Bridge Loans and Hard Money

Bridge loans and hard money are the short-term, high-cost capital that powers value-add and time-sensitive deals. They're expensive — sometimes very expensive — but they enable transactions that conventional debt can't fund. Used correctly, they're a sharp tool. Used wrong, they're how investors lose properties.

This lesson covers when each makes sense, how they're structured, and how to avoid the common traps.

What problem they solve

Conventional bank loans require stabilized properties with proven cash flow. They underwrite to current NOI. They take 60-90 days to close.

But many great deals don't fit:

• Vacant or partially leased buildings — no current NOI to support a conventional loan
• Heavy value-add — current NOI is low; the deal pencils only after the work is done
• Distressed properties — banks won't touch
• Quick close requirements — auctions, short sales, off-market deals where the seller wants to close in 30 days
• Construction completion — finishing a partially-built project
• Repositioning — turning a Class C office into Class B medical, etc.

For these situations, you need short-term capital that's underwritten to the future state of the property, not the current state. That's where bridge loans and hard money come in.

Bridge loans

A bridge loan is short-term financing that "bridges" the gap between acquisition and stabilization. The exit is typically a refinance into permanent financing (conventional, agency, CMBS) once the property is stabilized.

Typical structure

| Feature | Common range | |---|---| | LTV | 65-75% (sometimes higher with mezz) | | Term | 12-36 months | | Rate | SOFR + 350-650 bps (currently 8-12%) | | Interest type | Floating, often interest-only | | Recourse | Partial recourse common; non-recourse for larger deals | | Origination fee | 1-2% | | Exit fee | 0.5-1% common | | Prepayment | Open after a minimum interest period (3-6 months) |

The interest-only structure is critical. During value-add, the property may not generate enough cash flow to amortize a loan. I/O lets the deal survive the transition.

Who provides bridge debt

• Debt funds (institutional credit funds focused on CRE)
• Specialty bridge lenders (Mesa West, Madison Realty, BridgeInvest, etc.)
• Some banks via specialty bridge groups
• Insurance companies for larger deals
• Mortgage REITs (KKR Real Estate, Blackstone Real Estate Debt Strategies, etc.)

Bridge lenders are credit-focused — they think in terms of risk-adjusted return on capital. Their underwriting is sophisticated and fast.

What bridge lenders look for

• Clear value-add story (specific business plan)
• Experienced sponsor with track record
• Realistic stabilized NOI projections
• Realistic timeline to stabilization
• Identified exit strategy (refi into specific permanent loan type)
• Adequate sponsor equity (typically 25-35%)
• Strong asset class fundamentals
• Property in a good market

They will require:

• Detailed renovation budget
• Construction draws schedule
• Lease-up plan (for office/retail/MF)
• Reserves for interest and capex
• Sometimes completion guarantees from sponsor

Bridge loan example

A 100-unit Orlando MF property in distress:

• Purchase price: $8,000,000
• Renovation budget: $1,500,000 (unit interiors + exterior)
• Total project: $9,500,000
• Bridge loan: $7,125,000 (75% LTC)
• Sponsor equity: $2,375,000

Bridge terms:

• Rate: SOFR + 500 = ~10% currently
• Term: 24 months + 12-month extension option
• I/O entire term
• Origination: 1.5% ($107K)
• Reserve for interest: 12 months ($720K)

Year 1-2 plan:

• Renovate units as they turn
• Increase rents from $1,200 to $1,600/unit
• Stabilize at 95% occupancy
• New T-12 NOI: $850K (vs. $510K at acquisition)

Exit at Month 24:

• Stabilized value at 5.5% cap = $15.4M
• Refi into agency loan at 75% LTV = $11.55M
• Pay off bridge ($7.1M + accrued exit fee + interest)
• Net cash to sponsor: ~$4M
• Returns over 2 years: $4M / $2.4M equity = 1.65x equity multiple, ~28% IRR

This is a textbook bridge-to-permanent value-add. The deal doesn't pencil with bank financing but works beautifully with bridge.

Bridge loan downsides

• Expensive — 8-12% interest is 2-4x conventional. Eats into returns.
• Floating rate exposure — if SOFR rises, your debt service rises
• Refi risk — if the property doesn't stabilize on schedule, you can't refi out
• Extension fees — extending costs 0.25-1% of loan plus rate adjustments
• Restrictive covenants — bridge lenders often require lockboxes, cash management, monthly reporting
• Small mistakes are expensive — every month of delay is real money at 10% interest

When to use a bridge loan

✓ Significant value-add story with measurable KPIs (rent increases, occupancy, expense reductions) ✓ Realistic timeline (12-24 months to stabilize) ✓ Identified exit lender (have permanent debt warmed up before you close the bridge) ✓ Adequate reserves (interest reserve + capex reserve) ✓ Experienced sponsor in this asset class

When NOT to use a bridge loan

✗ The deal "pencils" but has no real value-add — you're paying bridge cost for no reason ✗ Timeline is uncertain or aggressive ✗ No exit lender lined up ✗ First deal — too much complexity, too much downside ✗ Market is rolling over (refi exit gets harder)

Hard money loans

Hard money is bridge debt's faster, smaller, more expensive cousin. It's typically used by smaller individual investors for shorter-term needs.

