Loan Options for Investment Properties and Commercial Real Estate
Property investments are a great way to build wealth stably, especially if you have the help you need to manage the property in a time-efficient way. The key to commercial real estate success is understanding the strategy you’re taking with each individual purchase and then adapting your financing strategy to best fit your goals. Let’s talk about the options and their best uses, so that way you’re better prepared to adapt your financing to your next purchase.
Stated income loans are common instruments used primarily for multifamily structures, but they can also be used for single-family residences and for commercial properties under the right circumstances. They are great because they typically allow for cash-out refinancing and because they are based on the building’s income and not on its resale value. This means they are able to more accurately fit your business cycle. With these loans, you can even use one building to finance another, creating a hedge against risk for new investments.
There are also traditional fixed-rate instruments and CMBS options that are similar, but that offer reduced interest rates in trade for prepayment restrictions. These instruments can be great for a stable, long-term investment, but they’re really designed for companies that will be moving into the buildings they purchase more than anything else. You may find them useful as an investor when you’re planning on holding the building, it doesn’t need too much renovation, and you have a large down payment available.
Bridge loans are also great options for real estate investors. Like bridge loans for home purchases, these instruments allow you to close on commercial real estate quickly, so you can renovate it into the condition it needs to reach to be a stable property investment. From there, you can refinance it into a longer-term loan with one of the other instruments discussed here or you can return it to the market and sell it at a profit to an investor looking to gain rental income.
The last important loan type to understand is mezzanine financing. This is a combination of equity sponsorship and financing used for those who are financing projects that are larger than the scope of traditional loans. They allow for major developments and large property purchases, and they require special lending institutions to set up. They are not necessarily going to be available from a bank or credit union.
Understanding these products is the key to using them well. Know your options the next time you buy commercial real estate.