When it comes to the world of real estate, there are dozens of individualized ways to finance new acquisitions or access to the equity built up in the parcel. They fall into six or seven distinct categories when you really look at their similarities and differences, though. Of those, there are really four that every investor should understand before starting to acquire commercial real estate in earnest. Each is built to serve a different investment purpose, so it is essential to match your financing to your strategy.
1. SBA Loans
There are two SBA loan programs you can use to acquire property, but both have similar restrictions. The 504 program allows businesses to acquire assets needed for operation, including buildings for facilities, equipment, and even items like franchise licensing, within limits. The 7a program provides real estate loans for businesses that are either purchasing or rehabilitating a property for the purpose of occupying it and operating from it. That program is very popular with those investing in rehabilitating older hotels and motels.
2. Traditional Commercial Real Estate Loans
Sometimes called commercial mortgages or bank loans, these loans are the ones that most closely approximate the mortgage on a personal residence. The difference is that since commercial properties represent risks that residential loans do not, the LTVs tend to be a bit lower, the interest rates a little higher, and the terms comparable but slightly shorter than its counterpart in personal asset financing programs. Some hard money lenders also offer these loans, so it’s not really accurate to call them bank loans anymore. Banks do offer the highest LTVs on this loan type, however, if you can get the application approved.
3. Bridge Loans
There are actually several types of loans lumped together as bridge loans. Their shared characteristics are interest-only payment options, full principal payment at the end of the loan, and few if any restrictions on the use of capital. Some programs offer three-to-five-year loans for business capital. Others focus on the 24 month and under market that appeals to home flippers looking to finance the acquisition they will sell after a few improvements.
4. Construction Loans
Commercial real estate loans aimed not at the purchase of a building but at the creation of one are their own separate program. Sometimes the cost of the land parcel is part of the initial loan, other times the land has been acquired in a separate transaction. Either way, the loan uses milestone achievements to unlock another round of funding by essentially allowing you to draw on the equity you create as you build. For more details about these programs, you need to talk to a real estate financing professional.