Timing is essential in taking advantage of real estate deals. Even a slight delay of a few hours can cause you to lose an excellent opportunity to another investor who can offer cash right away.
This is why the most successful commercial property investors are those who know how to (1) find and (2) get approved for investment property loans fast. They also have a good understanding of the features of different types of investment property financing, enabling them to use the most appropriate loan for a project depending on its timeline, business model, and exit strategies, among other factors.
Let’s face it—having access to the hottest property listings and the most insightful market knowledge in the world is useless if you can’t find funding for your project. It’s essential to learn how to acquire investment property loans quickly so you can take advantage of an opportunity before someone else does.
Defining investment property loans
As its name suggests, an investment property loan is used to acquire or rehabilitate an ‘investment property—a real estate asset that is expected to create income by rent or to sell for a profit. They should not be confused with traditional loans.
While you can technically use a traditional loan to fund the purchase of a rental property, many experts advise against doing so. Why? Because conventional loans provided by banks and other traditional financial institutions often take too long to be processed. Requirements can be tedious, and borrowers have to jump through a lot of hoops. They can take three months to get approved and are not viable for commercial property investors who need to act fast.
For those who need speed, investment property loans are superior to traditional financing. In particular, hard money loans and private money loans take only a few days—and sometimes just 24 hours—to receive. If you have a good working relationship with hard money or private money lenders, you might be able to get your funds within the same day.
The time it takes to acquire commercial real estate investment loans is more in line with a timeline of a typical commercial property investor. They have higher interest rates than traditional loans, but if you know what you are doing, the extra cost is worth it.
Here are the three best ways to find the loan you need for your next investment property:
1. Talk to a hard money lender.
A hard money loan is a short-term loan widely used by developers whose goal is to rehabilitate a property and quickly sell it for a profit.
The word ‘hard’ alludes to firmer financing terms and not how difficult it is to get. Commercial hard money loans provide easy money. Lenders are not too concerned about the borrower’s credit score. They instead look at the commercial property’s value—particularly its after repair value—when deciding whether or not to grant the loan.
The speed at which you will receive your hard money loan will give you an advantage in a competitive market. When you have a great relationship with a hard money lender, you can immediately make offers while other investors are still waiting for their bank’s approval.
Traditional banks usually take several months to grant loans because they have to follow strange and regulations. This is not the case for hard money lenders. No wonder hard money loans are the financing mode of choice for projects on tight deadlines.
The collateral for the loan will usually be the property you want to purchase. But many hard money lenders are flexible in this regard. They may accept other forms of collateral such as personal assets, retirement accounts, or residential properties.
Terms for hard money loans are also quite flexible. Private hard money lenders are often willing to negotiate loan terms, including fees and repayment terms.
But because hard money lending is risky, interest rates are high, and repayment times are shorter. This type of loan is best suited for those who immediately need funding to buy or develop a property and sell it quickly. As a borrower, you’re also expected to shoulder more expensive loan-servicing, origination, in closing fees. Make sure that the repayment terms and associated costs are clear to you before you sign anything.
2. Network with private money lenders.
‘Private money is not the same as hard money, even though these terms are sometimes used interchangeably.
Unlike hard money lenders, private lenders are not professionals. They don’t organize themselves as lending companies and are not affiliated with lending companies. Instead, private lenders might be people that are already in your network—people who might be interested in investing in real estate without actively managing it. They could be your parents, coworkers, neighbors, cousins, etc. You can also approach accredited investors whom you might meet in commercial real estate networking events.
Private money lending is much less formal compared to hard money financing. Most lenders in this space will look at trust as your currency. It’s essential to present yourself as a seasoned commercial real estate investor who can professionally manage the deal and ensure its profitability.
3. Try conventional mortgages.
Conventional mortgages are not available from the government, so you can’t get them from the FHA or the USDA Rural Housing Service. You have to go to private financial institutions such as credit unions and banks or Fannie Mae or Freddie Mac.
Note that conventional mortgages are used on residential investment properties (not commercial). We thought we would mention it here, anyway, for readers interested in acquiring multifamily apartments that don’t qualify as commercial real estate.
To be approved for a conventional mortgage, you need to have the following:A credit score of at least 650
- A debt-to-income ratio of less than 43%
- No record of bankruptcy or foreclosures in the past seven years
- Credit history
- Ability to pay your existing mortgage (if you have any) on top of the mortgage on your investment property
Many lenders will also ask you to prove that you have enough money for at least six months’ worth of payments. You likewise have to show that you can afford the 20% down payment requirement if you don’t want to pay for private mortgage insurance.
Of these three strategies to quickly finding commercial investment property loans, the first one—hard money—is often the best choice for time-sensitive deals.
The key is establishing a good working relationship with the trusted commercial hard money lenders that understands the projects you tend to work on. When you have such a relationship, you can start looking for properties with much more confidence, knowing that you can take immediate action when a good deal presents itself.