5 Best Methods of Commercial Real Estate Financing

David Cohn
Oct 14, 2020
Commercial Real Estate Lending

The way investors purchase commercial properties has evolved over the years.

These days, it is not uncommon for CRE investors to buy existing buildings to restore and repurpose them and make sure that they can meet the needs of modern businesses.

Now more than ever, there are many ways to profit from CRE.

Still, investors of all sizes share one common concern: Getting the right commercial real estate financing.

It is up to investors to be creative and find ways to find the best financing method for their situation while making sure that what they choose can make it easier to and affordable for them to do whatever they want with the property. If you are looking for solutions yourself, here are five methods of commercial real estate financing you can consider:

Number #1: Joint Ventures

Do you have a business partner or are you thinking of asking a trusted person to invest with you? Then a joint venture financing could be a good option.

This kind of arrangement is ideal for both established and novice investors.

One of its notable benefits is low cost of entry. If you can afford it, partnerships may also give you opportunities to diversify.

Joint ventures may also consist of more than two parties as long as everyone agrees to pool their resources for the same cause.

Each participant is responsible for the costs, losses, and profits associated with the joint venture.

However, everyone must remember that the venture is a unique entity, which is separate from the other business interests of the participants.

Number #2: Crowdsourcing

By inviting other investors to collaborate on your real estate transaction, you might be able to generate enough capital for the commercial property.

Keep in mind that investors who join you and deposit funds are at risk, but they also have the chance to earn interest besides having their contributions returned later.

Also known as ‘crowdfunding’, crowdsourcing can be a great option in commercial real estate financing these days because of the internet.

It is easier to reach out to individuals who are willing to support your project financially.

You may be surprised at how fast you could raise the funds you require, especially if you can show to those companies and individuals how the property could benefit them or the community itself.

With crowdsourcing, you can eliminate the middlemen involved in financing so that you and the investor can work directly instead of having other groups or private equity funds in the middle.

It may allow more flexibility in your commercial real estate investments as it gives you the freedom to invest beyond where you live and get the best possible returns.

Number #3: Seller financing

If you can find a seller who is willing to provide complete or partial commercial real estate financing on the property, then seller financing could work out for both of you.

This means that the seller can finance the purchase instead of the bank.

They can let go of a valuable parcel of real estate to turn a profit and be free of operational expenses and responsibilities associated with that property.

At the same time, any previous owner could generate passive income as they gain interest on the principal.

When you (the buyer) takes ownership of that property, you can typically get sufficient income through good management.

In seller financing, the secure loan could offer the following advantages:

  • More flexibility in negotiating the loan terms
  • Expanding the range of qualified buyers
  • Improve the chances of an outcome that can meet the needs of the buyer and the seller.

Should you consider this form of real estate financing, the mortgage loan will be secured by a lien on the property.

The seller may provide a mezzanine loan as you pledge your interest in buying and owning the property.

Sellers may consider that arrangement to get cash to pay for debt or operations or to satisfy the redemption requests of the investor.

Alternatively, they may consider seller financing to increase their capital for other ventures or obtain liquidity for their portfolio.

Before you go into seller financing, keep in mind that sellers are typically extra cautious when it comes to this kind of transaction—and you should be, too.

You need to make sure that the seller is qualified and eligible to lend, and they must comply with every lending law, including those that are related to securities, debt collection, and state licensing.

It is important to assess the seller’s capability to originate and service the loans.

Not all properties may be suitable for seller financing. Financially robust real estate should generate the best results for both the buyer and the seller, as well as any third-party lender involved.

However, properties with too much vacancies may not produce the necessary returns to help the buyer pay off their obligations to the lender and seller, or at least reap some profit.

So, it is also important to check that the current loans on the property must provide the right for the seller to repay without penalties.

Cash proceeds from the sale should be sufficient to pay off their existing loan.

Number #4: Traditional Loans

These are widely available commercial real estate financing solutions offered by many banks.

Because banks are competing to get your attention, they may be willing to offer attractive terms and interest rates.

Traditional loans have helped many commercial property investors get the funding they require to purchase ore refurbish a building, and if you want to explore these options, you could easily do your homework online and compare the current offers from top banks.

Traditional commercial loans have terms that can range typically from five years or possibly less and up to 20 years.

The amortization period is typically lengthier than the loan’s term.

For example, a lender could provide a commercial loan with a seven-year term and a 30-year amortization period.

Banks and other financial institutions may be able to provide traditional commercial real estate financing for different kinds of properties, including multifamily units, industrial buildings, office buildings, retail centers, and much more.

In most cases, a property will have to be occupied by the owner.

Similar to the residential mortgage, the traditional commercial loan is secured by the property you want to purchase.

Number #5: Equity Trading

Hefty down payments are often related to large transactions. If you have another property that is worth over its previously appraised value, you could consider tapping into its equity to use to cover an aspect of your next holding’s principal.

Be sure to get help from the right source

Rockville, MD-based commercial real estate investment advisory firm, Capital Investors Direct, offers customized commercial real estate financing solutions to discerning investors nationwide.

We are confident that we can provide the best financing option to you when it may not be available via conventional banks.

We pride ourselves on a simple application process, our ability to finance all sizes of CRE projects and close fast, provide interest as low as 7 percent, and for being able to customize the loan structure to make sure that it suits your exact situation.

If you are already eyeing any form of commercial property in your area, get in touch with Capital Investors Direct for commercial real estate financing that best fits your unique needs.

Our team manages investments of every size to provide easy and quick commercial real estate loans as per the objectives and goals of investors and lenders while making sure that your project needs are prioritized.

Using the latest technology in finance, we are able to offer different investment solutions to suit your requirements, whether you require a bridge loan, hard money loans, stated income, construction, permanent, or jumbo loans.

When you’re ready, don’t hesitate to contact us so our qualified commercial real estate placement professionals can look into your requirements and evaluate your situation before structuring a loan that is right for you.

Our work doesn’t stop after providing the funding, as we will continue to follow up on your progress and provide additional assistance, should you need it.