Decoding Commercial Real Estate Loans
Finding the right loan for your real estate deal can be incredibly easy once you know your options, because financing for commercial real estate is purpose-built to work with buyers. It’s just that each one has different buyers in mind. With the variety of methods for investing in properties, that means there are a lot of choices. The first step to success for new investors is learning about each loan choice. That way, picking the right one is easier when it’s time to close on an investment.
Long-Term Loans for Commercial Properties
If you are looking to buy and hold a property for any reason, the options available to you resemble home mortgages in many ways. They tend to be amortizing instruments with terms above 10 years, require a sizable down payment, and offer fixed interest rates. In addition to traditional commercial real estate loans, these options include stated income loans on working rental properties and CMBS loans.
Business owners looking to purchase properties for their operations can also check out the SBA’s 7a and 504 programs. Those loans come with occupancy requirements, though, so they are not built for investors.
Construction and Major Development Financing
When you’re putting together a major project like a downtown redevelopment or a new building construction, the financing options do not look anything like the loans most people are used to. Construction financing provides some working capital based on the lot’s initial property value. More becomes available at certain construction milestones, using the equity added to the property through improvements as collateral for each new round of loan distribution.
There are also investment channels for funding large real estate projects, including both equity sponsorship of the deal and mezzanine financing that combines debt and equity funding to strike a balance that provides the most working capital possible.
Short-Term Commercial Real Estate Loans
Finally, there are a category of loans specifically designed for short-term financing. There are a few different structures for financing, but all of them tend to be lumped together as bridge loans. As a result, popular hard money lending programs that hold down the cost of interest by securing the debt wind up wearing the same label as unsecured bridge credit loans offered by banks to major investors with the financing to pay for the privilege.
Bridge loans all have the same general purpose regardless of their exact structure. They serve as short-term financial solutions that allow you to close and to work on the property. In some cases, they are optimized for properties you’ll refinance and hold, in others they are built for flipping. If you’re getting started with short-term investment, hard money flipping loans are often the most cost-effective commercial real estate loans out there.