Financing Commercial Real Estate Investments

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Pros And Cons: Single

3 Pitfalls to Avoid with Owner Financing – Commercial Real Estate Investing Training

Although there are many ways to own investment property, letâs take a closer look at one of the most striking comparisons: owning a single-family dwelling vs a larger property with five units or more. Whenever youâre looking for investment properties, itâs worth the time to consider every aspect of the commitment, including upfront investment, cash flow opportunity, tenant relationships, and risk.

Single-Family Dwelling

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Financial Solutions That Keep Your Business Moving Forward

Offering commercial mortgages, construction loans and non-recourse financing for multi-family, office, industrial, retail and mixed-use properties, the Commercial Real Estate experts at Investors work closely with you to create a financing strategy that fits your budget and timeline. Financing for commercial properties available in New York, New Jersey, Pennsylvania, Connecticut and Delaware.

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Loan Terms And Loan Programs

Commercial real estate financing is available under a range of terms, interest rates, and conditions. The most important factor in a commercial loan decision is often the earning power of the property. Lenders use the propertys value to determine how much they will lend, a figure expressed as loan to value . Many of our products have a maximum LTV of 65% or 70%. A borrower will need to supply the remainder of the purchase price using personal assets or contributions from an investment partner.

An investor can also finance a commercial real estate investment using the earning power of the building or buildings in question. A lender will evaluate the deal based mostly on the propertys ability to generate enough revenue to cover insurance, taxes, and mortgage payments. This option makes it easier for commercial buyers to access the cash they need.

We have deep experience with stated income, bridge financing, and mortgage loans. We can understand real estate investors and real estate investments. Our online platform for submitting and evaluating loans streamlines the loan process for commercial real estate owners or buyers. You can see your options, select the right loan program and get an approval letter to submit with a bid.

Learn from Our Experience

Loan From An Online Marketplace:

Using Hard Money Loans for Real Estate Investments

Online markets now offer to link borrowers with private investment that helps commercial finance buildings exchange for a return, which is sometimes referred to as soft money loans. This form of loan is known as a soft money loan since the interest rates are still greater than those of traditional bank loans but lower than those of hard money and commercial mortgage lenders. Borrowers are often matched with shortened loans extending from six months to several years through online markets.

Investors should feel more prepared to tackle their first commercial transaction with these commercial real estate financingoptions in mind. Commercial real estate is a distinct market segment that differs significantly from typical residential real estate and must not be underestimated. Those that are willing to take on this section of the real estate market, on the other hand, have the opportunity to have a one-of-a-kind experience as well as an equal one-of-a-kind set of benefits.

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For Most People Purchasing A Home With A Residential Real Estate Loan Comes Before Starting A Business With Commercial Real Estate Financing And The Fact Is The Two Are Very Different Processes So Its Important To Know What To Expect When It Comes To Your Business Loan

As a homeowner, you may have already gone through the process of applying for and obtaining a residential real estate loan. And that is a good thing when it comes to what to expect with some of the processes of applying for and obtaining a commercial loan for your business.

However, there are also some distinct differences in the processes, documentation required and terms when applying for commercial real estate financing for your business. Many lenders can assist you with ease and help you get the loan you need to get your company up and running fairly quickly.

When applying for commercial lending, youll need to have specific paperwork and documentation ready to present. You will also need to decide if you are going to apply through a conventional bank lender or seek an alternative lender for your commercial loan options. Its also important to know that its not about the state of your personal income that matters when applying for commercial real estate financing. While that may have been an instrumental part of getting your residential home loan approved, your personal finances are not typically considered in a business loan. What matters more is the profitability of your business or property.

Certified Development Company / Sba 504 Loan

The 504 Loan Program is another SBA product made available through Certified Development Companies . These loans are specifically intended to stimulate business growth and job creation by offering small businesses yet another financing avenue. More specifically, however, the 504 Loan Program provides approved small businesses with long-term, fixed-rate financing used to acquire fixed assets for expansion or modernization, according to the SBA.

The Small Business Administrations 504 Loans cant exceed $5 million, and are specifically designated for fixed asses, including:

  • The acquisition of existing real estate assets

  • The acquisition of raw land and subsequent improvements

  • The construction of new facilities or modernizing, renovating or converting existing facilities

  • The purchase of machinery for long-term use

  • The refinancing of debt to facilitate the expansion of a business with new or renovated facilities.

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Debt Service Coverage Ratio

Lenders also look at the debt-service coverage ratio . In essence, this measures a propertys ability to service debt, and it compares a propertys annual net operating income to its annual mortgage debt service, including principal and interest. A DSCR of less than one percent reveals a negative cash flow, and commercial lenders generally look for DSCRs of at least 1.25 to ensure proper cash flow.

