A desirable commercial property may become undesirable for investment purposes if the financing options do not align with the needs of the investor. Therefore, prior to making an offer, investors should understand the maximum amount of money they will be able to finance, the payment schedule that would work best for them, and the specific terms of the loan that will help achieve their objectives.
The correct types of commercial real estate loans will be determined by the specific deal being financed, the characteristics of the property involved, and how an investor intends to use the funds from the loan.
Step 1: Define Your Investment Goal
Start by asking what you want the property to do.
Produce rental revenue: A standard commercial mortgage could work well for a business that produces steady revenue such as a store front, a retail operation, or a storage facility.
Support your business: Eligible businesses can use SBA financing to purchase or upgrade a property that is used by the business.
Create value through upgrades:The value created through upgrades to a home can be funded with short-term financing prior to either refinancing or selling.
Build a new property: Construction financing can cover costs as work progresses.
Your goal helps narrow the choices before you approach lenders.
Step 2: Plan for the Property’s Timeline
The length of time you need the funds matters.
A longer term mortgage may be appropriate if you plan to keep the property for a while. On the other hand, if there is a small gap of time from when you buy your property until you can secure permanent financing, then a bridge loan would likely be more appropriate. Finally, if your project requires you to finance it in stages (i.e., with each stage receiving its own financing), then construction loans are designed specifically for this purpose.
Hard money loans can allow an investor to make quick decisions because of the importance of the property value to the lender. On the other hand, the cost of these types of loans is typically higher than other options, and the repayment period is generally much shorter.
Step 3: Understand What the Lender Will Check
Lenders will almost always check through multiple sections of your application:
| Factor | Why it matters |
|---|---|
| Credit history | Shows how you manage debt |
| Property value | Helps support the loan amount |
| Rental income | Shows the capability of the home mortgage to repay |
| Down payment | Reduces the lender’s risk |
| Business plan | Details the purpose of the fund and how you intend to repay it |
Step 4: Compare the Real Cost
Do not just pick on interest rates only. Examine fees, repayment plans, loan duration, potential for rate adjustments, and prepayment penalties. Inquire about how delays in completing the project will affect the plan.
Make Financing Part of the Plan
Before making a decision about what types of commercial real estate loans you should use, it will be useful to understand the various types of loans available so that you do not choose one which may create financial difficulties for your business. Choose a financing option that is appropriate for the purpose of the property being financed, as well as the length of time needed to complete the project. Finally, review all of the loan terms with a knowledgeable lender prior to signing.
