3 Considerations When Picking Commercial Real Estate Loans
When it comes to financing property, you have a lot of choices. The key to making your best return on any given investment is understanding all your costs, and how to minimize them, and accepting slightly higher costs on paper can lead to better timing and higher total returns. Most commercial real estate lending products are built with a narrow range of purposes in mind. There are some, however, that are flexible enough to meet a range of needs, and often you have a few suitable choices for a given deal. If you are wondering how to choose between them, there are a few critical factors to take into account first.
1. How Does Each Option Help You Manage Risk?
Real estate investment is a matter of taking calculated risks based on expertise in the local market. There are no guarantees, but there are also not many surprises for seasoned investors that do their work. A big part of that is understanding how to use financing as a method of risk management. Often, investors who could use cash still finance a deal because defaulting on a loan is less of a setback than losing a significant portion of a portfolio’s working capital.
Even when that is not the case, risk management can take other forms. For example, using a cash-out financing option to get capital from a stable investment means being able to take risks while secure in the knowledge that the financing is being paid by your other investments. This way, you’re using commercial real estate lending to avoid losing the property if it takes too long to rehabilitate and remarket it.
2. How Does the Loan’s Term Fit Your Investment Timeline?
While it’s true that bridge loans and other short-term financing options have higher interest rates than commercial mortgages, the fact is that the total cost is still usually lower for short-term investors who opt into the bridge loan. That is because of two things. First, the total finance charge for the loan is lower because you’re paying for it for a shorter period of time. Second, the loan closes faster so you can do your work and remarket the property quickly, shortening the time you are paying interest even further.
3. Does This Loan Match Your Resources?
Different commercial real estate lending products have different requirements for down payments, minimum credit scores, and other features. It is important that you match not only your investment timeline but also your resources to your options. Sometimes that means looking for an option with no down payment requirements so you can raise the value of the building and refinance. Keep that in mind.