In commercial real estate, primary mortgages don’t always cover all of a deal’s debt requirements. That is, a gap may exist between the cash you put into a deal and the senior debt financing available. Fortunately, bridge loans offer a solution in these situations. As such, we’ll use this article to discuss including bridge loans in multifamily acquisition underwriting. 


Specifically, we’ll cover the following topics:


  • Bridge Loan Overview
  • Example: Bridge Loans in Multifamily Acquisition Underwriting
  • Final Thoughts


Bridge Loan Overview


Commercial real estate deals include two primary sources of financing: 1) owner contributed capital (i.e. the cash you put into a deal), and 2) senior debt (i.e. a permanent mortgage). However, the capital stack model includes a variety of other financing options when these primary sources do not cover a deal’s capital requirements. 


In particular, bridge loans serve as a short-term financing tool until investors can secure a permanent mortgage. While individual terms vary, bridge loans in commercial real estate typically have terms from three months up to three years. And, unlike more permanent financing sources – which can take a long time to close – you can normally close on a bridge loan in a relatively brief period of time.


In the next section, we’ll provide a comprehensive example of how investors can include bridge loans when underwriting a multifamily acquisition.  


Example: Bridge Loans in Multifamily Acquisition Underwriting




Assume you want to buy an apartment building, renovate the common areas and individual units, and increase the value of the property – a standard value-add model. Reviewing the deal, you determine that you can purchase the property for $1.25 million and renovate it for an additional $230,000. 


With $250,000 in capital, you can qualify for an interest-only acquisition loan to purchase the property, but you don’t have the additional $230,000 cash on hand to complete the renovations. Accordingly, the purchase looks like this: 


Initial Purchase Financing
Cap Rate 5%
NOI $62,500.00
Income-Derived Value $1,250,000.00
Contributed Capital* $250,000.00
Acquisition Debt (Interest Only) $1,000,000.00
Acquisition Debt Interest Rate 4%
Acquisition Term 1
Total Acquisition Debt Interest $40,000.00
*For simplicity’s sake this amount ignores closing costs.


Of note, the current net operating income (NOI) of $62,500 and interest-only debt service of $40,000/year translates to a debt-service coverage ratio (DSCR) of 1.56 – more than sufficient to qualify for the acquisition loan. (NOTE: Most lenders require a DSCR of between 1.20 and 1.25). 


To finance the renovation, you decide to use a bridge loan. But, you first need to run the numbers, which we’ll complete in the next section. 


Including a Bridge Loan in Your Underwriting Model 


After submitting your renovation plans, construction bids, and post-renovation pro forma, a lender offers you a $250,000 bridge loan. This amount includes the $230,000 in renovation costs plus $20,000 in interest reserve. 


Your new underwriting numbers look like this:


Value-Add Period Financing
Bridge Loan (Interest Only) $250,000.00
Bridge Loan Interest Rate 8%
Term 1
Total Bridge Loan Interest $20,000.00
Value-Add Increase in NOI 25%
New NOI $78,125.00
New Income-Derived Value $1,562,500.00
Perm. LTV 80%
Perm. Mortgage* $1,250,000.00
*New loan pays off acquisition and bridge loan.


The first four lines outline the terms of the loan. As unsecured debt, bridge loans generally have higher interest rates than secured loans, which explains the 8% rate. The one-year term corresponds with your projected renovation schedule. Lastly, the $20,000 in interest reserve allows you to control your cash flow by paying the interest on the loan with draws against its principal. 


Next, after conducting a market analysis, you determine that, following the renovation, you can increase the property’s NOI by 25% through a combination of increased rents and decreased operating expenses. Using the market cap rate of 5%, this increased NOI translates to a new, income-derived valuation of $1,562,500.


You then submit these numbers to a lender in a permanent mortgage application. At a loan-to-value (LTV) of 80%, the property qualifies for a $1.25 million permanent mortgage. When you close on this loan following the renovation and subsequent lease-up, the permanent financing will pay off 1) your $1 million acquisition loan, and 2) the $250,000 bridge loan. 


Once you close, you will control an asset valued at $1,562,500 for $250,000 in contributed capital (ignoring closing costs for simplicity’s sake). Or, viewed from a different angle, you will now have $312,500 in equity in this property ($1,562,500 value minus the $1.25 million mortgage). 


Final Thoughts


Yes, we used a simplified example in the above article. But, the important takeaway is the valuable role bridge loans can play when underwriting a multifamily acquisition. While you pay a higher interest rate, these loans offer a speed and flexibility not available in many conventional loan products. 


If you’d like to discuss different real estate investing options for your unique situation, we’d love to chat! Drop us a note, and we’ll set up a meeting to talk about available multifamily real estate investment opportunities.