In most instances, investing in commercial real estate requires financing. Commercial real estate is often costly, and an investor may want to develop the property before putting it on the market. Understanding how you can fund your commercial real estate ventures and what funding is available for investors will help you pick the right option.
The most common way to fund a commercial real estate venture is to take out a loan. However, it’s essential to consider all your funding options before choosing a loan. There are many other funding methods, including money lenders, self-directed accounts, crowdfunding, and seller financing.
But why is a loan one of the most popular choices when investing in commercial property? It’s the first thing most people think of when looking for financing, and in the case of a traditional bank loan, borrowers already have an existing relationship with their bank. Other than bank loans, there are many options for investors to raise the money they need to invest in real estate.
How To Raise Capital For Commercial Real Estate?
Raising capital for commercial real estate is one of the most crucial steps in your investment journey. When covering funding for property, there are typically two factors that need to be considered: debt and equity. Debt is generally from bank loans and may come with other fees like interest rates.
The equity is the amount that makes up the difference between the price of the property and the debt. It is the money an investor puts into the property. Once invested, the investor becomes a partner, sharing profits and losses with the company or partners providing the funding.
While there are numerous ways to get funding for commercial property, there are a few that you should consider when sourcing capital for your investments.
Consider Using Hard Money Lenders
Hard money lenders are licensed to lend money to those who require it. They are a popular choice for those who want to start investing and are an easy option when looking for capital to fund a property investment.
Hard money loans are meant for short-term lending and depend on the value of the building, not the lender’s credibility. Lenders have the advantage of negotiating the terms of the loan, including the restructuring of repayments.
Apply For A Bank Loan
Applying for a bank loan is through credit unions and banks. Financing through a bank loan is the most commonly used method of financing a commercial property and is used to purchase or construct a building.
Bank loans are usually made to businesses, not individuals, and extend from 5 years to 20 years, but can be less depending on the size of the loan.
Interest rates on these types of loans are higher than those on residential loans, and upfront costs may be involved before a loan can be approved. Lenders have to have a credit score of 680 or higher to get approved for a commercial real estate bank loan.
Check If You Can Utilize Your Self-Directed Accounts
A self-directed account is also known as an Individual Retirement Account or IRA. It allows investors to use their retirement money to invest in prospects like real estate. But this does come with a few restrictions.
Your self-directed account can purchase property only as an investment, not as a home for your family. When buying through your IRA, you need to purchase the building in cash, and it needs to cover all expenses relating to the ownership of the building.
You will also need a custodian to ensure you abide by the strict rules governing this account and that all the relevant documents are in place.
Utilize A Crowdfunding Portal
Crowdfunding is an intelligent way to raise capital to purchase real estate. It involves sourcing capital from a number of people and then investing it by purchasing apartments, retail buildings, and offices. Crowdfunding is an excellent option for those who don’t like the stress of managing the deal themselves. Everything is managed by a developer who takes on the role of managing the property.
Numerous online platforms offer crowdfunding opportunities, and one of the most significant advantages is that you don’t need a large amount of capital to invest in real estate.
Use Life Insurance Company Loans
There are many life insurance companies that underwrite loans, and they do this because they benefit from the returns, and it mitigates their risk. These loans are long-term (5 -30 years) and have fixed interest rates. Those looking to buy offices, warehouses, retail spaces, and hotels may be viable candidates for this type of funding.
One of the biggest advantages of this type of funding is there is no limit to the amount you can borrow. If you’re a high-risk investor and identify a lucrative opportunity, then this is a good way for you to raise the necessary capital you need.
Consider A Joint Venture Loan
A joint venture involves a minimum of two parties investing in a single project. This also includes sharing of knowledge, expertise, and other skills. When entering into a joint venture, an agreement is drawn up that stipulates each party’s contributions and allocates profits and losses.
Joint ventures usually involve the sponsor and the investors. The sponsor contributes 10% to 20% of the capital, with the investors contributing the rest.
Try Seller Financing
Seller financing is not the most common method of funding for real estate. Seller financing is a loan given to the buyer from the seller. In this case the seller offers the buyer an alternative option for financing instead of applying for a bank loan. The buyer enters a legal contract with the seller and pays installments, which works similarly to a mortgage.
Seller financing is a good option for those with low credit scores who prefer fewer regulations when purchasing property.
Get A Conduit Loan
A conduit loan is one of the most appealing types of funding for commercial real estate investments. They are only available to revenue-generating buildings and have reasonably flexible credit requirements. This is not the type of funding you would apply for if you purchase land and want to build on it.
A conduit loan is sold by conduit lenders or commercial and investment banks and comes with a fixed interest rate extending over 25 to 30 years.
Conclusion
Its essential to consider the different ways of funding and compare aspects like fees, repayments, interest rates and legalities. Take your time in researching the best options for investment and look for room to negotiate with lenders. While bank loans are the most commonly used source of funding, other options can be just as beneficial when investing in commercial real estate.