Many potential real estate investors may fail to realize a profit because they do not have the right real estate financing. Understanding how to finance your commercial or residential real estate investment can make the difference between a profitable transaction and barely breaking even––or potentially losing money. Even when access to liquid capital is limited, there are still several ways that potential investors can acquire real estate financing. Learning the challenges of real estate financing is the first step toward establishing a thriving real estate investment business. Working with a skilled real estate and business lawyer can help you to start this journey on the right foot. At Harrison Law, PLLC, we advise you of the benefits of potential investments and help draft contracts that benefit your business interests. Contact us today at (480) 320-2310 to get started.
What Is Lending in Real Estate?
Lending in real estate is how investors finance their purchases. A lender, such as a private equity lender, public debt market, or senior lender, like a national bank, offers a loan with specific terms of repayment.
Commercial real estate (CRE) loans fall into one of four categories:
- Owner–Occupied Commercial Mortgages, in which the collateral property is occupied by a management company with an ownership interest in the property
- Income-Producing Commercial Mortgages, in which the property is managed by a third party and not the investors taking out the commercial loan
- Construction Loans, which extend credit for building and development, typically over a series of stages as the project progresses
- Bridge Loans, which are interest-only loans bridging the gaps between other loan types, and the in which the higher risk entails correspondingly higher rates and fees
Individuals and businesses considering commercial real estate investments should be aware that the State of Arizona considers many of the activities associated with leasing out commercial investment properties to be taxable income, and take the money that will go toward taxes into their total expenditure calculations alongside whatever interest is due on their investment loan.
What Is the Difference Between Lending and Mortgage?
A loan is a money-borrowing agreement between the lender or creditor and the borrower or debtor. The money lent out is referred to as a loan, and the terms can vary. Some loans require collateral, while others may have high fees and interest rates in lieu of a collateral deposit.
A mortgage is a specific type of loan tied to a piece of real estate property like a piece of land, commercial real estate building, or a house or multi-family dwelling. Mortgages are secured by the piece of real estate the loan is for and repaid by the borrower in installments.
What Is the Most Common Form of Real Estate Financing?
Conventional bank financing, such as a mortgage or a loan, is the most common way real estate investors finance their purchases. A bank or credit union lends money to the investor based on the collateral, credit history, and projected ability to repay the loan. Loans through FDIC-supervised institutions are subject to federally-regulated real estate lending standards published through the National Archives in the Code of Federal Regulations; these federal standards may curtail real estate financing in some situations.
Rates for conventional bank lending are typically higher than those for a primary dwelling but lower than many investors may get from a private lender. Investors can further maximize their profit based on the size of their down payment. There is an element of risk, however. If the investment property is tenantless, the investor still must pay the mortgage on the property, which eats into their profits. Banks also take longer to approve traditional loans, which can affect an investor’s ability to quickly snap up a lucrative piece of property.
What Are Other Sources of Real Estate Financing?
Conventional loans are just one avenue real estate investors have for securing capital. Other options may be better for your particular goals. An experienced commercial real estate lawyer, like those at Harrison Law, can advise you which manner of raising capital will best serve your investment goals.
All-Cash Investing
An all-cash investment does not necessarily mean that the buyer shows up at closing with a bag of cash, but rather refers to paying for the property upfront. This payment method can make real estate transactions easier, as the seller has no concern that financing will fall through. There is no waiting period for a loan or mortgage approval, either; meaning that all-cash investments may be completed on a shorter timescale than real estate transactions that must await a third party’s assessment and approval.
Paying in cash can be a safer method of investing and allows the investor to avoid high-interest rates and fees that” could reduce their profit on investment. Cash payments are not an option open to all real estate investors, though. Paying the entire cost of a property upfront may also leave an investor with a shortage of liquid capital, which could mean trouble if developing or renovating the property requires more money than the investor anticipated.
Private Lender Financing
Private lenders operate outside traditional financial institutions, profiting by extending loans to other parties, such as real estate investors. These may be venture capitalists, professional real estate lending companies, or private individuals. Private lenders can be more flexible than traditional financial institutions and may have less stringent requirements about the terms of loans they extend and to whom they are willing to lend money.
Private lending may be a good fit for investors who do not fit the typical mortgage profile, such as novice investors or those with less-than-stellar credit. However, private lenders typically set higher interest rates than banks, especially if they perceive the borrower as a high-risk investment.
Take Out a “Hard Money” Loan
A “hard money” loan is an asset-based loan, and the amount of the loan depends on the value of the property used to secure the loan. Hard money loans are a type of bridge loan: short-term funding that can be used for a quick infusion of cash to finish developing a property for lease or to quickly secure a hot property.
Hard money bridge loans can be approved in as little as seven business days so that investors can move quickly. As long as the investor can quickly sell a renovated property or secure tenants for the property, this can be a viable option. However, hard money loans typically have notably higher interest rates than traditional mortgages and asset-based loans, so they may only be suitable for short-term borrowing periods.
Do You Need a Skilled Commercial Real Estate Lawyer?
Ensure that your business interests are protected with the right commercial real estate law firm. The legal team at Harrison Law, PLLC, has decades of combined experience helping clients with real estate transactions, drafting and analyzing contracts, and representing their business interests. If you are considering your options for real estate financing, contact us at (480) 320-2310 to learn more about our services.
© 2023 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved
This website and article have been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.
