How Can You Finance Your Commercial Real Estate Investment?

Investing in commercial real estate can be a rewarding venture, providing both steady cash flow and long-term appreciation. However, one of the most crucial steps in this process is securing the right financing. Understanding the options available for commercial real estate financing will help you make informed decisions that align with your investment goals. In this blog, Cornovus Capital takes you to explore various financing methods, key considerations, and practical strategies to help you successfully fund your commercial property investments. 

Understanding Commercial Real Estate Financing 

Commercial real estate financing refers to the loans and financial products available specifically for purchasing, developing, or refinancing commercial properties. These properties include office buildings, retail spaces, warehouses, and multi-family residences. The financing landscape for commercial real estate is different from residential properties, requiring a deeper understanding of loan types, lender requirements, and real estate investment financing strategies. 

 

Key Considerations For Financing 

Before diving into financing options for commercial investors, consider these critical factors: 

Investment Goals 

Define your objectives. Are you seeking immediate cash flow, long-term appreciation, or a combination of both? Your goals will dictate the type of financing that best suits your needs. 

Property Type 

Different commercial property types may require different commercial real estate investment strategies. For example, a retail property might have different risk profiles compared to an industrial facility. 

Address 

The address where your property is located can affect its value and your financing options significantly. Properties in high-demand areas may qualify for better loan terms. 

Financial Situation 

Assess your creditworthiness, available capital, and complete financial health. Lenders will check these factors to determine your eligibility for loans and the terms they can offer. 

 

Types Of Commercial Real Estate Financing 

Several commercial real estate funding sources are available for commercial real estate investments. Here are the most common types: 

1. Conventional Loans 

Conventional loans are traditional mortgages offered by banks and credit unions. The typical downpayment of at least 20% and a strong credit history is required for these loans. These loans come with fixed or adjustable rates and various term lengths, often ranging from 5 to 20 years. 

2. Small Business Administration (SBA) Loans 

SBA loans are one of the popular commercial real estate loan options for small business owners looking to finance commercial properties. The SBA 504 and 7(a) loan programs provide low-interest rates and extended repayment terms. They require a smaller down payment (as low as 10%), making them an attractive choice for many investors. 

3. Hard Money Loans 

Hard money loans are for a short-term and are secured by real estate. Private investors or companies provide these loans. They are based on the property's value rather than the borrower's creditworthiness. While hard money loans can be obtained quickly, they often come with higher interest rates and shorter repayment periods. 

4. Bridge Loans 

Bridge loans are short-term financing solutions designed to provide immediate funds while the borrower secures long-term financing. They are often used when a property is purchased before a buyer has sold another property. These loans are useful in competitive real estate markets where timing is critical. 

5. Mezzanine Financing 

Mezzanine financing is a mix of debt and equity financing to fund the purchase of commercial real estate. This type of financing is typically used by developers and investors seeking capital for larger projects. Mezzanine loans are subordinate to primary loans, meaning they are repaid after other debts, which makes them riskier and more expensive. 

6. Portfolio Loans 

Portfolio loans are mortgages held by the lender and not sold on the secondary market. These loans are often more flexible regarding qualification criteria and terms. They can be an outstanding option for investors with unique properties or situations that do not meet conventional commercial real estate loan requirements.   

 

Steps To Secure Commercial Real Estate Financing

Financing your commercial real estate investment requires a systematic approach. Here’s a step-by-step commercial property financing guide to help you navigate the process: 

Step 1: Keep Your Financial Documents Prepared 

Lenders need to have a comprehensive set of financial documents to assess your creditworthiness. Gather the following: 

Personal and business tax returns (typically for the last two years) 

Personal financial statements 

Business financial statements (if applicable) 

Bank statements 

Property details, including income statements, leases, and operating expenses 

Step 2: Assess What’s Your Financial Situation 

Before applying for real estate investment loans, evaluate your financial health. Consider your credit score, debt-to-income ratio, and available cash for down payments. This assessment will facilitate the understanding of your borrowing capacity and improve your chances of approval. 

