Financing a commercial real estate project is one of the most important steps in the property acquisition process. If you have found a great investment property, you might be wondering what type of commercial real estate loan will be the best for you. Let's find out!
Many times, commercial property owners need additional financing to keep their assets in a furnished condition. This is where conventional banks, private investors, and the U.S. SBA (Small Business Administration) come to the rescue.
There are various types of loans available on the market. Although the risks involved with commercial real estate can at times be higher than residential property businesses, they can produce thousands of dollars in additional profits.
Here are five different types of loans commercial real estate owners can choose from:
Hard Money Loans
This type of loan comes solely from private investors looking to diversify their portfolio. These lenders are opting to take the risk on the basis of the value of commercial property and not the credit score of the owner.
For their protection, owners need to list their commercial real estate as collateral against the loan. Furthermore, these loans carry a high-interest rate to secure the investments of private lenders. Hard money loans are best for temporary financing needs and are not suitable for long term investing goals. In addition, these loans are popular among “fix and flip” commercial estate investors.
This loan gives the owner instant access to cash. Generally, we can say that these loans are similar to hard money loans. Borrowers usually avail this loan while deciding between various long-term financing options. These loans are temporary and can sometimes last for just a few days!
Most investors largely opt for this type of loan to renovate their property before putting it up for sale. These loans can be obtained from banks and even private lenders. It is important to note that borrowers need a decent credit score to qualify for this type of loan.
Long-term Conventional Loans
This is one type of long term financing available to commercial real estate owners. In this type of loan, borrowers will have a fixed interest rate throughout the tenure of the loan. The interest rates are quite low and annual payments are mostly static.
However, there are strict requirements for the owner to obtain such a loan. These include having a credit score of at least 700 and significant balance in their personal and business bank accounts. Furthermore, borrowers need to mortgage their property as security against the loan.
Joint Venture Loans
As the name suggests, this loan is suitable when all the stakeholders share an equal profit and loss ratio. This loan is beneficial for co-owners if none of them can obtain a proper source of funding on their own. This type of financing is similar to partnership businesses, but is only for a specific commercial project.
Joint venture loans can be obtained via private investors and real estate investment firms. The interest rates on these loans are average and can range from 6% to 10%. In a simple scenario, both or all the partners to the commercial real estate apply for funding by submitting a joint loan application.
Commercial real estate owners opt for this type of loan to finance the material and labor cost of a commercial real estate structure. This structure can include an office building, industrial complex, or retail centers. If an investor has acquired an undeveloped land, he can use the land as security to obtain a construction loan.
These loans are usually long-term and can range from a period of 1 to 3 years depending on the type of construction.
Wrapping up, there are several types of commercial real estate loans available for owners. The ultimate decision to obtain a specific type of financing for your project solely depends on your requirements and goals. In any case, do not forget to check your credit rating before applying for a loan since a poor score will likely act as a hindrance when it comes to obtaining different financing facilities.
If you are actively looking to finance a commercial real estate project, please reach out to us as we’d be more than happy to help facilitate the process of securing funds on your next project. With years of expertise and credibility, our talented team can streamline your funding process and assist in choosing the right loan option in your next commercial real estate acquisition.