164: Chad Soapbox - The Dangers of Floating Rate Bridge Debt Today

Is real estate in trouble?

The short answer is no, but there are certainly areas to be cautious about. Today, Chad focuses on floating rate bridge debt and why you should be careful when dealing with this kind of financing. He breaks down how to mitigate risk and navigate the terms set by lenders, and how to devise foolproof exit strategies.

Tune in and take proactive steps to avoid getting caught up in a debt trap!

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[00:00 - 06:55] Don't Get in Trouble in Real Estate

The real estate industry is still strong, and deals are promising, but pay attention to your expenses

Lenders hold the purse strings, so treat them with respect

As long as you don't run out of time or money in a deal, you won’t have any problems

Leveraging long-term debt options have less risk

[06:56 - 08:53] The Types of Debt in Commercial Real Estate Investing

Agency debt is the safest type of debt, with a fixed rate and non-recourse loan for five to twelve years

Recourse fixed-rate debt is slightly higher on leverage, with four to ten-year loans and collateralization of other assets

Bridge debt is designed for projects not ready for long-term debt, with two to three-year loans and one or two one-year extensions

[08:54 - 19:33] The Danger Zone: Missed Covenants, Lender Funding, and Rate Caps

The biggest thing about bridge debt is that you're not in control of your money; the lenders are

You have to budget your cash tightly when using bridge debt

Lenders can get nervous if don’t comply with their covenants and refuse to fund your draws

This will lead to a cash problem; you’ll have time but you'll run out of money

Rate caps are time-sensitive and require some planning

Exit is everything and lenders are worried if they will be able to get repaid

Watch out for the unknown unknowns; floating rate loans have different rules than fixed-rate loans and can be more unpredictable

[19:34 - 21:15] Go into Deals with Eyes Wide Open

Bridge debt can be a great tool if used correctly

Understand  the terms and conditions of the loan and assess your ability to meet the requirements

Quotes:

“Your lender is your biggest investor and they have the most teeth in the deal.”  - Chad Sutton

“You only get in trouble in real estate if two things happen: if you run out of time on your deal or you run out of money on your deal.” - Chad Sutton

“Most fixed-rate loans and recourse fixed-rate loans, pretty predictable. The rules are mostly the same. But with variable rate loans, these are usually debt funds and the rules are all different. And so your unknown unknowns, what you don't know can hurt you here.”  - Chad Sutton

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Real Estate Runway Podcast is all about alternative business and investment strategies to help you amplify life and maximize wealth! Click here to find out more about the host, Chad Sutton.

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