Investing in real estate is one of the more stable methods of building up a long-term portfolio, especially when you take a diversified approach to your holdings and research your markets carefully. Before you jump into commercial real estate for long or short-term investments, it’s important you understand how much financing influences both the demand in the market and your ability to achieve a satisfactory return on your property purchase. Property purchases are high-value transactions, so the buyer’s ability to qualify for a loan is absolutely vital to your success. That’s why you need to know your market cap before deciding to purchase. Your own ability to find cost-efficient financing is just as important, though. Understanding your options and what they are designed to do can keep you from making costly missteps as you invest.
Traditional Real Estate Loans
The most common kind of real estate loan is built like a home mortgage, with fixed interest rates and amortizing payments. Typically, the down payment required to get one is larger than a down payment on a home, closer to 30% than 10 or 20. The terms are also usually shorter, with the most common loan lengths being 10 and 20 years. There are just a couple of issues with this loan type, and one is short-term purchases. This kind of commercial real estate financing is built around the idea that the buyer is going to be keeping the property for income or operations, and that’s why the terms are so long. The other issue is that the company tends to need a long operating history and deep reserves of cash for many traditional lenders to approve the financing. That pushes some smaller businesses out.
Real estate bridge loans are designed for the short-term, allowing you to get into a resale situation or to line up that longer-term financing. They’re a favorite for fix and flip enthusiasts, but people looking into a longer-term purchase use them as renovation loans, so they can improve the property before moving into long-term financing and get a better valuation. They allow for fast closings, so in a market that has a lot of movement, they’re a good resource to know about.
The Small Business Administration also offers commercial real estate loans to qualified small businesses. The loans are guaranteed by the Administration for at least a portion of their value, which means lenders can offer great rates to companies that would usually be seen as too new or too small to qualify. Your financials have to show the company is in good health and there are requirements on the purchase that include a stipulation you use at least half the floor space for your own operation, but they are ideal for smaller companies looking to own the space they work out of.