￼3 Types of Loans for Commercial Real Estate Investors
Finding the right financing is half the battle when it comes to real estate investing. If your loan does not match your investment goals, the timing and size of payments alone could adversely affect your eventual returns, even if the out-the-door cost of financing is less. That is because working capital plays such a large role in certain kinds of real estate investment. If you are considering a property investment as a first-timer, there are three loan types you need to understand. Each is linked to one major investment strategy that new investors tend to use.
These loans work a lot like traditional mortgages, but they have lower LTV limits and higher interest rates due to the increased risks involved in financing investment properties when compared to individual homes. This means you can count on commercial real estate financing with amortizing payments, low fixed rates, and long repayment terms if you go this route. That is ideal for investors looking to hold an income property for years because it shortens the path to returns by years. You only need to recoup the down payment and earn more than the monthly overhead, after all. Cash buyers need to make all their money back.
Bridge Loans for Property Flippers
Fix and flip loans are typically aimed at those working with single-family homes, but equivalent bridge loan products do exist for commercial properties, including retail spaces and apartment buildings. These short-term loans have higher interest rates than commercial mortgages but they offer the option to make interest-only payments until the loan is due at the end of the term. This gives investors a chance to minimize capital overhead and budget for improvements, and the resale of the property pays off the loan and provides a return at the end of the investment.
Asset Capital Loans
This is a broad class of loans that typically has terms shorter than seven years, with many products in the three-to-five-year range. Commercial real estate is used as the collateral to back a cash-out refinancing with negotiable payment requirements and loan terms that you can then use to finance other investments. This is an ideal loan to use when you have equity in a stable investment that you want to use to fund the improvements to another building, and it can be used alongside a bridge loan on the property you are purchasing to finance the entire cost of the flip. Keep that in mind as you plan your next property purchase.