Quick overview
Bridge financing (also called a bridge loan) is a temporary loan designed to provide immediate liquidity for a real estate transaction when timing or condition gaps make long-term financing impractical. Investors use bridge loans to: close time-sensitive purchases, fund renovations that increase property value, or cover cash flow until refinancing or sale completes. Authoritative explainers include the Consumer Financial Protection Bureau and Investopedia for basic mechanics and consumer cautions (CFPB; Investopedia).
When to use bridge financing — practical scenarios
- Buying a property at auction or in a fast-moving market where a traditional mortgage won’t close in time.
- Using purchase-and-renovate strategies (buy–rehab–refinance or BRRRR) where you need capital quickly to complete improvements and then qualify for longer-term financing.
- Closing on a property while waiting for long-term loan approval or sale proceeds (e.g., bridging between a purchase and the sale of the investor’s existing asset).
- Temporary working capital for an opportunistic commercial purchase that will be refinanced after leasing improvements.
In my work advising investors, bridge loans are best for transactions with a clear, executable exit plan in 6–18 months. Without a credible exit — a refinance, sale, or committed long-term loan — the cost and risk climb quickly.
Who provides bridge financing and how they differ
- Private lenders / hard-money lenders: Fast underwriting and flexible collateral rules; interest rates usually higher (often quoted in the high single digits to mid-teens depending on market and borrower). These lenders underwrite mainly to after-repair value (ARV) or current property value, not personal income. (See Bankrate’s industry overview.)
- Banks and credit unions: Slower to approve but may offer lower rates when the investor has an existing relationship and a clear plan. Terms can be more borrower-friendly but require more documentation.
- Specialty bridge lenders and mortgage brokers: Offer products that sit between hard-money and bank bridge loans, sometimes tailored for fix-and-flip or transitional commercial loans.
For further reading on business use of bridge financing, see our glossary piece on Short-Term Business Bridge Financing: When to Use It and for buyer-focused uses, see Bridge Loans for Homebuyers: Uses and Risks.
Typical terms, costs, and underwriting criteria
- Term length: often 3–24 months; many common products target 6–12 months. (Market-dependent.)
- Interest rates and fees: variable — private/hard-money lenders commonly charge higher interest and points (e.g., 8%–15%+ in some markets), while bank bridge products can be lower. Expect origination fees, appraisal fees, legal/title fees, and sometimes an ‘exit fee’ or prepayment penalty. (See Bankrate; Investopedia.)
- Loan-to-value (LTV): commonly capped at 65%–75% of value for investment properties; some hard-money lenders use lower LTVs to limit their exposure.
- Security and collateral: loans are usually secured by first or second liens on the property. Lenders care most about the property’s liquidity (how easily it can be sold) and the borrower’s exit plan.
- Documentation: for private lenders, proof of property value and the exit plan matter more than full tax returns; banks will require standard loan documentation and stronger credit verification.
Example cost calculation (simple):
- Purchase price: $600,000
- Bridge loan: 70% LTV = $420,000
- Interest rate: 10% annual (interest-only) for 9 months = $31,500
- Origination fee: 2% = $8,400
- Other fees (appraisal, legal, title): $5,000
Total financing cost ≈ $44,900 — or ~7.5% of the loan amount for the 9-month hold. This illustrates how quickly costs compound and why the exit must be reliable.
Exit strategies — the single most important factor
A bridge loan is only as good as the planned exit. Common exits are:
- Refinance into a conventional mortgage (rate and term mortgage or commercial mortgage).
- Sale of the property after renovation or lease-up.
- Payoff using proceeds from another asset sale.
Before borrowing, document lender commitments for the follow-on financing when possible. Without a committed follow-on lender, you’re taking execution risk — refinances can fail if appraisals, credit conditions, or interest rates change.
Tax and accounting considerations (U.S.)
