Are you looking to build or buy an income-producing property in California? Such investments are usually far more capital-intensive than their residential counterparts. For that reason, you may consider taking out a commercial real estate loan to finance your project. Read on to learn about the different types of mortgages available for revenue-generating properties and where to obtain them.
What Is a Commercial Real Estate Loan?
As a developer or investor, you can take out a mortgage or other type of loan to finance the purchase or construction of an income-generating property. You can acquire different forms of properties with a real estate loan, including hotels, office buildings, shopping malls, rental apartments, warehouses, industrial facilities, and raw land.
What Are the Benefits of a Commercial Real Estate Loan?
Commercial real estate lending is beneficial to both the borrower and the lender. Without such financing, many investors would find it more difficult to buy capital-intensive properties for income generation purposes. Housing development companies may also use such loans to finance real estate development projects from the ground up.
On the other hand, commercial banks and lenders get the bulk of their earnings from commercial real estate loans, which are usually much larger than home mortgages. As you consider taking out these commercial loans, keep in mind that:
- Just like home mortgages, commercial real estate loans are usually secured by the property being purchased or constructed.
- There are different types of commercial property loans provided by different lenders.
- Commercial real estate loan rates vary depending on factors like property type and lenders.
Types of Commercial Real Estate Loans
The type and structure of commercial real estate lending vary based on factors like its purpose, lender, and borrower. However, there are five main types of these loans, namely:
If you’re looking for a financing structure similar to a home mortgage, this option may suit you. With this type of lending (also called permanent loan), the property you’re buying can serve as collateral. However, many lenders will accept other forms of collateral for these commercial loans. Acceptable asset options include heavy machinery, other property that you—the investor or property developer—owns, or deposit accounts.
An owner-financed loan can be an excellent choice if you wish to avoid the usually more rigid payment terms of traditional commercial bank lending. In that case, the property’s owner will lend you the funds needed to buy it. You might even get a lower interest rate when you take out a seller-financed loan, such as to acquire income-producing apartment complexes.
The lending option is commonly available for purchasing properties from individual sellers. As such, real estate or housing development companies don’t usually provide this kind of financing.
You may consider taking a bridge loan if you have short-term financial objectives for the property you’re buying. If you intend to sell the property within two years, for example, this type of lending can serve the purpose well. Some investors have traditionally taken such short-term commercial real estate loans when they expect to appreciably improve their creditworthiness before long.
Small Business Administration (SBA) loans are available to many enterprises, including real estate investors. The SBA may guarantee these types of loans, reducing the lender’s risk exposure. The real estate financing option offers many perks not available with traditional commercial bank loans, such as significantly lower interest rates.
Besides financing the purchase of a commercial property, you can use an SBA loan to raise capital for your enterprise. Other viable applications of the borrowed funds include replenishing your inventory, structuring other loans, or buying equipment.
Hard Money Loans
If you’re struggling with operating cash flow or servicing your current debt, a hard money loan is worth considering. You can get this kind of financial help from a private investor or lending company rather than a conventional source like a commercial bank or credit union. The main advantage of this type of loan is that the lender won’t usually consider your credit rating before approving it. Instead, the property being financed will serve as the loan’s sole collateral. Just like bridge loans, hard money loans typically are short-term in nature. Typically, you should be able to pay them off in a few months or one year. Fidelity Mortgage Lenders is one of the few hard money lenders that provides a 20 year fully amortized loans or a 30-year amortized loan with a balloon payment in 15 years.
Alternative Sources of Commercial Real Estate Loans
Commercial banks, private lenders, the SBA, and other traditional lenders are not the only available source for commercial real estate lending. There are other viable options worth considering, including:
Life insurance providers may be involved in the business of covering risks, but they’ll usually avoid investing in “risk-free” options like treasury bonds. Insurance carriers generally consider commercial real estate loans as a low-risk investment option with a better ROI. However, you need a healthy credit rating to qualify for these loans.
Crowdfunding is another feasible commercial real estate financing option wherein you need to convince a pool of peer-to-peer investors to support you financially. You can start by signing up at a real estate crowdfunding site where companies looking for real estate development financing connect with private and institutional investors.
Whether you’re looking to develop or buy an investment, business, or industrial property, you can take out a commercial real estate loan to finance your project. Such lending is usually one of the most viable and cost-effective options for acquiring or constructing office buildings, rental apartments, warehouses, industrial facilities, and other commercial buildings. At Fidelity Mortgage Lenders, we can help you secure the right loan for your needs. To get started, contact us or give us a call at (800) 752-9533.