2 June 5 Ways to Finance Commercial Real Estate Investments
When buying commercial real estate, you have a lot of different financing options from which to choose. Depending on your finances and goals, different financing methods might be more suitable than others.
From mortgages to construction loans, from private equity to HELOCs, Revolving Loans, and Commercial Bridge Loans, there are many different ways to finance your commercial real property purchase. Once you understand what type of financing is right for you – and
your property – there are lots of advantages to using financing as opposed to taking cash out of your business instead. Here are the best five ways to finance commercial real estate deals you should know before looking for financing for your next commercial real estate investment.
What type of financing is best for your next commercial real estate purchase?
Before you begin the process of shopping for financing for your next commercial real estate purchase, first decide which option is best for you and your situation. There are many different types of commercial real estate financing, so it’s worth taking a moment to understand each of them.
1.Commercial Mortgage: A mortgage is the most common type of financing used for buying and selling commercial real estate. If you have excellent credit, the mortgage bank or broker may offer a low rate and flexible repayment terms. Depending on the lender, a mortgage could be a 30-year fixed rate or a variable rate tied to an index like LIBOR.
2. Preferred Equity: Preferred equity in real estate is a type of financing used frequently by commercial real estate investors and private equity companies. It gives active investors the ability to leverage more funds for investment while providing additional security to their investments. Preferred equity financing is a unique type of finance. Strong and experienced developers with solid development projects are supported by preferred equity financing. Preferred equity finance covers both the land and the construction, with the term “finished construction” referring to the entire project. Preferred equity financing is best for larger-scale projects with a well-attended pre-sale.
You can also use equity investors to raise funds to purchase commercial real estate. You and other investors contribute enough money to buy a commercial property in private equity. Investors often receive a percentage share of the entity that owns the investment, as well as a share of the property’s income and other benefits. These transactions can be set up as an LLC, GP, LP, or something else entirely.
3. Hard Money / Bridge Loan: Real estate investors typically use hard money lenders as a financial resource. The financing for these ventures comes from a private individual or organization rather than a bank. Because these loans are not subject to corporate regulations, they frequently have fewer qualification requirements and can be obtained more quickly.
Financial organizations offer bridge loans, which are similar to hard money loans in several ways. It’s a short-term loan with a high-interest rate (typically one year or fewer). A bridge loan’s purpose is to provide finances and maintain cash flow while you renovate, fix and flip capital, refinance, or lease a commercial property. It can also be used while you wait for long-term financing to be secured.
4. SBA Loan: The U.S. Small Business Administration (SBA) offers some of the least expensive loans for investing in commercial real estate and guarantees repayment of a portion of the loan. Because of the assurance, banks are more ready to take risks. While the affordability of a loan depends on the circumstances of the investor, these loans typically offer larger borrowing limits—up to $2,000,000. Longer periods, cheaper down payments, and protection against balloon payments are all features of SBA loans that can help firms maintain a steady cash flow. SBA-backed loans help the borrower by increasing credibility and reducing risk for the lender.
5. Joint Venture: A real estate joint venture (JV) is an agreement between two or more companies to collaborate and pool resources to build a project. Real estate joint ventures finance and develop the majority of significant projects. Property investing in a joint venture can be quite appealing to all parties involved. Assume you’re a rising real estate developer with enough cash in hand to buy a large plot of land in a trendy neighborhood that you think would be ideal for a mixed-use development. However, you lack sufficient funds to complete the construction of the said structure.
Rather than abandoning your ambition, you contact a commercial real estate brokerage agency. The brokerage business then introduces you to a potential sponsor or investor (often a private equity or family office organization). A contract is reached, and a joint venture is formed. Joint ventures exist in a variety of shapes and sizes, and no two are alike.
Bottom line
Understanding what each of these types of financing is and how it works can help you choose the best option for your next commercial real estate purchase. Buying commercial real estate is an important decision, potentially very profitable and often complex. With support from our experts and a loan adapted to your needs, we can help make your project a reality.