Before financing a commercial property, investors need to consider all aspects of the process: loan-to-value ratio, debt-service coverage, and creditworthiness. Additionally, a proper business plan will help investors, especially beginner investors, to streamline the financing process.

Why Is Commercial Property Refinance A Popular Option

Realty Mogul CEO explains investing in commercial real estate deals with crowdfunding

Multiple reasons contribute to commercial property refinancingbecoming a popular choice. Some of the reasons are pre-planned strategies ofinvestors who crunch numbers and come up with formulas that work to theirbenefit through the refinancing route.

Some of the reasons are unplanned, mainly the product of markettrends and conditions that force an investor to end up refinancing as the onlyway forward. The single biggest reason for refinance is the repayment mode ofcommercial properties. The balloon payment at the end of the loan tenure iseffectively the main reason behind most investors refinancing route.

For instance, a property on the market may appear to be a soundchoice due to demand and the attractive cost. To quickly take ownership of theproperty, investors take out a commercial property loan, put in down payment,and take possession of the property. There is no other way of procuringhigh-value property unless the investor ties up with other institutionalinvestors.

The repayment of the loan amount is often from the rental incomeof the property. However, as the loan comes to the end of its tenure, theinvestor needs to make arrangements for the balloon payments repayment. Thiscould be as much as 85% of the loan amount. Though it does not necessarily haveto be 85% of the loan amount, the maximum is often 85% of the loan amount.

It is to be borne in mind that the loan amount is different fromthe purchases actual value, which includes the down payment and the loanamount.

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Property Is Important But There Are Other Things To Consider

You will need to have prepared your financial information for your lender such as business income, expenses, payroll, rent, and more. You will also need to have statements such as bank statements, tax returns, a solid business plan and credit record. Having all your documentation in good order is a key to getting your loan approved for your business.

Commercial Investment Property Loans:

So, what are the major differences between a commercial investment property loan and a residential investment property loan? As mentioned above, a solid business plan, coupled with a good credit score, are essential steps that are taken in order to obtain a commercial investment property loan. In addition to a good credit score and business plan, commercial property investment loans are typically more concerned with the benefits and necessary work needed to improve the actual property in order to see cash flow expectations. This is usually coupled with endless amounts of questions about cash flow, whereas residential investment property loans do not worry as much about this. Also, commercial investment property financing options tend to have loan terms between five to twenty years, whereas residential investment property loan choices are longer .

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Types Of Lenders Commercial Property Refinance

There are five different broad categories of commercial propertyrefinance lenders.

Traditional Banks,

CMBS also known as Asset-Backed Trusts or Hard Money Lenders

GSE backed mortgage funds.

  • Traditional Banks By far, the most popularand common among the various categories of lenders across all categories ofloans, traditional banks are the pillars of funding, managing, and funding mostof the assets. Traditional banks are often the first choice of borrowers whenit comes to borrowing, including refinancing. However, traditional banks losesome of the sheens compared with other entities because of the regulation ofcentric processes. Banks governed by various regulations to protect the fundsat the banks disposal from turning into non-performing assets. Consequently,the processes may appear to be a bit more tedious than that of other entities.Banks typically offer shorter loan tenures, though it is not mandatory and isentirely at the discretion of the bank and the various criteria used todetermine the suitability/risks associated with a loan. One reason forinvestors choosing banks over other entities is the existing relationship withthe bank. Most investors and institutions hold accounts for transactions andmay or may not have availed a bank loan. This forges a relationship with thebank, which can then be used to the investors advantage.
  • CMBS or Hard Money Lenders

What Is The Interest Rate On Commercial Real Estate

Building wealth through property investment

The interest rate on commercial real estate varies significantly based on the type of loan that the borrower chooses to elect. Loans backed by the Small Business Association tend to have the lowest interest rates. For example, the SBA 7A interest rate varies between 5.5 and 6.75 percent, while the 504 loan ranges between 3..5 to 6 percent. Conventional bank loans offer fixed or variable interest rates, typically between the 5 to 7 percent range. Hard money loans from private investors come in with the highest interest rates on the market, typically between 10 to 18 percent. Hard money loans can be fixed or variable and have the shortest loan terms.

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Different Types Of Funding For Commercial Real Estate Investing

If you are new to commercial real estate investing and lack the money to pay cash for an opportunity, you still have the option of acquiring one through various funding sources. Thats one of the most attractive aspects of investing in commercial real estate – using someone elses money!

When you see a commercial property for sale and feel confident that it can generate income , you can try applying for loans, looking into private equity, or utilizing some creative finance options.

Getting A Commercial Real Estate Loan

Commercial real estate loans come in many shapes and sizes. For many, their flexibility makes them the loan of choice for investorsâ even if they could technically use a conventional mortgage.

