Financing Options for Commercial Real Estate Investments
If you’re investing in real estate, the financing you obtain has just as much impact on your bottom line as the market limits for rental and resale, the cost of improvements, and other variables. It’s not just because you need to get the best interest rate to maximize your profits. In fact, in some cases, the right payment structure could make a higher-interest vehicle more profitable than a lower-interest one. How? Well, if you can buy commercial real estate at a higher interest rate but you don’t have to risk as much capital on your down payment, you can improve your profits and buy more properties.
The important thing is to determine what your investment will be used for. If your company is operating in the building or you’re renting it out for income, then a longer loan term that controls your monthly overhead is usually a good idea. If, on the other hand, you’re looking at improving and reselling a property quickly, you might want to look at an interest-payment-only bridge loan or another short-term lending vehicle.
Those aren’t the only options, either. Developers building new construction, including block and district development, need financing as much as other commercial real estate investors do. The problem is, they don’t usually have the equity in the property because they need to build it, and banks don’t want to finance value that doesn’t exist yet. The solution is a milestone-based system that lets you borrow against the existing equity in a property to build, and then unlocks more of the loan value as you prove you have built to certain levels of improvement before giving you more.
There are also equity sponsorships and hybrid options like mezzanine financing for both developers and purchasers working above the threshold covered by traditional commercial loans for real estate. These options allow you to reach further and do more without worrying about whether you will have to cover the project’s grand scope mostly out of pocket, but they do involve taking on equity investors.
Don’t forget there are also options specifically for investors managing a portfolio of commercial real estate properties across town. Those loans allow for cash-out refinancing, so you can use one building’s equity to finance improvements in another. They’re called stated income loans, and they allow you more control over how your investments pay for one another than traditional real estate loans. Which lending structure is best for you is a matter of what your investment goals are at this time, so consider your options and choose carefully.