Which Commercial Real Estate Loan Should You Use?
Investing in real estate is a matter of understanding how your local market interacts with national trends, where its demand hotspots are developing, and how to best structure your investment process. Success frequently means going in with a plan for your exit, even when you’re buying long-term income properties. Having a long view means knowing when to invest in improvements, what market conditions you want to see before selling out, and how much income you’d like to make. Often, investors with this foresight successfully reach their projected income goals, but to do that they need to use financing that works with their anticipated paydays. Often, that’s not a traditional fixed-rate commercial real estate loan, so you need to know your options to invest wisely.
If you’re not buying facilities for your own operation, this is not an ideal loan category for investors. It’s worth knowing, though, because if you are seeking to set up shop with your own offices, your best rates are likely to come through the 504 or 7a program. They do come with some prepayment restrictions, but they have some of the best terms and interest rates you will find when you’re still establishing your income.
Short-term financing with fast approvals and minimal monthly payments can be the best option if you’re looking to improve and remarket a property. Sometimes they are even marketed to investors as flipping loans, but they are useful for more than just a quick flip investment. Investors looking to buy a bargain priced income property and rehabilitate it to the market cap can close with a bridge loan, make improvements, and then refinance into a traditional commercial real estate loan based on the new value of the building. Often, that means paying off the bridge loan while retaining enough equity to avoid needing down payment money.
When you’re looking to develop or redevelop properties instead of just renovating them, construction loans provide tiered lending that re-evaluates the available equity in the property at specific construction milestones, providing you with the capital you need to keep pushing forward until the project is complete. While that’s not often the first project a new investor takes on, it’s a useful option for bargain priced buildings you can’t improve on lots that have a lot of latent value.
Traditional Bank Loans
Traditional commercial real estate loans are the most popular option for investors seeking mortgage-style financing on properties that will be used for rental income and additional indirect income through added services to tenants. They’re low cost, but they require a property that is in good condition and a large down payment, often 30%. As a result, they can be tough to obtain when you’re a new investor. They’re incredibly useful when your goal is to minimize monthly overhead so you can draw income from a property, though, which is why they are perennially popular.