Fidelis Private Fund is a mortgage fund that invests primarily in short-term bridge loans. Our business model is based on years of experience and a proven strategy. In this article, I share some of the key advantages and how that business model ultimately benefits our investors while providing a very valuable service to our borrower clients.
In general, there are two loan categories in a real estate mortgage fund one can invest in:
- Short-term bridge loans 1-2 years
- Long-term permanent loans. 3 year+
The general definition of short-term bridge financing is a loan with a maturity of fewer than two years, whereas long-term financing includes loans with maturities of 3 years or longer.
The benefits of private money short-term, bridge lending to a mortgage fund like Fidelis Private Fund include:
- Exit Strategy: There is more clarity in the loan exit strategy due to the short time the loan is outstanding. The economy, as it relates to the market conditions that affect the loan repayment, is more defined in the near term, rather than looking years into the future.
- Less Interest Rate Risk: There is less interest rate risk due to the short-term nature of the loans. As loans roll over sooner, updated market pricing is applied.
- Access to Inefficiencies in the Market: Bridge loans cater to the immediate demands in the market and provide an essential need for clients, and usually, there is a premium to accommodate this service.
- Enhanced Yield: Investor yield is improved due to the opportunity of reinvesting the loan funds more frequently.
- Increased Liquidity: There is increased liquidity in the fund based on short-term loans being paid off more quickly than long-term loans.
Given these advantages, you might wonder why other funds, REITS, or banks don’t typically focus on bridge lending as their primary offering. Here are a few reasons why:
- Underwriting bridge loans is more of an art than a science.
- Often private money bridge loans need to close fast. There is not the luxury of completing the traditional institutional underwriting criteria on every loan. Therefore, this risk needs to be mitigated in other ways. For example, using common-sense underwriting, taking into account the client relationship, and offsetting the risk with additional collateral.
- The same structured loan criteria and terms are difficult to repeat consistently, given each loan request is unique with its own set of property and borrower advantages and disadvantages. It’s not as simple as completing a checklist (i.e., credit score, appraisal, etc.) that determines whether or not to fund a bridge loan.
- Short-term, creative loan structures often include multiple secured assets that are not uniform and difficult to package as a saleable asset if needed.
- It takes experienced, skilled, loan originators to underwrite and structure a bridge loan properly.
- Short-term loans pay off more quickly; therefore, it takes more effort to replace those loans paid off with new loans to keep the capital working.
Fidelis is well-positioned as a mortgage fund to utilize the benefits of short-term bridge lending and maximize the return to our investors at the same time minimizing the risk.
We recognize many of our clients want long term loans, a required financing option for real estate investors. That’s why if the loan request is not a fit for Fidelis, we will arrange long-term financing by brokering the loan to a lender that best fits the client’s needs. Fidelis is a one-stop-shop for all investment real estate loans, both bridge, and long-term financing.
What is your perspective as an investor in a mortgage fund or financial institution when it comes to short-term vs. long-term real estate investment financing?