- Interest deductibility: For investment real estate, interest on loans used to acquire or improve rental property is generally deductible as a business expense; consult IRS Publication 527 (Residential Rental Property) and Publication 535 (Business Expenses) for rules on deductibility and capitalization of interest. Claiming interest depends on how the property is held and the loan’s purpose — talk to your tax advisor before assuming deductibility. (IRS Pub. 527; IRS Pub. 535.)
- Loan costs and points: Origination fees, points, and other costs may have special tax treatments — some are amortizable while others are currently deductible depending on the taxpayer’s situation.
- Timing and accounting: If you use an entity (LLC, partnership), confirm how the entity reports interest and fees. In my practice I routinely coordinate with investors’ CPAs to ensure costs are captured correctly and that capitalization vs. expense treatment aligns with long-term tax planning.
Risks and how to mitigate them
Primary risks:
- High carrying cost: interest and fees can erode expected returns.
- Execution risk: inability to refinance or sell on schedule.
- Valuation risk: appraisal or market conditions may reduce the property’s value.
- Liquidity risk: property may take longer to sell than planned.
Mitigations:
- Build conservative time and cost buffers into your pro forma (add 10–20% to time and cost estimates).
- Prequalify for follow-on financing before closing when possible.
- Use lenders with experience in your market niche.
- Keep sufficient reserves (cash or lines of credit) to cover overruns.
Common mistakes I see
- No credible exit plan: taking a bridge loan without documented refinance or sale path.
- Underestimating total costs: forgetting fees, escrow, interest accrual, and renovation overruns.
- Over-leveraging: using max LTV without sufficient margin for market shifts.
Checklist before taking a bridge loan
- Confirm your exit strategy and get lender pre-approval for follow-on financing where possible.
- Run sensitivity cases on time-to-refinance and renovation cost overruns.
- Compare offers from at least three lenders (private, bank, and specialty) and read fee schedules carefully.
- Ensure title and lien positions are understood (first lien vs. second lien implications).
- Consult a tax advisor about interest deductibility and reporting.
Short case study (illustrative)
Investor A finds a 12-unit apartment building with motivated sellers priced at $1.2M. The investor has 25% down but needs 90 days to refinance into a 30-year mortgage after leasing vacant units. A private bridge lender offers 9-month financing at 9.5% interest-only plus 1.5% origination and $10k in fees. After rehabbing and signing leases, the property appraises higher and refinances into a conventional loan; the bridge loan cost is paid from the refinance proceeds. Because Investor A budgeted reserves and had documented lease commitments, the strategy succeeded. If leases had lagged, the investor would have faced rollover risk or higher refinance costs.
Frequently asked practical questions
- How long do bridge loans usually last? Typically 3–24 months; many common products target 6–12 months depending on the lender. (Investopedia; Bankrate.)
- Are bridge loans harder to get than conventional loans? Not necessarily — they require a clear exit and property-centric underwriting; private lenders are often faster but more expensive.
- Can I deduct the interest? Often yes for investment properties, but check IRS guidance and consult a tax professional (IRS Pub. 527; IRS Pub. 535).
Resources and further reading
- Consumer Financial Protection Bureau — What is a bridge loan? (CFPB)
- Investopedia — Bridge Loan definition and overview
- Bankrate — Bridge loan guide and rate considerations
- IRS Publications 527 and 535 for tax rules on rental property and business interest
Internal reading on FinHelp.io:
- Short-Term Business Bridge Financing: When to Use It — https://finhelp.io/glossary/short-term-business-bridge-financing-when-to-use-it/
- Bridge Loans for Homebuyers: Uses and Risks — https://finhelp.io/glossary/bridge-loans-for-homebuyers-uses-and-risks/
Bottom line
Bridge financing is a powerful, tactical tool when an investor has a time-limited opportunity and a realistic exit. It is not a substitute for long-term financing and carries measurable cost and execution risk. Use conservative underwriting assumptions, shop multiple lenders, and document your exit strategy before you close.
Professional disclaimer: This article is educational and does not constitute personalized financial or tax advice. Consult a licensed lender and a tax professional before entering any loan agreement.
