Investors with deep pockets could always buy a piece of commercial property outright, but commercial loan financing can help investors diversify. This article will illuminate some common methods of commercial financing.
Most investors will readily understand conventional mortgages. Even if an investor has enough money up front to purchase a property, a mortgage is usually a better option. An investor can take advantage of multiple investment opportunities and achieve greater returns by spreading their savings between multiple down payments. Some mortgage providers resell their loans to a government entity like Fannie Mae or Freddie Mac. This resale to a government entity restricts the mortgage terms these lenders can offer. Portfolio lenders can offer borrowers more flexible terms on a conventional mortgage. Portfolio lenders finance loans directly from their own funds. Without the involvement of a government group, portfolio lenders can offer better terms to borrowers in some cases.
Any mortgage for an investment property usually requires a down payment of 25 to 30 percent. First time real estate investors may not have the savings to afford such a substantial down payment .These investors could borrow against the value of their home in order to raise the money needed for a down payment. Home equity lending offers both tax benefits and considerably lower interest rates than other types of financing. The lender will consider the borrowers home rather than the property being invested in, which can smooth out the approval process. The purchase of the investment property will also be easier, as sellers prefer buyers who can offer money up front.
Still some borrowers won’t qualify for a conventional mortgage. Hard money or private investment may be the only commercial loan financing method available.
Hard money is offered by professional lenders and private money usually comes from individual investors. Hard money providers do not closely scrutinize a borrowers credit references and instead consider the value of the property being borrowed against. While hard money is expensive it may be only option in some cases. This is especially true for particularly distressed properties that an ordinary bank won’t finance. Unlike hard money lenders, private lenders do not regularly issue loans. Private lenders are individuals with savings on hand and an established relationship with a borrower. Private lenders give borrower cash in exchange for repayment at a specific interest rate. There are no hard and fast rules when it comes to private lenders and the terms on private loans will vary on a case by case basis. The personal relationships of an individual investor will most often determine the terms of any private loan.
One type of commercial loan financing isn't actually a loan at all, these are equity partnerships. Partners get a fixed amount of profit from the investment rather than earning a specific interest rate.
A lender is referred to as an equity partner when they buy a share of ownership in a property. These partners can finance the entire purchase price or the down payment on an investment property. The terms of a partnership are usually defined in an operating agreement or in a promissory note. Like private loans the terms of partnership can vary on a case by case basis. The main difference between a partner and private lender is that a partner receives a specific share of the income generated by the property rather than regular interest payments.
Conventional mortgages, hard or private money lenders and equity partners are the most common way to finance the purchase of a commercial property. Crowd funding is another option. Any first time real estate investor should consider their personal contacts and their credit profile. A private loan or an equity partnership may be a better option than a conventional mortgage or a hard money loan.
Broker/RI/CEO/MLO
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
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