5 Ways to Finance a Commercial Real Estate Purchase
The biggest obstacle to overcome when trying to start investing in commercial real estate is, as always, funding. It can be rather challenging to make such a significant property purchase if you are beginning your career or have no one backing you. As such, the mere idea of trying at all can seem daunting to people. Still, it is not impossible to become an investor if you are wise in your approach. All you need to do is find a way to finance your activities at the start before the money starts rolling in, and you can pay off your debts. As such, let’s take a closer look at 5 ways to finance a commercial real estate purchase and help you fulfill your ambitions!
The first way to finance a commercial real estate purchase is also the simplest: coming up with the money yourself. Now, yes, this is not a small investment, and most wouldn’t be able to get into it on their own. At least not at the start, when just dipping your toes in commercial real estate. The good news is that you don’t have to. Your first few investments before you grow your own capital enough can be made through the assistance of friends and family. After all, it’s likely that everyone has some free cash that they are either hesitating to invest or whose investment hasn’t been doing much. They might be willing to support you and help you make it, and you can take your time paying them back. Make sure you find the best property to invest in since people’s money depends on you.
Seller loan financing
The next way you can finance a commercial real estate purchase is through seller financing. The concept might sound weird, but it is making a payment plan with the property’s previous owner. This is popular because it lets you set the terms through negotiation and makes it possible to ensure a win-win scenario. By cutting out the middleman, aka banks and similar institutions that typically fund loans, the seller gets a better price. You don’t need to worry about interest rates, loan approvals, or other problems. This lets you finish the purchase and start focusing on your plans for the property much sooner, too. As the experts from Verified Movers like to point out, the sooner you start making plans to move in furniture and other necessities, the better. And by providing some furniture and appliances, you make it appealing to renters.
Conventional bank loan
The traditional bank loan is perhaps the most common way people finance their commercial real estate purchases. And for a good reason! A ‘traditional’ loan can be customized to suit your needs, and the lender is always reliable. Remember that while significant banks are typically relatively rigid regarding loan agreements, approaching a smaller, local bank familiar with the housing market you operate in and with your goals can yield better results. Of course, due to the limitations on how much a bank can lend to a single individual. This limitation is considerably more significant for small local banks; you might run into issues. This means that you’ll need to carefully balance the scale of your investment with what resources you can easily acquire locally. Often, starting small and expanding is the better and safer option.
This option is available only to those investors who want to acquire multifamily real estate for rent. Still, approaching an agency lender is one of the better options for financing a commercial real estate property. Note that agencies themselves are not the actual lenders. Instead, they vet and approve the applicants and then pass them on to a traditional bank. The bank then makes the loan to you, but the ‘original’ lender, aka the agency, is the one held as guarantor. Meaning that they are the ones who will deal with the bank in case your payments are late. However, they will then collect the debt pond and sell it to other investors, so the end result is as bad for you as defaulting on a more traditional loan. So, treat it with all the seriousness you as would a standard loan.
Commercial mortgage-backed security loans
Commercial mortgage-backed security loans are the final way to finance a commercial real estate purchase. Or CMBS loans in short form. Unlike our previously discussed entry, these loans are available for every commercial real estate investment. Knowing that large banks package and sell CMBS loans as bonds is also helpful. So, what does this mean for you in practical terms?
These loans are much more rigid than anything else on this list. You can’t negotiate the terms since they are pre-packaged loans. Their repayment scheme is also designed for individuals with a steady revenue stream. So, if there is a major disruption to your profits, you might find yourself in need to renegotiate the loan terms, which is mostly impossible. Still, using CMBS loans is a lucrative investing strategy if you can stick to the terms.
The potential of commercial real estate
Using the 5 ways to finance a commercial real estate purchase we’ve outlined here, you’ll be able to become an investor. All that’s left after that is to slowly turn your operation into something highly profitable. And the potential of a commercial real estate nearly guarantees this! If you are smart when picking out the city you plan to operate in; you will always be able to find people willing to rent your properties. The only advice we have left for you is to carefully pick which of the financing options you want. Each has its advantages and drawbacks, so it’s only a matter of deciding what would serve your purposes best!