The prospect of using bridge financing when acquiring a replacement property for your 1031 Exchange may seem counter intuitive for several reasons:
1. You may be purchasing a stabilized property that easily meets Bank underwriting requirements
2. Most 1031 Exchanges must deploy significant cash resulting in a low leverage loan which is easily financed
3. Exchange properties are usually held long term, so locking in a low rate for an extended timeframe is smart
BUT, there are times when a Bridge Loan is actually a better solution to finance your 1031 Exchange….
QUICK CLOSINGS – With banks still working remotely and thus moving slower than normal, deadlines to close on a 1031 Exchange can become an issue. Closing with a reliable bridge lender allows you to get to the closing table before your 1031 deadline.
Value Add Opportunity – Maybe you are selling a stabilized asset and want to Exchange into a ‘Value Add’ or distressed property. Using a Bridge Loan will allow you time to renovate and stabilize the new asset so you can refinance based on the newly created value of the asset without the cost of expensive prepayment penalties.
Equity Recapture – In an effort to deploy 100% of your 1031 Exchange, you may wind up having more cash equity in the Exchange property than you want. When using a short-term bridge loan for your acquisition, you can refinance shortly after because there are no pre-payment penalties. Your refinance can then recapture some equity that was trapped in the transaction during the purchase.