What Kind of Funding Should You Use for Commercial Real Estate?

What Kind of Funding Should You Use for Commercial Real Estate?

Commercial real estate can be a great investment for both business owners and property investors. You can own the building that houses your company or rent out a property as an additional source of income. However, you need working capital to purchase real estate and you usually can’t front the bill if you’re just getting started. Where can you go for funding?

Fortunately, there are many financing options — in fact, there are so many that it may be difficult to find the perfect loan for your needs. However, if you do your research, you’re sure to have a better chance at getting the best financing and terms. To help you out, here are the basics of three popular loan options.

Alternative Lending

Alterative lending typically comes from third-party lenders. These entities usually only deal in commercial loans and may offer options that traditional banks and credit unions don’t. For example, you can get a stated income loan from a third-party lender, but banks and credit unions are barred from offering them.

The good news about alternative lending is that it may not be as difficult to get as a traditional mortgage. Many times, third-party lenders are more interested in the collateral’s value than your credit history, which means you can qualify for financing even if you’ve been turned down before.

Hard Money Loans

Also called bridge loans, hard money loans are short-term, usually lasting 2 years or less. They can be approved very quickly, sometimes providing cash in as few as 24 hours. If you’re a property investor, this can be a great option, since the turn-around time lets you jump on a business opportunity.

The one downside is interest rates. Since hard money loans are shorter and at higher risk, lenders tend to charge higher interest rates even if you have good credit. The good news is, if you’re interested in selling or renting the property, you can easily pay back the hard money loan without accruing too much interest.

Government-Insured Loans

The U.S. government has two agencies that offer lending programs for commercial real estate: the Department of Housing and Urban Development and the Federal Housing Administration. The important thing to remember when applying for government-insured loans is that the property you’re buying must meet certain criteria. The point of these programs is to offer affordable housing that addresses specific needs in the community, so there are always limitations on what you can use the funds for.