Investors have very different needs from companies that buy property to use as an operational home. That’s why there are so many ways to finance commercial real estate. Skipping over items that are aimed at businesses acquiring infrastructure assets like the SBA’s 7a program, what do you have to choose from? How does it line up with your investment goals? These questions can be tough to figure out without experience, so let’s review the basics and put some options in mind for first-time investor financing.
1. Bridge Loans for Real Estate
Commercial properties are often in need of work before they can be occupied, and this work builds equity into the property, so it makes sense to avoid financing it with a long-term instrument if you’re going to do quick improvements. For those holding property for long-term income, a bridge loan provides a low-cost opportunity to close early and get the building ready for tenants before refinancing into something that has low monthly payments to optimize your time to a return.
These loans are even more impressive for short-term investors because you can do the improvements, remarket, and close before the principal payoff at the end of the loan. That lets you finance most if not all of the property’s purchase cost, saving most of your capital for the improvements.
2. Traditional Commercial Mortgages
These are the products the SBA’s 7a program is based on, but they do not typically require you to occupy the property, so they are a favorite for long-term purchases like apartment buildings that you will use as regular monthly income sources. You can also find private loans with similar low-interest rates and amortizing structures. They have less stringent credit requirements, but also slightly lower LTVs. Still, they are an accessible choice for first-timers who do not have perfect credit.
3. Cash Out Financing Options
The third type of loan requires you to have an asset with equity you can refinance, and it allows you to take cash out of that asset and put it to work on another investment. Asset-based capital loans and stated income commercial real estate loans are both prime examples of this type of financing. This is useful if you have a property like a home you have paid off and you want to use it to finance a real estate deal. Those with existing income properties branching out into new types of investment also find them very useful because they can be used to cover renovations as easily as property purchases.