February, 2023 - Investor Loan Source

Funding Commercial Real Estate Deals: What You Need to Know

Securing funding for commercial real estate deals is an essential part of the process. Knowing the ins and outs of the various financing options available can make the difference between a successful deal and a failed one. In this blog post, we’ll discuss the fundamentals of financing commercial real estate deals and what you need to know to make an informed decision.

Commercial Financing vs Residential Financing

Regarding real estate investing, there is a significant difference between commercial and residential financing. Residential loans are typically assigned to individual borrowers, while commercial loans are typically granted to business entities. As for loan-to-value ratios, residential loans allow high loan-to-value ratios of up to 100%, while commercial loan-to-value ratios range between 65% – 80%. When it comes to the length of the loan, commercial loans range from 5 to 20 years, while the most popular residential loan is a 30-year fixed mortgage. Understanding the differences between commercial and residential real estate financing is important for any investor looking to get involved in real estate investing.

Types of Commercial Financing

Understanding commercial real estate financing basics requires knowledge of the different types of financing available to investors. There are many financing options for commercial property and construction projects, each with its unique requirements, benefits, and drawbacks. Here we will detail only a few options.

Bridge loans are a type of short-term real estate financing that can be used to cover cash flow gaps when financing is needed but not yet available. These loans are typically used when a company must repay one loan but hasn’t received the new, permanent loan yet. Bridge loans are typically for a short period, up to one year or less, and are not meant to be a long-term funding solution. Bridge loans can be used to cover the costs of purchasing a property, as you wait for another property to sell or for another type of capital influx to kick in, or to smooth over the refinancing process, as you wait for funds from your new loan to deposit.

Conventional Bank Loans are another option for real estate financing. These loans usually offer competitive interest rates and can be used for the purchase of a commercial building or the financing of any improvements or renovations. It often requires a larger down payment and has stricter credit requirements, as well as qualification requirements that vary based on the lender. Securing financing from a bank can be more difficult than other avenues.

Hard Money Loans are another type of commercial real estate financing that offers fast access to capital with minimal paperwork. These loans are backed by the property itself rather than by the borrower’s creditworthiness, making them a viable option for investors in need of a short-term solution.

Finally, Joint Venture Loans are another type of commercial real estate financing that can be used to fund larger projects. Joint venture loans involve two or more parties working together to finance a real estate project, often with one party taking a majority stake in the project. This type of financing can be an effective way to secure funding for larger projects without using personal assets or taking on debt.

Important Loan Ratios

When it comes to investing in commercial real estate, understanding the key loan ratios is essential. Two of the most important ratios are the Loan-To-Value-Ratio (LTV) and Debt-To-Service-Ratio (DSCR).

The Loan-To-Value-Ratio (LTV) is calculated by dividing the amount of the loan by its purchase price. Those with lower LTVs will generally qualify for better financing rates. The LTV ratio is also used to determine how much capital will be required from the investor. For example, the LTV for a $70,000 loan on a $100,000 property would be 70% since $70,000 ÷ $100,000 = 0.7.

The Debt-To-Service-Ratio (DSCR) is calculated by dividing the property’s annual net operating income (NOI) by its annual mortgage debt service. A DSCR of more than 1 indicates that the property has positive cash flow, while a DSCR below 1 means that the property has negative cash flow. When it comes to real estate financing, lenders usually seek a higher DSCR to ensure cash flow. For example, a property that has $100,000 in NOI and $70,000 in annual mortgage debt service would have a DSCR of 1.42 since $100,000 ÷ $70,000 = 1.42.

Investor Loan Source, a private money lending company, provides high-quality investment property loans to private real estate investors at the lowest costs possible. Our process for providing real estate investors with private lending is unique. We place emphasis on the hard asset and value of the collateral (property) and less on the borrower. Our asset-based real estate investment loan model means we can provide more money lending to more investors than is available from standard bank loan models. At Investor Loan Source, providing real estate investors hard money loans is our business; it’s all we do. We offer several business real estate loan products designed to serve a variety of investors and property profiles, including private money lending for properties to sell on owner finance.

To learn more about Investor Loan Source, visit our website or follow us on LinkedIn, Facebook, and Twitter. To apply for a loan, click HERE.

How to Start Investing in Commercial Real Estate

Commercial real estate may deliver the appreciation and stable returns most investors are looking for, even during economic uncertainty. The volume of capital invested in commercial real estate further demonstrates its proven worth as an asset. It also may offer investors a more diversified, balanced, and scalable approach to real estate investing. Whether you’re considering investing in an apartment complex, office space, light industrial, or a self-storage facility, here are a few tips to get you started in commercial real estate investing.

1. Establish Your Goals

When it comes to investing in commercial real estate, it’s important to establish your goals beforehand. Consider why you are investing in commercial real estate – are you looking to build long-term wealth or seeking a shorter-term return on your investment? Additionally, think about what kind of returns you are expecting and the level of risk you are willing to accept. These are all important questions to ask yourself before making a commitment to a commercial real estate investment. Taking the time to answer these questions will help you make an informed decision that is tailored to your financial goals.

2. Make a Plan

A successful long-term investment strategy requires careful planning. By mapping out your plan, you can ensure that you stick to your goals and don’t make decisions impulsively. This includes deciding what your buy box looks like – what types of assets you want to focus on and invest in. Knowing this ahead of time can help you stay focused on the right investments while also making sure you are not overextending yourself financially. Planning your strategy out in advance is key to creating a successful and sustainable investment portfolio.

3. Find Deals

When it comes to finding commercial real estate deals, relationships, and networking are key. Developing trust and credibility is essential to any successful real estate investment, so build strong relationships with brokers. You can start by following through on what you say you’re going to do and running your business professionally. Building a reputation with brokers as someone who does what they say and keeps their word will ensure you’re always at the top of the list when it comes to new deals. Take the time to nurture these relationships, and you’ll be sure to find the best deals for your commercial real estate investment.

