Case Study: Evaluating a Hard Money Lender for a Bridge Acquisition

This case study examines a hard money bridge loan used to acquire a multifamily property quickly before transitioning to permanent financing, illustrating the underwriting considerations specific to bridge lending.

Scenario: Stabilized 8-Unit Apartment — Off-Market Opportunity

James discovers an off-market 8-unit apartment building available for $620,000. It is 87.5% occupied (7 of 8 units) with gross rents of $6,800/month. The seller requires closing within 21 days—too fast for conventional financing. Current NOI is $52,800/year. Comparable buildings in the area trade at 7.5% cap rates, suggesting a value of $704,000. James plans to use hard money for acquisition, then refinance into a permanent DSCR or small-balance commercial loan within 6-12 months.

Lender Underwriting Analysis

The hard money lender evaluates: (1) As-is value supported by income approach: $52,800 / 0.075 = $704,000—loan at 65% LTV = $457,600. (2) Purchase price LTV: $457,600 / $620,000 = 73.8%. (3) Exit strategy: refinance into permanent financing at 75% of stabilized value after filling the vacant unit. (4) DSCR at proposed loan amount: $52,800 / ($457,600 × 0.10 interest-only) = $52,800 / $45,760 = 1.15. The lender approves at $450,000 (72.6% of purchase price, 63.9% of estimated value) at 11% interest-only with 2 points, 12-month term.

Execution and Refinance

James closes in 14 days, contributing $170,000 cash ($620,000 − $450,000) plus $9,000 in points and $4,000 in closing costs ($183,000 total cash). Over the next 4 months, he fills the vacant unit ($900/month), raises rents by $50/unit on lease renewals, and makes minor cosmetic improvements ($8,000). New gross rent: $7,800/month. New NOI: $60,600/year. At month 8, he refinances into a 25-year DSCR loan at 7.5% for $525,000 (75% of new value, where new value = $60,600 / 0.075 = $808,000). He extracts $525,000 − payoff of $450,000 = $75,000 in cash-out proceeds, recovering 41% of his initial cash investment while holding a stabilized cash-flowing asset.

Go / No-Go Decision Framework

Go Indicators

✓Bridge loans are strategic for time-sensitive acquisitions with a clear refinance exit.
✓Income-producing properties provide DSCR-based underwriting even from hard money lenders.

No-Go Indicators

✗Not modeling the full carrying cost timeline for a bridge acquisition: A bridge loan at 12% annual rate with 2 points costs $1,000/month per $100,000 borrowed—totaling $14,000+ over 12 months
✗Entering a bridge deal without a backup exit strategy: If the primary exit (sale or refinance) fails, the borrower faces default with no alternatives

Scenario: Calculating Bridge Loan Carrying Costs

James needs to model total carrying costs during the 8-month bridge period.

Outcome

The stabilized rental income nearly covers the bridge loan interest, making the total carry cost primarily the origination points—a strong indicator of a well-structured bridge deal.

Sources

Common Mistakes to Avoid

Not modeling the full carrying cost timeline for a bridge acquisition

Consequence: A bridge loan at 12% annual rate with 2 points costs $1,000/month per $100,000 borrowed—totaling $14,000+ over 12 months

Correction: Create a month-by-month carrying cost projection including interest, insurance, taxes, utilities, and maintenance before committing

Entering a bridge deal without a backup exit strategy

Consequence: If the primary exit (sale or refinance) fails, the borrower faces default with no alternatives

Correction: Always have at least two viable exit strategies: primary (e.g., refinance to DSCR loan) and backup (e.g., sell at a reduced price)

Key Takeaways