4 Types of Commercial Real Estate Loans
Investing in commercial real estate is one of the longest-standing ways for individuals to branch out beyond securities and accumulate assets with real-world value. It can be such a consistent moneymaker for professional real estate investors that some even make it the center of their money management strategy. If you are just getting started, the first step is to learn about the major loan types for commercial properties.
1. Commercial Mortgages
The most well-known type of real estate loan is a mortgage, and they are available for commercial buildings, not just residences. Commercial mortgages tend to have shorter terms and lower LTVs than loans taken out to buy a single-family home, but that is because commercial properties are often more expensive and riskier investments than a personal home would be. If you are looking to hold a property for years, though, this is often the best deal you will find on financing.
2. Bridge Loans for Commercial Real Estate
Bridge loans are a whole category of loans with similar features but far-ranging terms and LTV offerings. They are available from both traditional and alternative lenders, and they can usually be used to either purchase or refinance a property. As a refinancing tool, they are often used by businesses because cash-out financing provides operational capital when it is needed. As an acquisition tool, they are used to help house flippers minimize the out-of-pocket costs involved in home renovations.
3. Construction Loans for Developers
Building new developments can be time-consuming and expensive, which is why there are milestone-based loans available to developers. They are structured to allow you to get financing based on a lot’s current value, with periodic re-evaluations and additional cash distributions as construction raise that value and more equity becomes available. For many investors working on large commercial construction projects, this is the only cost-effective way to finance the undertaking. For others, it is just one of many ways, alongside private equity financing and other alternatives.
4. Stated Income Loans
Bridge loans are not the only form of cash-out financing available to investors. You can also finance commercial real estate with stated income loans. They can be used to buy new properties that are already income-generating or to refinance your existing income properties for the working capital you need to get your next investment project rolling. With terms that can be as long as commercial mortgages, these loans provide you with maximum versatility when you are planning the financial strategy behind a new project.