There are a lot of ways to get started in commercial real estate, but one stands out as an excellent choice for both accessibility and risk management. Commercial real estate financing allows you to limit your risks by using secured debt to cover the majority of the costs related to your investments. For new players building a portfolio, it might mean the difference between closing that first deal and waiting while you build capital. For those with deeper capital resources, it means limiting the amount of your reserve you have to risk in each deal.
1. Match Your Loan and Investment Types
Each real estate loan type is built to serve a specific purpose. Long-term mortgage-style loans are built for investors looking to occupy the building or to benefit from rental income for years in the future. It minimizes the monthly overhead to help you reach a return faster. By contrast, commercial real estate bridge loans are short-term instruments with interest-only payments and high LTVs that allow you to close quickly. When you intend to remarket the properties in just a few months, they are an ideal way to save on the costs of your flip.
2. Choose the Right Financing Provider
Most new investors are quite familiar with bank loans. Some even have experience with a wide variety of instruments that include personal credit lines, multiple types of asset loans, and other credit instruments. Choosing the right provider is not just choosing between banks and credit unions, though. You also need to consider the range of alternatives, from private hard money lenders to peer-to-peer funding platforms to find the provider who offers you the terms and conditions that match your needs best.
3. Balance Your Cash Down and Collateral Values
When you start looking at the world of private commercial real estate loans, you will quickly find that lenders will make practically any LTV available for the right price to the right customer. The question is how much it will cost you in terms of interest and other financing charges, especially when you are buying a product that only demands interest payments until the final principal balance is due at the term’s end. In those cases, your willingness to accept a little lower LTV by putting up a higher down payment is directly related to your monthly overhead costs while you carry out improvements and remarketing operations. Make sure you find the right combination to suit your current resources and investment targets.