Here are the basics of a commercial property loan:

  • The application process: It is typically harder to qualify for a commercial loan. Because there is more money on the line, banks will have stricter requirements. A lender will also want to investigate the earning potential of your investment property.
  • Down payment: Down payment requirements depend on the loan type and the lender. Some commercial loans may have a 15% down payment minimum, while others may be as high as 35%.
  • Loan term: Commercial loans typically have a much shorter repayment period. Instead of spreading out payments over 30 years, be prepared to pay back the lender in 10-20 yearsâ or less. This can usually be negotiated with the lender.
  • Interest rates: Rates will depend on the loan product but are usually higher than a mortgage.

Because the needs of commercial investors can be so unique, itâs important to work with a lender with plenty of commercial lending experience. They can help you craft a loan that works with your specific situation.

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Will I Qualify For A Commercial Real Estate Loan

As with all loan types, there are qualifications you must meet before receiving one. If you are looking to apply for a small business administration loan, you will likely be required to have a high business credit score , and the size of your business must meet the SBAs size standards. To successfully qualify for an SBA 504 loan, your business income must be less than 15 million. Traditional loans from a bank or mortgage institution will typically require a borrowers credit score to be 700 or higher. Commercial bridge loans will also require applicants to have a credit score of 680 or higher. Hard money loans are typically easier to secure, but they may have higher interest rates than traditional lenders. Be sure to research your lenders specific requirements to ensure that the loan you apply for is right for you.

What Is A Commercial Loan

Commercial and Investment Real Estate Financing

A commercial loan is a type of loan that is used to finance investments in commercial real estate. For example, loans for commercial real estate might be used to acquire an office building, a mixed-use development project, or apartment buildings. Some investors may even use commercial real estate loans to develop or renovate commercial projects as well.

Commercial loans for real estate are unique from traditional mortgages for residential real estate in several ways. First, commercial loans are often found at smaller, community banks rather than big banks that are well-known. In addition, banks tend to hold these loans in their internal portfolios, rather than selling them on the open market. As a comparison, traditional loans are often bundled and sold to entities like Freddie Mac or Fannie Mae. One of the attractive qualities distinguishing commercial loans from traditional financing is the amount of flexibility offered to investors. There are generally less restrictions when it comes to ownership, property type and number of properties owned within the portfolio, and properties can be titled within an LLC.

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How To Make Money From Investing In Real Estate

So how do you build wealth through real estate investing?

Let’s look closer at the various sources of return that will be revealed when working with this real estate calculator.

  • Real estate investments generate income through rent â Some people invest in properties such as buildings, commercial complexes, or houses for the purpose of renting them out. Income generating properties include warehouse units, apartments, office buildings, rental houses and more.
  • Real estate can appreciate quickly â Growth in valuation is usually the biggest factor impacting your investment return equation. If the properties around your area are scarce or the area experiences rapid economic growth then you can expect real property values to increase. Conduct careful research and know the development plans in your city before investing.
  • Make money from business operations â Engage in business services that could generate additional income, like setting up a vending machine, offering laundry, or food-catering services in apartments. If your property includes vacant land consider adding storage units for additional rental revenue.

Residential Loans Vs Commercial Real Estate Loans: Key Differences

  • Commercial real estate loans are usually made to business entities .

  • Commercial loans typically range from five years or less to 20 years, with the amortization period often longer than the term of the loan.

  • Commercial loan loan-to-value ratios generally fall into the 65% to 80% range.

  • Residential mortgages are typically made to individual borrowers.

  • Residential mortgages are an amortized loan in which the debt is repaid in regular installments over a period of time. The most popular residential mortgage product is the 30-year fixed-rate mortgage.

  • High loan-to-value ratioseven up to 100%are allowed for certain residential mortgages, such as USDA or VA loans.

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How Can I Get A Loan For A Commercial Property With No Money Down

You can get a loan for a commercial property with no money down by utilizing a variety of financing methods, such as a purchase money mortgage, an investing partner, or a hard money lender. Investors who have focused their careers on residential real estate may have shied away from commercial properties simply due to the perception that the associated risks and costs are great or that the down payment is prohibitive. However, by familiarizing themselves with commercial real estate financing basics, investors should find that commercial properties are not inaccessible.

Suppose an investor cannot afford the down payment required by certain commercial real estate financing options. In that case, they can find an investing partner who is willing to provide the funds required to qualify for a loan, such as a traditional bank loan. However, it should be noted that the property should promise attractive returns for the investment to be considered worthwhile for a partner.

Another viable option is going through a hard money lender. Bridge loans can help investors secure short-term funding for a down payment so that they may negotiate a longer-term loan through a more traditional lender. However, borrowers should beware that hard money lenders usually provide loans with high-interest rates.

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