Financing your commercial real estate investment is likely one of the critical items of the puzzle to changing into a commercial real estate investor. Sources for funding fall into sure classes, explained below. Each of them has benefits and trade offs, although they run the gamut in general desirability more or less from prime to backside here.
The first source of commercial real estate funding is the portfolio investor, one which represents an funding group that intends to hold on to that debt for as long as possible, and uses several of them as an earnings stream for his or her core business. The classic example of a portfolio investor is a traditional financial savings and investment bank, or a savings and loan office; in commercial real estate, the other major class of portfolio investor, and one that provides almost 30% of the investment capital in the market, is the insurance company or retirement portfolio. This type of investor needs something that is low risk however slightly higher yield than treasury payments, because what they’re looking for is stability, not growth. From your perspective as a commercial real estate investor, the first advantage is that they cost low interest rates. The drawbacks are that the process of securing these loans takes a very long time – minimal of two months, and six to nine months is way more common. The secondary drawback is that they have a tendency to have a a lot lower cap on how a lot money they’re going to invest.
An analogous class to commercial real estate investing is the federally backed commercial development loans, and HUD loans for growing rental properties. These loans are also at low rates, and if you qualify, they’re great. However, the requirements to get them can get positively arcane.
The following category out for loan sources are commercial managed backed securities, or CMBS loans. These are an outgrowth of the savings and loan meltdown of the mid ’80s, and provide a way to funnel monetary institution funds into the commercial real estate and development market; these loans typically have higher limits, and an easier application process, however are going to run higher curiosity rates as well; one section of this type of spinoff product, the “sub prime” mortgage backed security, is the basis cause of the housing collapse we’re undergoing proper now. CMBS loans even have a distressing tendency to be sold to different investors, that means that the phrases of your loan can turn into subtly altered over the course of the deal.
The last main category of lender is the so-called “Hard money” lender. This is a lender who’s lending from their personal property, or the belongings of a group of investors. These loans may be very versatile, and so they’ll fund development projects that institutional or portfolio investors would not touch with a ten-foot pole. On the down side, they are going to cost you a fairly premium in curiosity to make things happen, and will demand some input into the development itself. In case you do not mind a bit of investment accomplice elbow joggling, it can be price it.
With these types of lenders listed, ask yourself what kind of development you’re going to be doing. The lower the risk factors, the higher on this list you may go, and the lower your curiosity rates shall be – but in addition, the smaller the loan you can acquire. Keep these factors in mind when evaluating funding sources to your property development dreams.