Tips on Finding a Commercial Lender Offering Hard Money Loans
Commercial real estate investing comes with plenty of advantages. These investments typically offer higher rewards compared to residential real estate and have financing terms that can be advantageous to savvy investors who know how to use the tax code to their advantage.
Are you looking to get involved in commercial real estate this year? This article discusses some practical commercial real estate tips you can use to get started in commercial real estate or grow your current CRE portfolio.
Benefits of commercial real estate
Commercial real estate is attractive for many reasons. First, most investors are drawn to commercial real estate for the potential of high returns when buying and selling commercial properties. However, there are many other reasons that investors get involved in commercial real estate, including:
- Investing in tangible assets. Another big upside to commercial real estate is that you’re investing in a tangible asset that tends to appreciate over time. Stocks, for example, are intangible and may fluctuate in value much more frequently than commercial real estate.
- Financing options. Commercial real estate investing is attractive because there are numerous ways you can finance your commercial real estate deals. First, hard money loans are a short-term financing option that gives investors quick money secured by real property. In most cases, bridge loans allow investors to buy and sell properties before securing financing for up to a year.
- Cash flow. In addition to providing high returns, commercial real estate has the potential to provide consistent cash flow to investors.
Commercial real estate tips
Commercial real estate investing can be a risky endeavor–especially for those that don’t have much experience. Here are our top commercial real estate tips for investors looking to get started in commercial real estate.
- Running the numbers
Investors should ensure that they have the potential to get a return on their investment before investing in commercial real estate. This means running the numbers on the property using a variety of different tools. After all, commercial real estate is one of the most expensive asset classes, and investing in CRE shouldn’t be taken lightly.
Investors should consider acquisition costs, potential rental income, operating expenses, down payments, cap rate, cash flow, and cash-on-cash return. Commercial real estate investors should also account for vacancy expenses, leasing fees, and insurance when running the numbers on a potential investment.
- Knowing what lenders look for
Qualifying for a commercial real estate loan can be difficult for new investors who lack the experience to secure a loan with favorable terms. That’s why new and experienced investors should know the different requirements lenders look for when considering issuing a loan for your commercial real estate purchase.
- Business finances. Commercial lenders will look over your finances to ensure you have sufficient cash flow to make monthly payments on your commercial loan. They will look at your loan-to-value (LTV) and annual net operating income to assess the financial strength of your business.
- Personal assets. Banks and commercial lenders want to see that you have good credit history and assets in the bank to ensure you’ll be able to pay back the loan even in hard times.
- Business credit. Businesses should also have a good credit history that shows consistent repayment of debt obligations and low credit utilization rates.
- Consider hard money lenders
Hard money lenders come in different classes, including:
- Primary lenders
- Secondary lenders
- Third-party lenders
Primary lenders are the closest people in your life willing to provide you with the cash you need to finance your commercial real estate deal, while secondary lenders include your co-workers, acquaintances, and professional partners you’ve built relationships with over the years. Lastly, third-party lenders are accredited investors who work for companies that issue hard money loans.
All three types of hard money lenders can provide you with the financing you need for a commercial real estate deal. However, using primary and secondary lenders may give you a
better interest rate but come with the pressure of dealing with friends, family, and acquaintances.
Commercial real estate investing offers the potential for outsized returns in addition to high cash flow. While most new investors want to get into commercial real estate for the high earning potential, commercial real estate can also be a great way to hedge against inflation and use the tax code to your advantage to reduce your taxable income at the end of the year.