As a beginner in the field of real estate, you may be struggling to picture how you’ll manage to finance all your commercial real estate funding needs. At this point, you may also come across various myths about real estate which might potentially draw you back from investing in real estate.
If you have heard that real estate is only for experts and not for the common lot, let us tell you that this is the biggest myth! Any person, any person can invest in commercial real estate and make good money out of it.
All it requires is the right guidance and a little knowledge about how the real estate industry works. Everyone’s got to start from scratch and everything has a beginning, right?
So, first of all, don’t let any of these myths get to your minds and stop you from investing in real estate. The first step to investing in commercial real estate property is being sure about investing!
Once you’re through that, the next step is to figure out how to find your commercial property deals. Here’s all you need to know about how to get the right funding for your commercial property deals, as a beginner. Read on!
There are two broad ways of investing in the commercial real estate – Equity and Debt. You can invest using the funds raised by using equity or Debt.
Here’s a brief explanation of what equity is and what debt is.
- Equity – Equity is the value of the total assets less the total liabilities a person has. Put it simply, equity is the cash you have in your business in the form of assets or real cash. Let’s say, you want to sell your house and settle the mortgage loan, the amount that’s remaining is considered as your equity. It is often called ‘Owners Funds’ in financial terms.
- Debt – Borrowing cash from an outside source with a promise of paying it back after a certain period of time along with the interest amount on such amount borrowed is defined as debt. It is, often called ‘Borrowers funds’ in financial terms.
Equity basically refers to using all the cash one has to purchase or invest in a commercial real estate property without being dependant on outside funds.
On the other hand, investing in the commercial real estate by making use of others’ cash that is debt financing makes the investor depend on outside funds and has an increased amount of liability towards the settlement of the loan amount.
Depending on your ability to raise the required funds from outside, you can choose to invest using equity funds or debt funds. Under the two broad categories falls various other sun categories of financing.
This blog is an overview of such types of funding which give you a fair picture of the number of ways through which you can finance your commercial real estate.
Let’s look into the types of equity and the types of debt funds which are available for investing in commercial real estate while also understanding briefly about their pros and cons. Let’s get started.
Types of Equity financing to fund commercial property deals
1) Your Equity
Your equity, as the name suggests, is the amount of money you have under your personal name. This is the direct money that’s readily available to you for usage in investing in commercial real estate property deals.
There are no interest fees or any other kind of overhead expenses in relation to your equity because it’s your own money. However, the biggest disadvantage of using your own money is the kind of risk that comes along.
If you lose money in the game of real estate, there’s a lot more at stake when you’re investing all by yourself than what the stake would be in case you borrow funds.
Investing in real estate using own equity is a bygone idea now and you’ll rarely see anyone doing this unless they are successful millionaires already!
2) Hand loans
Hand loans refer to the amount of money you borrow from your near and dear ones who choose to help you with your funding without charging interest or with minimal interest.
People who choose to invest by using the hand loans often try to procure their hand loans from more than two sources.
The disadvantage of using hand loans as a funding for real estate is the limit on the value of money you can raise as these loans are given out of trust and relationships and thus there’s almost always a cap on how much cash your friends or relatives are willing to provide you.
Types of Debt Financing to fund your commercial property deals
Investing in commercial real estate using equity funds has become very conventional now. Most of the Investors today seek the help of various lending institutions to finance their real estate needs.
Here’s a list of various types of loan programs available that you can use to fund your commercial property deals.
Private Capital Investors is one of the leading lending institutions providing various types of loans to real estate investors across the states.
Our vast lending network that’s spread across like a spider web across the states enables us to provide the best deals to our clients while also providing our clients assistance regarding the type of loan they must raise which best fit their requirements.
If you’re confused about how to go about financing your commercial property deals and want assistance in knowing what is the right kind of loan you must be looking out for, get in touch with us today and talk to one of our loan consultants.
Below mentioned are the major types of debt financing a investor can choose from to finance the commercial property deals. Read on!
1) Commercial stated income loans
The commercial stated income loans are the loans that are provided on the basis of the income inflows reflected in the bank statements.
These loans help investors who do not have a regular or consistent source of income like the salaried professionals.
These loans are best suited for self employed people and freelancers who do not have the stable, consistent and regular source of income. These loans do not have the lengthy loan eligibility requirements like the traditional loans thus enabling any person with a decent amount of income invest in commercial real estate.
If you do not have a regular source of income which also means a poor credit score, you can apply for stated income loans.
The disadvantage of stated income loans is that these loans are provided at slightly higher rates of interest than the traditional loans.
2) Commercial hard money loans
Hard money loans are the loans provided by private money lenders or private lending institutions that aren’t regulated by the government.
The increasing list of loan eligibility requirements has made many investors turn their backs on the conventional banks and turn their heads towards the private money lenders.
Private money lenders or private lending institutions exempt the borrowers from having huge eligibility criteria. If you’ve been knocked down by the banks for not fulfilling the loan eligibility requirements, there’s less to worry as you can always seek help of private money lenders.
The disadvantage of raising such hard money loans for commercial real estate is the chances that you might bump into fraudulent lenders and lose money. However, this disadvantage can be ignored as there are various ways to spot a genuine and authentic hard money lender.
It’s just a matter of extra care and diligence, but otherwise, hard money loans are a great fix to conventional loans that come with a huge list of loan eligibility requirements.
3) Commercial Mortgage Bridge loans
Bridge loans are the loans that are raised to meet an immediate temporary financing requirement hoping to generate more cash inflow in future.
In other words, commercial mortgage bridge loans are the loans that help bridge the gap between your present and future financial conditions.
For example: You can raise a commercial mortgage bridge loan for making repairs and renovations to your existing building will help you fetch better clients who are willing to pay higher for your property and this money can be used to settle off the bridge loan raised earlier.
The cons of bridge loans include having a good credit score, if not, great, having a high valued asset as collateral to the loan amount, and having to arrange to raise about 20% of the loan amount using other funds as bridge loans provide coverage of only 70 to 80% of the loan amount.
4) Loan programs for refinancing an existing loan
Real estate investors often face situations where they need huge finance to settle off their old and existing loan in order to avoid penalties and fees or contributing to a poor credit score.
In such situations, investors look out for loans that they want to use to refinance their existing loans. There are various loan programs available for refinancing an existing loans provided by traditional as well as private lending institutions.
Before you consider refinancing of your loan, it’s always suggested to take help of a real estate expert or consult a professional to know if you actually need to refinance your loan or not.
They were some of the most common ways of funding commercial real estate property deals. Each way has its own set of pros and cons and you need to weigh them in light of your financial needs and circumstances.
Remember that many investors have lost huge money by making the wrong decisions. And many have also made a fortune out of investing in the commercial real estate by making the right decisions! Taking the advice of real estate experts and professional loan consultants is of prime value!