Bridge Loans Explained: When Speed Beats Price in Real Estate

Marcus

Honestly? Both. And that tension is exactly where the opportunity lives right now.

Alex

Walk me through it, Marcus. Start with cap rates because I think a lot of our listeners hear that term and kind of... glaze over a little.

Marcus

Right, so a cap rate — capitalization rate — is basically how you measure the return on a property independent of financing. You take the net operating income, so rent minus expenses, and divide it by the purchase price. So if a building generates a hundred thousand dollars a year in net income and you paid two million for it, that's a five percent cap rate. Simple math.

Alex

Got it. And why does six matter specifically?

Marcus

Here's the thing — for most of the last decade, investors were gobbling up properties at four, even three and a half percent cap rates. And they could justify that because debt was cheap. You could borrow at three percent, buy at a four cap, and still cash flow. But now? Debt is sitting at six, six and a half percent depending on the product. So if you're buying at a five cap... you're actually losing money on a spread basis from day one.

Alex

Wait — so people were doing that? Buying properties that don't cash flow?

Marcus

Oh, absolutely. And some of them are really feeling it right now. I talked to a syndicator last month — raised about twelve million dollars from investors in 2021, bought a multifamily asset in the Sun Belt at a four-point-two cap rate. Variable rate debt. And now they're sitting at a six-point-eight borrowing cost and they cannot make the numbers work. They're doing capital calls. Investors are furious.

Alex

That's rough. So the people who bought at peak... they're kind of stuck.

Marcus

Stuck or selling at a loss. And that's actually where the opportunity is. Because their pain is creating real pricing resets. We're seeing cap rates in certain markets — secondary Midwest markets, parts of the Southeast — finally pushing toward six, six-and-a-quarter. Which means for a buyer coming in fresh today with equity and patience... the math actually works again.

Alex

So you're saying this is a buyer's moment if you have the cash?

Marcus

If you have the cash, or if you're strategic about the financing. Look, I'll give you a concrete example. A client of mine — small family office, not a huge institution — they just closed on a thirty-two unit apartment building in Columbus, Ohio. Purchase price was three-point-eight million. Cap rate at acquisition? Six-point-one percent. They locked a five-year fixed rate at six-point-three with a slight rate buydown using seller concessions. So on day one their spread is thin, like twenty basis points...

Alex

Hmm. That's really tight.

Marcus

Super tight. But here's the play — they underwrote it for value-add. Average rents in that building were about a hundred and forty dollars per unit below market. They've already done six units at market rate rents and the NOI is already climbing. By month eighteen they're projecting a seven-point-four cap rate on cost. That's a completely different story.

Alex

So they're engineering their way to a better cap rate through operations, not just hoping the market bails them out.

Marcus

Exactly! That is exactly the shift in mindset that separates the investors who are going to do well in this cycle from the ones who are just waiting around hoping rates drop. You can't just buy and pray anymore.

Alex

Buy and pray — I love that. Is that a technical term?

Marcus

Oh it absolutely should be in the textbooks. Chapter seven — buy, pray, and refinance when the Fed bails you out. That strategy worked great from 2010 to 2022. And then... well.

Alex

And then 2023 happened.

Marcus

Yeah. And a lot of folks are still in denial about it. The data is pretty stark — commercial real estate transaction volume dropped about forty-five percent year over year from 2022 to 2023. Forty-five percent. The market basically froze because buyers and sellers couldn't agree on price. Sellers still wanted 2021 valuations, buyers were pricing in the new rate environment. That bid-ask spread is finally starting to close.

Alex

So the market is thawing a little bit. Marcus, for someone who's listening right now — maybe they've got some capital on the sidelines, they've been waiting for the right moment — what is the one thing they should actually do?

Marcus

Run your own numbers at a six cap threshold. Don't chase a deal that only works at five. I cannot stress this enough. Before you even look at a property seriously, build your model assuming six-percent debt cost, assume rents are flat for the first twelve months — be conservative — and see if the deal still pencils. If it does? You've got a real deal. If it only works if rates drop or rents jump... pass. There will be another one.

Alex

The discipline to pass. That's harder than it sounds, right? Because there's always that feeling of, like, what if I miss it?

Marcus

Oh man, FOMO has bankrupted more real estate investors than bad tenants ever have. I promise you that. The deal of the century comes around every few years. But a bad deal that wipes out your equity? That's also pretty frequent if you're not careful.

Alex

That is going on a coffee mug. FOMO has bankrupted more investors than bad tenants. Marcus, this has been so good. So just to land the plane — the key takeaway from today, in plain English?

Marcus

The market has reset around six. Six percent is the new center of gravity — for borrowing costs, for cap rates, for what a healthy deal looks like. Stop fighting that reality and start underwriting to it. The investors who embrace that reset right now, who have the patience and the discipline to find deals that actually work at today's numbers, they're going to look like geniuses in five years. The ones still waiting for 2021 to come back... they're going to be waiting a long time.

Alex

Underwrite to six. I love that. Marcus, thank you so much for being here. This is The Capital Playbook, folks — if today's episode helped you think differently about your next deal, share it with someone who needs to hear it. We'll see you next week.