4. Perform Due Diligence (or Find Someone Who Can Help)

Performing due diligence on a property requires a great deal of education, training, and professional opinions. It is important to remember that the investment may be portrayed in a positive light, but it is up to you to assess it with clear eyes and decide if the value is truly there. This can include research into local markets, investigating the area’s future development potential, understanding the building’s history, inspecting the property for structural integrity, and consulting with local experts for their opinion. Taking the time to perform due diligence is essential to ensuring that you are making a smart and informed investment decision. But what do you do if you find a deal where the due diligence is beyond your abilities? This is where networking is key. Partner with someone who is knowledgeable or brings in an expert to show you how it’s done.

What is next?

Finding the right financing for a commercial real estate deal is critical to making your project a success. In our next blog post, we will discuss different types of funding available to real estate investors and entrepreneurs, as well as provide insight on how to secure financing. With the right financial support, you can tie all the pieces of your deal together and take your project to the next level. Stay connected with us to learn more about the different types of commercial real estate funding available and how you can secure it for your own projects.

To learn more about Investor Loan Source, visit our website or follow us on LinkedIn, Facebook, and Twitter. To apply for a loan, click HERE.Categories

Why You Should Invest in Commercial Real Estate

What comes to mind when you think of real estate investing? For many, it’s rehabbing single-family homes or managing rental properties. And while these are great investments, many investors may be missing out on opportunities in commercial real estate.

Why diversify into commercial? Here are three reasons why you may consider this asset class.

Income Generation

Commercial real estate (CRE) has the potential to offer consistent income, often higher than traditional rental properties. The earnings potential is one of the most alluring reasons investors transition from traditional real estate investments into commercial properties. Where single-family homes see annual returns between 1% to 4% (at best), commercial properties often see annual returns off the purchase price between 6% to 12%, far outperforming smaller asset classes.

Hands-Off Maintenance

When you rent a single-family property (or even a multifamily apartment complex), repairs and maintenance of the property’s condition are always the investor’s responsibility. With a large enough rental portfolio, maintenance management can be costly and time-consuming, continually pulling investors into the daily management of their assets. While there are variations, CRE often operates under Triple net leases. With a triple net lease, the business renting the property is held responsible for remodeling, repairs, and general maintenance, while the investor is only left making the mortgage payments. Even common areas of the property can be improved through CAM charges (common area maintenance fees), making the expenses and the process of maintaining a property simpler for CRE investors.

Hedge Against Inflation

Defined as a decline in purchasing power over time, inflation has driven many investors across asset classes to consider how they can best protect (and grow) their hard-earned cash. CRE has been known to generate consistent cash flow, making it a reliable hedge against inflation. Why does commercial real estate continue to perform, even during economic instability? Commercial properties are closely tied to consumer markets, where rising consumer prices quickly correlate to rises in rents and values in CRE (lease agreements can even include annual base-rent adjustments tied to CPI). Commercial real estate is built to be quickly adaptable to consumer markets, making it historically a cushion against inflation that investors can count on.

These are only a few of the benefits CRE can offer. Despite the increases in economic uncertainty, commercial real estate provides exciting opportunities to earn more cash, spend less time and money on repairs, and hedge against inflation. These key differences may help investors take their business to the next level.

To learn more about Investor Loan Source, visit our website or follow us on LinkedIn, Facebook, and Twitter. To apply for a loan, click HERE.

3 Ways to Invest During an Uncertain Market

Although uncertainty remains in the real estate market and broader economy for years ahead, there are opportunities for real estate investors to stay active in the market while investing wisely. As the market continues to correct from the highs of a seller’s market in prior years, raised rates and falling affordability are likely to continue to soften demand for housing, bringing prices down. No one has a crystal ball for what is to come, but investors want to know how to protect their businesses during uncertain times. What strategies can you utilize to remain active and profitable as the market softens?

1. Buy Deep

For most investors buying deep has always been an important strategy. However, the seller’s market of the past few years made buying discounted properties rare in some markets, leading investors to pay higher prices — banking on above-asking offers and bidding wars to turn a profit. But as fewer buyers enter the market and sellers lose power over their pricing, investors are better positioned to negotiate deeper discounts. Regionally, many factors will drive how that local market responds, so investors should study the market they are investing in. What changes in pricing are you seeing? Is there more opportunity to leverage with sellers and pay less for an investment property? Paying too much for investment may lead to loss as regions shift away from a seller’s market. If you buy deep, even if the market declines, you could have purchased at a price that allows you to turn a profit.

2. Flip with Caution

Flipping is a risky proposition, even more so during times of uncertainty. While there may be large profits in rehabbing properties, there’s also a chance that you could lose big, especially during market shifts. Experienced rehabbers know that completing a project on time and on budget is essential, no matter what the market, as unforeseen repairs and additional holding costs will burn away profits. This is especially true during market changes, as the rapid appreciation of prior years is less likely to be seen. While there is always opportunity in rehabbing, extra caution and conservative underwriting are prudent when markets shift.

3. Invest in Less Volatile Markets

While some heated markets like Austin or Phoenix saw high post-pandemic appreciation, these may also be areas where prices fall off faster as the market shifts. Avoiding overheated markets may help protect investors. Where, then, should investors look? Many factors drive a real estate market, including population growth, wage growth, economic diversity, and average income. Rather than following the excitement of the hottest markets, consider investing in smaller, less well-known cities with a predictable history of growth factors.

To learn more about Investor Loan Source, visit our website or follow us on LinkedIn, Facebook, and Twitter. To apply for a loan, click HERE.