be true, just dig a little deeper because everything

[15:49] that’s a value sounded too good to be true before it became of absolute common use. I mean, think about electricity, think about cell phones, all of those things sounded too good to be true before they actually became a part of our daily use. And so if something sounds to be true, just dig a little bit deeper. And that’s what we’re wanting to help you do learn about this arena, ask for our emails with the information and let us help you learn what’s out there. And then you can either use our sources or you can go find your own in your own area with a lot more education behind you. Super. But once again, this is No BS Winnie Guy Todd Strobel for the Prosperity Podcast. Special thanks to Kim Butler. Take care

[16:33] and happy holidays, everybody. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.