There is a plethora of options for commercial real estate financing, but most of the time a buyer only needs to understand a few of them. This is simply because the product is often specialized to the buyer’s needs, so if one is investing there is one subset of useful loan options, but when buying facilities for a company’s base of operations, there is another. For investors, three loan types really matter.
This loan type has a few names, but they all convey the same idea. This is the business-class version of the familiar mortgage. The main differences are in the numbers. A commercial mortgage typically has a lower LTV limit than a residential one, with slightly higher interest. Most lenders also only offer terms up to 20 years, not 30, although there are a few exceptions. The upside is controlled monthly overhead, but the downside is the big down payment requirement. It’s a good choice for a long-term acquisition like an apartment building or multi-space retail property.
Real Estate Bridge Loans
Short-term investors are not well-served by commercial mortgages. The approval times alone would make them unappealing, and that’s where commercial real estate bridge loans fill the gap. They can base the collateral on equity from a property you own to provide access to the cash that covers expenses like renovations on a new acquisition. There are also investor-focused versions that cover the cost of buying new properties, using the property itself as collateral.
Bridge loans have a scattershot set of LTV minimums and maximums that depend on the lender, the length of the loan, and the specific market the bridge loan gets marketed toward. For example, flipper loans tend to offer high LTVs, one-to-two-year terms, and interest rates to balance those features. A true bridge program designed to offer working capital based on the equity in a property will often have significantly different program offerings.
Stated Income Loans for Real Estate
The last type of loan is aimed at investors with some properties that are earning a stable income and carrying little or no debt. Stated income loans use the value of the building’s income as the basis for the loan instead of its resale value, making them more like a working capital loan based on your business income than a traditional real estate loan. The difference is that the building is also used as collateral to keep interest rates in check. This can set you up to use the income from one building to pay for another. Keep that in mind as you consider your options for your next investment.