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You’ll find many reasons to invest in commercial real estate. Commercial real estate investments can deliver reliable cash flow and great profits. With reliable returns and appreciation, the assets can also be a great way to build wealth. You also have a diverse array of options for investing in commercial real estate. Investors can operate in different sectors, different markets, different asset classes, and more.
As advantageous as commercial real estate can be, there is a lot you need to know before starting. The markets are complex, and you must arm yourself with knowledge. One area to study is commercial real estate financing. There are many different types of loans, and they can serve an investor in different ways. However, selecting the wrong financing options could lead to disaster.
What do you need to know about commercial real estate loans? Read on to learn the basics about commercial real estate financing.
Commercial Real Estate Loan Terms
Just like any loan, there is a term under which the borrower must repay the loan. The term refers to the amount of time the borrower has for repayment. It can vary depending on various factors. Different types of loans have different terms. Factors like the loan’s purpose and the type of lender can also affect the term length. Loans like commercial mortgages might have terms that go as long as 25-30 years. However, there are loan types that might have terms as short as a year.
Interest Rates on Commercial Loans
Borrowers will also need to pay their debts back with interest. Just like a loan’s term, the interest rates can vary depending on an array of factors. Different loan types have different rates. Certain types of lenders might also charge higher rates. Long-term loans from conventional lenders tend to have the lowest rates. However, if the investor needs money fast, they might have to accept higher interest rates and fees.
Commercial Mortgages
Commercial mortgages are a common type of loan for real estate investors. Similar to a home mortgage, commercial mortgages are used for property purchases. They are long-term loans that typically run for at least five years. Most commercial mortgages are for 15-25 years. Commercial mortgages can also have fixed or adjustable rates. Owner-occupied commercial structures may be eligible for SBA 504 loans. However, properties that are strictly for investment purposes are not eligible.
Bridge Loans
The name indicates what bridge loans are for. In general, they serve as a bridge between conventional loans. For example, an investor might take a construction loan to develop a property. When the property is complete, they might have to pay the balance of the loan. However, long-term financing for the mortgage might not be available right away. The bridge loan provides financing during the time between the two loans. Bridge loans are short-term financing, and they usually have higher interest rates. However, they can be a valuable form of financing for commercial real estate investors.
Construction Loans
Many investors buy properties to develop them. Maybe you want to build an apartment complex or an office park. Construction loans can cover the project’s costs. Unlike a mortgage, a construction loan does not release the lump sum all at once. Instead, it pays the money out at milestones during the project. Another point is that the borrower typically only makes interest payments while the project is underway. Once it is complete, you may need to pay the entire loan. That is where a bridge loan can be useful while you wait for mortgage approval.
Commercial Real Estate Lenders
You’ll find many different types of lenders in the world of commercial real estate financing. Banks happened to be some of the most common lenders. They issue commercial mortgages and construction loans. Banks might also issue loans for renovation or rehab projects. You also have hard money lenders as an alternative to banks. They offer quick capital when investors need funds in a hurry. For example, hard money lenders are a common source of bridge loans. Since they offer capital quickly and take more risk, they usually charge higher interest rates.
Collateral for Commercial Real Estate Loans
Collateral is an important part of commercial real estate financing. The loans are often for significant sums, so the lenders want security in the form of collateral. With commercial mortgages, the commercial building and land serve as collateral. The property is usually also the collateral for construction loans and bridge loans. Investors can also use equity in properties they already own as collateral for loans.
Commercial real estate debt financing can be complex. As an investor, you need to understand your options and take time to compare loans. You may even want to work with a finance expert to help you evaluate your needs and find loan options.
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