The Beginner’s Guide to Commercial Real Estate Financing
Investing in real estate is one of the best ways to get a combination of stability and strong returns. It’s not risk-free by a long shot, but its risks are manageable, and that’s why so many people look at it as an important part of an investment portfolio. Before buying commercial real estate, it’s vital that new investors understand the way financing works for commercial properties, because it is very different from the way the residential mortgage market works.
When you look for financing for commercial properties, you have a much wider range of financial products than consumers on the market for a primary residence. That’s because there are a wide variety of reasons to buy a property and things to do with it. The loan that minimizes your monthly overhead when buying facilities for your business might not be the loan that works when you are purchasing income properties or buying land to develop with new construction. Each has its own form of financing.
The ability to close quickly is also important for investors. A big part of successful commercial real estate investment is knowing when to go for a bridge loan to buy yourself time. Bridge loans are typically 12 to 15-month products that the borrower pays interest only payments on, with a lump sum payment of the principal at the end. They aren’t designed for borrowers to pay them off with their own money, they’re designed to get you quick approval so you can close, and then to buy you enough time to improve the property and either refinance or resell it. As a result, these loans are ideal for buying properties that will need improvement before being refinanced into a long-term loan.
If you’re buying an existing income property that is in good shape or you’re refinancing one out of a bridge loan and you know you won’t be trying to pay it off early, you also want to know about CMBS loans. These products work like traditional amortizing fixed-rate loans and offer the same repayment terms, but with one exception. They restrict prepayment and offer a lower interest rate than traditional loans in return. That makes them great for an investment plan that calls for a property to pay for itself over time.
Once you understand the purpose of each commercial real estate loan, it’s easier to see how your investment plan works with the right loan to deliver you even better results than you could get with a one-size-fits-all product. Keep that in mind the next time you’re browsing investment properties.