Decoding Commercial Real Estate Loan Types
Investing in commercial real estate can be incredibly lucrative, but it’s not a casual investment format. Successful investors have both deep research skills and the ability to imagine the possibilities in a property without getting carried away with optimistic estimates. The first step in that process? Understanding the purposes of the wide variety of loan options, as well as when they are the most cost-effective approach to a project.
Bridge loans are designed for property flippers and rehabilitators, which means their costs are optimized for the shorter terms they are written to cover. The most common use of any type of short-term property loan is to turn the property, reselling it at a profit after investing in the improvements that make it turnkey-ready for the next owner. Depending on the property type, that can mean updating the features in a single-family home, preparing multifamily housing for a long-term investor, or even rehabilitating a commercial space and reselling it to a company that wants to own their facilities outright.
Amortizing Term Loans
Longer term loans tend to look a lot like mortgages on personal homes, but with a few conditions that acknowledge the realities of the business world. Most of them have maximum terms of 20 years and not 30, and they typically require larger down payments than consumer home loans. They come in a variety of formats, though, including traditional bank loans, CMBS lending, and crowdfunding debt investments. Among the most popular amortizing term loan programs are those run by the Small Business Administration. The SBA guarantees loans to small businesses in whole or part when the company has healthy finances but lacks the deep cash reserves or income required for a traditional bank loan, and often provides the best terms for commercial real estate investments that will also be your company’s base of operations in an area.
Specialty and Alternative Lending
There are also a wide range of lending formats for specialized projects. Construction loans use the equity that is built into development projects to finance their next stages, assessing progress at several milestone steps to ensure the timeline for completion is realistic and the investment likely to bear fruit. Other formats for developers include equity sponsorship, which involves taking on private investors, crowdfunding investment, or even a mezzanine strategy that combines debt and sponsorship to minimize the dilution of existing partner shares. No matter what you’re looking to do, you’ll find a commercial real estate loan designed to help you realize your investment goals.