Step 3: Create A Business Plan That’s Well-Structured 

A well-structured business plan is essential for securing financing. Your plan should include: 

An overview of your investment strategy 

Market analysis and property details 

Financial projections, including anticipated income and expenses 

Exit strategy detailing how you plan to sell or refinance the property 

Lenders want to see that you have a clear understanding of the market and a solid plan for achieving profitability. 

Step 4: Browse The Best Financing Options 

Shopping around is important because not all lenders offer the same terms. Compare interest rates, fees, and loan terms from multiple lenders. This process can help you identify the best loans for commercial property. 

Step 5: Submit Your Loan Application 

Once you’ve chosen a lender, submit your loan application along with all required documentation. Get ready to answer questions and supply additional information as needed. The lender will conduct due diligence, which may include an appraisal of the property and a review of your financial situation. 

Step 6: End By Closing The Deal 

If your loan application is approved, you’ll move to the closing process. During this stage, you’ll review and sign the documents of the loan, pay any closing or associated costs, and officially secure your financing. Once the deal is closed, you can proceed with your investment plans. 

 

Common Commercial Real Estate Loan Requirements 

Different lenders may have varying requirements, but here are some common criteria you should expect for funding commercial property investments: 

Credit Score: Most lenders have the condition of a low credit score of 650, though others may accept lower scores depending on other factors.   

Down Payment: Expect to provide at least 20% of the property’s purchase price in the form of a down payment. However, SBA loans may allow for lower down payments.   

Debt Service Coverage Ratio (DSCR): Lenders typically look for a DSCR of at least 1.2, meaning the property generates 20% more income than the debt payments. 

Experience: Some lenders may require you to have experience in managing commercial properties, especially for larger loans. 

 

Key Financing Strategies For Success 

Implementing effective financing strategies can help you optimize your commercial real estate investment. Here are some essential investment property financing tips: 

1. Utilize Leverage Wisely 

Leverage lets you use borrowed funds to increase your potential returns. While this can amplify profits, it also increases risk. Use leverage judiciously to ensure you can cover your debt obligations, even in challenging economic conditions. 

2. Focus On Cash Flow 

When evaluating potential properties, prioritize those that generate strong cash flow. Positive cash flow ensures you can cover your mortgage payments and other expenses. Additionally, strong cash flow can make securing financing easier, as lenders prefer properties with proven income. 

3. Build Relationships With Lenders 

Establishing strong relationships with lenders can improve your chances of securing favorable financing terms. Attend industry events, network with real estate professionals, and maintain open communication with your lenders. A good rapport can lead to better opportunities and terms in the future. 

4. Consider Multiple Financing Sources 

Don't limit yourself to traditional financing options. Explore various funding sources, including private lenders, crowdfunding platforms, and joint ventures. Diversifying your financing options can give you more flexibility and capital access. 

5. Keep An Eye On Market Trends 

Stay informed about market trends, interest rates, commercial property mortgage rates, and economic conditions. Understanding how these factors affect your investment will allow help make better choices and property selection. 

 

Conclusion 

Successfully financing your commercial real estate investment is crucial to achieving your financial goals. You can position yourself for success in the competitive world of commercial real estate. It would involve understanding the various financing options available and implementing effective strategies. Embrace commercial real estate financing opportunities and embark on your journey toward financial prosperity.  

When searching for Commercial Real Estate Financing options, connect with Cornovus Capital. They will connect you with a robust network of financing lenders nationwide.   

 

FAQs 

 

1. Is A Home Loan Available For Commercial Properties? 

No, in the United States, you can only avail of commercial real estate loans for commercial properties. Commercial loans and residential loans are different.   

2. How Much Is A Downpayment On An Investment Property In US? 

Usually, the buy-and-hold real estate investors have a downpayment of 20- 25%. Some loan programs may go as low as 15%. However, with Cornovus Capital, you can get 100% potential financing for owner-occupied commercial real estate purchases. 

3. What Is The Credit Score Needed For Investment Property? 

For commercial real estate financing, the credit score should be 620- 700 and even higher.