Typical structure

| Feature | Common range | |---|---| | LTV | 60-70% (of as-is value or ARV) | | Term | 6-18 months | | Rate | 10-15% | | Interest type | Floating or fixed; usually I/O | | Recourse | Almost always full recourse | | Origination fee | 2-4% (called "points") | | Prepayment | Open or with minimum interest period |

Hard money lenders are typically:

• Private individuals
• Small lending companies
• Family offices
• Specialty residential-to-commercial transition lenders

The "hard" in hard money refers to "hard asset" — the loan is collateralized by the property and the lender is willing to foreclose quickly if the borrower defaults.

What hard money is good for

• Auctions — close in 7-21 days
• Distressed acquisitions — quick close, no bank patience
• Seller-finance bridge — buying a property to flip or quickly refinance
• Short-term capital while waiting for conventional — your bank loan needs another 30 days but you have to close now
• Construction completion — finishing a stalled project
• Quick rehab — buy, fix, refinance into conventional

What it's NOT good for

• Long holds — 12% interest is too expensive to carry beyond 18 months
• Stabilized assets — there's no benefit; conventional is much cheaper
• First-time investors with no plan — the "I'll figure it out" approach is how people lose hard money loans

The hard money trap

The most common hard money disaster:

1. Investor finds a "deal" — vacant retail building at 70% of "comp value"
2. Buys it with hard money: $1M loan at 13%, 12 month term, 3 points
3. Plans to "fix it up and refinance"
4. Renovation takes longer than planned
5. Leasing takes longer than planned
6. Month 12 arrives — property isn't stabilized, conventional refi isn't available
7. Hard money lender extends — for 2 more points and rate increase to 15%
8. Month 18 arrives — still not stabilized
9. Investor can't service the debt
10. Hard money lender forecloses
11. Investor loses entire equity (and personal assets if recourse)

This pattern is common. Hard money disasters happen because investors underestimate timelines and overestimate ARV.

Avoiding the hard money trap

If you must use hard money:

1. Conservative ARV — assume after-repair value is 10-20% lower than your optimistic case
2. Conservative timeline — assume the project takes 50% longer than expected
3. Pre-arranged refi — talk to a conventional lender BEFORE closing the hard money loan; understand exactly what conditions trigger their commitment
4. Build interest reserve — have cash to cover 6-12 months of interest if needed
5. Have an escape hatch — selling, partnering, raising more equity — know your contingencies before you need them
6. Set a hard "out" date — if you're not on track at month 6, change strategy

Bridge vs hard money — choosing

| Factor | Bridge | Hard Money | |---|---|---| | Loan size | $2M+ | $200K-$3M typical | | Sponsor profile | Institutional / experienced | Individual / less experienced | | Process complexity | Higher | Lower | | Closing speed | 30-60 days | 7-21 days | | Rate | 8-12% | 10-15% | | Recourse | Often non-recourse | Almost always recourse | | Best for | Value-add to stabilization | Quick close, short fix |

For larger or more sophisticated deals, bridge is usually the right tool. For smaller, simpler, faster situations, hard money fits.

The exit is the deal

The single most important thing about bridge and hard money: the exit must be planned before you close.

Don't close a bridge loan thinking "I'll figure out the exit when the property is ready." Identify the exit lender, get a soft commitment, understand their stabilization criteria (DSCR, occupancy, NOI), and build your business plan around hitting those numbers by a specific date.

If you can't articulate a clear exit, you don't have a business plan — you have a hope. Hopes don't pay back debt.

What to take away

• Bridge and hard money loans solve problems conventional debt can't — value-add, vacancy, distress, speed
• Bridge: institutional, $2M+, value-add focus, 8-12% rate, 12-36 months, often non-recourse
• Hard money: individual / specialty, smaller, shorter, 10-15%, almost always recourse
• Both are I/O (interest-only) so the deal can survive the transition period
• The exit is the deal — refinance into permanent debt must be planned before closing
• Use only when the value-add story is clear and the timeline is realistic
• Build interest reserves and contingencies — running out of runway is fatal
• Hard money traps catch investors who underestimate time and overestimate ARV
• Beginners should generally avoid these tools until they've done several conventional deals first

Next lesson: agency debt — Fannie Mae and Freddie Mac multifamily loans, the cheapest financing in CRE.