Here is some good news for commercial real estate investors: You’ve got options!
Today’s market is comprised of a number of lending alternatives, from traditional banks to hard money lenders and everything in between.
These institutions offer a wide range of loans – to select the best option for you, it’s important to understand the different options available and their pros and cons.
To help you gain a basic understanding of today’s commercial lending environment, today we’re going to cover the four main types of commercial real estate loans available to investors.
1. Traditional Mortgages from the Bank
Banks will generally offer the lowest interest rates and most attractive terms. For many borrowers, the bank is their first stop – not only because of the rates and terms offered, but also because of the existing depository relationship they may already have with the institution.
Unfortunately, a relatively small number of investors qualify for this type of loan. Denials can be issued for any number of reasons, but credit score, requested loan amount, and the present state of the subject property are regularly cited as reasons for a bank rejection.
2. Commercial Bridge Loans
The main reason bridge loans exist is to help borrowers secure short-term financing to either reposition or add value to a property before permanent financing is attainable. Bridge loans are referred to as a stop-gap measure, with terms of usually just 6 to 36 months.
When applying for bridge financing, be sure to present a clear exit strategy for the loan. Lenders will want to know how you plan on transitioning from the bridge loan to a longer-term solution, so you can build confidence by providing a detailed plan listing your expected next steps.
3. Commercial Hard Money Loans
A commercial hard money loan is very similar to a commercial bridge loan, with the main difference being that hard money loans come from private investors, whereas bridge loans come from financial institutions. You can qualify for a hard money loan with a lower credit score but you could pay with an interest rate somewhere in the low- to mid-teens.
Sometimes referred to as a last resort for borrowers, hard money loans actually can make great sense in certain situations. Borrowers must simply determine what they are comfortable spending in order to secure financing.
4. Alternative Permanent Financing
Alternative lenders exist in today’s market to meet the needs of those who are not able to work with banks. Like traditional banks, these lenders typically offer commercial loans with terms of 5-7 years and amortizations of up to 30 years. The key difference has to do flexibility.
Non-bank lenders often offer reduced documentation solutions and streamlined transaction processes. They are also more likely to reduce or eliminate restrictions on the amount of cash borrowers are able to take out of their existing mortgage during a refinance. In exchange for these types of benefits, non-bank lenders typically charge a slightly higher interest rate than their bank counterparts.
There are lots of options for prospective commercial real estate investors, and they don’t all have to be traditional loans from traditional lenders. There are also other loan types available from private lenders, companies, and the government, so make sure you explore all your options. Apply now for your commercial real estate loan through Investment Property Loans.